How to Franchise Your Business

Is your business ready to franchise?

A business is ready when it is profitable, repeatable, documented and distinctive. If it depends on the owner's personal skill, it is not ready yet.

Ask these questions honestly:

• Does each location make healthy profit after paying a manager, not just you?
• Have you opened at least a second unit, ideally in a different market?
• Can an average person follow your process and get decent results?
• Do customers choose you for the brand and not just for you personally?
• Is the brand name clear to use and protect?

If you answer no to several, spend more time strengthening the business. Our guide to ways to grow your business can help you reach that point.

Work out whether a franchisee can make money

A franchisee must cover royalties and fees and still earn a fair return on their investment. Model a unit's economics from their side, not yours.

Franchisees pay an initial fee, ongoing royalties and often a marketing fund contribution. Then they pay rent, labor, supplies and their own debt service. If your current margin cannot absorb royalties, the model will not work.

Illustrative unit model: annual sales $600,000; cost of goods and labor $420,000; occupancy and other costs $90,000, leaving $90,000 before royalties. A 6 percent royalty is $36,000, leaving $54,000 to cover the franchisee's loan payments and pay. Would that attract an owner who invests $250,000? If not, adjust the model.

Use the break-even formula and a cash flow projection to test several scenarios.

Document the system

Create an operations manual, training program and brand standards that let a new owner reproduce your results. Documentation is the product you are selling.

Write down everything: opening and closing procedures, ordering, pricing, customer service scripts, hiring, safety, marketing and reporting. Include checklists, photos and short training videos.

Create a training program, typically a mix of classroom and in-unit time, and a support plan for the first months. Define brand standards for signage, uniforms, logos and tone. See our guides on small business branding and brand style guides.

Test the manuals by having someone who has never done the job follow them at one of your units. Fix every point of confusion.

Protect the brand and get legal help

Register your trademark and hire a franchise attorney. Franchising is regulated, and mistakes can be expensive.

Your trademark is the core asset you license. Search and register it with the USPTO before you sell the first franchise. Confirm the business structure; many franchisors form a separate entity for the franchise operations.

The FTC Franchise Rule requires you to provide a Franchise Disclosure Document (FDD) to prospects before they sign or pay. Some states also require registration or filings before you can offer franchises there. Rules differ, so a franchise attorney is essential.

Your accountant should help prepare the audited financial statements that the FDD requires. Ask both advisors for fee quotes up front.

Set your fee structure

Most franchisors charge an initial franchise fee, an ongoing royalty on revenue and a marketing fund contribution. Price them against competitors and unit economics.

Think about what each fee pays for:

• Initial fee. Covers your costs of recruiting, legal work and training a new owner.
• Royalty. Pays for ongoing support and gives you recurring revenue.
• Marketing fund. Pooled money for national or regional advertising.
• Other fees. Technology, renewals, transfers or required supplies.

Look at comparable brands in your industry to see what the market expects. Our guide to average franchise fees explains typical structures. Keep fees low enough that franchisees succeed, since your income depends on their success.

Build the support team and recruit franchisees

You need people to train, support and audit franchisees, plus a sales process to find qualified buyers. Hire for support before you scale sales.

Typical early roles include a training lead, a field support person and someone handling recruitment. The franchisor business often runs at a loss for the first few years while it builds a network.

Recruit selectively. Look for owners with the capital, work ethic and willingness to follow a system. Screen their finances and talk to them over several meetings. Remember that a poor franchisee hurts the brand for everyone.

Read the buyer's perspective in our guide on how to become a franchise owner so you can anticipate their questions.

Funding the move to franchising

Franchising costs legal fees, documentation, training development and support staff before the first royalty arrives. Plan twelve months or more of cash.

Create a budget for attorney and accountant fees, FDD preparation, state filings, trademark work, manual production, a recruiting website and salaries for support staff. Add a cushion, because the first sale can take longer than expected.

Use cash from the operating business where you can. Do not starve your units to fund the franchise side. For a proven operation, working capital or a term loan may fund a defined launch budget, if the payback math works. ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue, and shows true cost and payback before you sign.