How to Start a Franchise in 8 Strategic Steps

When people hear the term small business, they typically think of a 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. Franchising offers a unique opportunity to combine proven business models with your entrepreneurial spirit.

Franchising is a business expansion strategy in which a franchisor gives a franchisee the rights to use its procedures, business model, and brand while selling its product or service. Business services software can help ensure the process runs smoothly. 

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 your best small business move.

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.

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? What is the statement of work? 

Once you have a couple of franchises you want to own, 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?
• Industry analysis: Study the industry to identify trends, opportunities, and potential challenges.
• Franchisor evaluation: Research potential franchisors, their track record, financial stability, and support systems.
• Market analysis: Assess the demand for the franchise concept in your target market.
• 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?

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.

Here are some things you should definitely consider:

• Alignment: Select a franchise that aligns with your interests, values, and financial goals.
• Due diligence: Conduct thorough research on the franchisor, including their business model, financial performance, and reputation.
• Franchise disclosure document (FDD): Carefully review the FDD for important information about the franchise.

3. Evaluate costs

When considering a franchise, it's essential to carefully assess the financial implications. Beyond the initial franchise fee, there are several other expenses to consider.

Startup costs, including rent, renovations, equipment, and inventory, can be substantial. Ongoing expenses, such as utilities, supplies, employee wages, marketing, and advertising fees, must also be factored in.

Some franchisors may also require contributions to a marketing fund. It's crucial to evaluate these costs comprehensively to determine if the franchise opportunity aligns with your financial goals and capabilities.

Here are some things you should definitely consider:

• Franchise fees: Understand the upfront costs, ongoing royalties, and other fees associated with the franchise.
• Startup costs: Calculate the expenses for setting up a new location, including equipment, inventory, and marketing.
• Financing: Explore various funding options, such as personal savings, loans, or investor financing.

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.

Here are some things you should definitely consider:

• Key information: Carefully examine the FDD for details about the franchisor's financial performance, legal structure, and operational requirements.
• Risk factors: Assess any potential risks or challenges associated with the franchise.
• Legal advice: Consult with an attorney to review the FDD and protect your interests.

5. Acquire funding 

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 many ways to fund a business, but one that is common with franchises is 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 early withdrawal. 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.

Here are some things you should definitely consider:

• Financial planning: Create a detailed financial plan to secure funding.
• Funding options: Explore various options like personal savings, loans, or investor financing.
• Franchisor assistance: Some franchisors may offer financing assistance or guidance.

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.

Here are some things you should definitely consider:

• Site selection: Evaluate potential locations based on factors such as demographics, traffic, and competition.
• Franchisor guidelines: Adhere to the franchisor's specific location criteria.
• Lease negotiation: Negotiate favorable lease terms for your franchise location.

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 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, scope management, dealing with suppliers, hiring strategies, permits/licenses, needs assessment, and finances.

Here are some things you should definitely consider:

• Operational knowledge: Complete the franchisor's training program to learn about the business operations, systems, and procedures.
• Customer service: Learn the franchisor's customer service standards and best practices.
• Marketing and sales: Understand the franchisor's marketing and sales strategies.

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.

Here are some things you should definitely consider:

• Staffing: Hire and train qualified staff.Inventory: Stock your location with the necessary inventory and supplies.
• Marketing: Develop a marketing plan to promote your grand opening and attract customers.
• Final Touches: Ensure your location is ready for business and meets the franchisor's standards.

Your franchise journey starts today!

Starting a franchise is no easy feat. While some 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. Understand your resource allocation needs to ensure a smooth process. 

This article was originally published in 2019. It has been updated with new information.