How to Start a Franchise
Franchises are mutually beneficial arrangements for both franchisors and franchisees. Franchisors benefit from the relationship by being able to share the costs of expanding their brand and operations. Franchisees benefit by not having to start their own business from scratch or “reinvent the wheel.” Generally, a franchise is a business model that falls into one of two categories:
A business (the franchisor) allowing another business (the franchisee) the right to distribute products bearing the franchisor’s brand (e.g., trademark, logo, etc.).
Business Format Franchise
A business (the franchisor) provides significant assistance to another business (the franchisee) with the operation of the franchisee’s business (e.g., training, product inventory, etc.).
As an aspiring entrepreneur, joining a franchise allows you to adopt a business model that you already know works. Customers will recognize the name and already know what to expect from the product. Franchises can offer what many other businesses cannot – consistency. For example, fastfood chains are a big player in the franchise game. Over 80 percent of fastfood chain restaurants are franchised. As a customer, when you step into a McDonald’s, you know what your favorite items to order are (sometimes even by a memorized combo meal number). Your past experience at countless other McDonald’s locations influence your purchasing decision and product expectations. That’s the advantage of being able to adopt the name, marketing, and operations of a wellknown franchise.
Operating as a franchise means joining a different company’s way of doing business for better or for worse. Franchises seek to maintain quality control in its products and consistency in its operations. That means there’s little flexibility when it comes to adoption of a marketing plan or location of where you buy your supplies and products. Before jumping into an existing franchise, make sure you do your research.
The first step in researching and joining a franchise is finding one that you believe in. One option is to look at Entrepreneur’s Franchise 500 List. Entrepreneur’s list provides detailed information regarding company history, financial requirements, ongoing fees, and small business financing options. In addition, you can search in specific industries for a company that matches your interest. The International Franchise Association also offers a search tool for franchise opportunities specific to industry, investment level, and location. Don’t forget that you can also brainstorm a list of some businesses that you truly believe in and search their websites to see if they offer any franchising opportunities.
Once you find a franchise that you believe in and can afford, you’ll want to do some due diligence. Franchisors are legally required to disclose pertinent information such as the identity of key persons, litigation history, and financial performance representations in what is known as a Franchise Disclosure Document (formerly known as an Uniform Franchise Offering Circular). If after a thorough analysis, you believe that the franchise is a good fit, then you’ll have to review and agree to the terms of a franchise agreement. A franchise agreement will usually dictate terms such as the initial investment amount, ongoing fees and royalties, required sales quota, and the length of the relationship.
For a more detailed guide to starting a franchise, be sure to read the Federal Trade Commission’s A Consumer’s Guide to Buying a Franchise.