When people hear the term small business, they typically think of some mom and pop shop with a single location.
While those family operated bakeries and shoe repair stores are in fact small businesses, people tend to forget that a large number of small businesses operate as franchises. In fact, one out of every twelve businesses in the United States is a franchise.
Franchising is a business expansion strategy where a franchisor gives a franchisee the rights to use its procedures, business model, and brand while selling its product or service. Technically, a franchise is the contract binding the two parties, but it is commonly used to describe the business itself.
Some of the most common and profitable franchises include fast food restaurants, hotels, and convenience stores.
One of the biggest advantages of starting a franchise is that the business plan is already laid out for you. If that sounds like a step you would like to skip, opening a franchise might be the best small business move for you.
How to open a franchise
While you won’t have to write a business plan, you can’t open your own franchise without putting in some time, hard work, and energy into these eight steps.
8 steps to opening a franchise
- Do your research
- Choose a franchise
- Attend discovery day
- Review the franchise agreement
- Get funding
- Choose a location
- Take the provided training
- Prepare for opening day
Let’s go over each one in a little more detail.
1. Do your research
Before anything else, you must first do some research to fully understand the nature of franchising.
How does it work? What can you expect as an owner? What options are available to you?
Once you have a couple of franchises you would like to own in mind, conduct even more research on those specific business ideas.
Here are some things you should definitely consider:
- Personal preference: What kind of franchise would you like to own?
- Cost: How much will it cost to run that type of franchise?
- Rules and regulations: Are there any specific rules and regulations for that industry?
- Customers: What kind of people will be included in your customer base? How can you make their lives easier?
Need a better grasp of how your potential customers will operate? Check out some user research software to better understand what makes them tick.
After gathering all of that information, weigh the pros and cons of each option.
2. Choose a franchise
The next step should be choosing a franchise you think best suits your management style, budget, and personal preferences.
Once you’ve chosen a franchise to open, you need to get studying – learn all of their franchising terms and conditions. Visit the franchise’s website for most of the information, but you can also find things you need in reviews and testimonials from former or existing franchisees.
When you have all of the background information down, let the franchisers know you are interested. They will provide you with a franchise disclosure document, which outlines the franchising rules, fees, responsibilities, and financial history. Make sure you read this thoroughly to make sure you can fulfill the requirements of an owner.
3. Attend discovery day
Next, the franchisor will invite you to discovery day, where you will meet them personally and get to know the corporate mission, vision, and values.
The franchisor will also be interested in getting to know you, just to make sure you are a worthy business partner. There are certain traits you can show off to have a better chance at creating a solid relationship with a franchisor you wish to work with.
Prepare for discovery day as best you can. These events typically include presentations, one on one meetings, and scoping out existing franchises. Ask any remaining questions you might have to be sure of your decision to become a franchisee.
4. Review the franchise agreement
After discovery day, the franchisor will present you with a franchise agreement, which is a formal legal contract between the franchisor and the franchisee that gives you the right to open a franchise.
If this is your first franchise venture, it might be wise to consult with a lawyer who has experience working with these documents before signing any contract to ensure you understand everything you are agreeing to.
On the other hand, make sure the franchisor is holding up their end of the deal. If they promise things in a conversation, note whether or not it is included in the contract. It would be a shame to assume you were receiving certain types of aid from your franchisor, only to find out they are not legally obligated to do so.
Check out G2’s top rated legal services to guide you through the franchise contract process.
5. Get the funding you need
Before signing, make sure you have a reliable form of business funding to financially provide for your new business venture.
Typically, franchisors will expect the contract to be signed with the payment needed to start the franchise.
There are a lot of ways to fund a business, but one that is common with franchises is called rollover for business startups (ROBS). ROBS allows franchisees to use funds from their retirement supply to invest in their franchise without paying penalties or taxes for withdrawing the money early. This is a solid option for franchisees because they don’t have to pay anything back.
Another way is with franchisor financing, where a franchisor will loan money to a franchisee to get their business off the ground. If the franchisor is willing, this is a great option because they already know the business model (which includes costs associated with the business) and there is potential to get the cash fast.
6. Choose a location
Alright. Now that you have done your research, chosen a franchise, signed all of the appropriate documents and secured the funding you need, it’s time to choose a location for your franchise.
The franchisor might provide some guidelines you will need to follow, but other than that, it is up to you. Be strategic when choosing a location. Consider things like competitors in the area and potential foot traffic.
When opening their first store, franchisees will often start by leasing a property because it requires less money up front and there is a lower risk associated with it. However, if you are certain your franchise will be in this same location for a long time, it is worth buying a space so you aren’t paying rent on a place you may as well own.
7. Take the provided training
Next, you will need to take the necessary franchise training programs provided by the franchisor.
The training aspect of this process depends on the franchisor, but it typically happens around the time you are looking for locations and ready to sign a lease.
These training programs should teach you the following aspects of the franchise: products/services, marketing, dealing with suppliers, hiring strategies, permits/licenses, and finances.
8. Prepare for opening day
Once you are fully trained, it’s time to prepare to open your franchise. Make sure you have all of the equipment you need, the interior is appealing to customers, and you have a well-trained staff.
Finally, plan and execute the grand opening. It is worth your while to put decent time, effort, and resources into your franchise’s grand opening. After all, it is the first impression your customers will have of this specific franchise. Tactics like social media marketing will help you create buzz around your event and brand, all while building a community of potential customers.
Starting a franchise is no easy feat. While some of the key risks of starting a small business are eliminated by taking the franchise route, that doesn’t mean the process is a walk in the park. However, following the steps above will help you stay on track for this exciting venture.
Once you get the ball rolling, you will need to tackle the accounting side of your franchise. Check out our small business finance guide to help you get started.