How to Start a Franchise Business

How to Start a Franchise Business

If you want to leave employment and start your own business, you have plenty of options. Starting a business is not easy, especially if it is your first attempt to run your own shop. But you can smooth and shorten the process by opening a franchise business. Becoming the owner of a franchise will allow you to tap into the huge resources of an established brand while maintaining a great deal of independence.

How Franchising Works

As a franchise business owner, you will pay a fee to rent the brand name of the parent company. You and your team run the day-to-day operations of the business. You must also use the brand logo and other marketing images, and you must follow the rules and regulations related to how the company produces goods and services. Essentially, you must uphold the standards of the brand and do nothing that would sully its reputation. Aside from these strictures, you are free to hire, fire, manage, and lead as you see fit. And you get to keep all the profits from your business (minus the licensing fee).

Some of the more popular franchise businesses are:

  • McDonald’s
  • 7-Eleven
  • Taco Bell
  • Ace Hardware
  • Great Clips

Benefits of Starting a Franchise Business

There are many benefits to starting a franchise business. Here are a few of them:

1. More support

If your goal is to become a professional entrepreneur, if you want to spend the rest of your life opening different businesses and then selling them, becoming a franchise owner is a great place to start. The support you will get from the franchisor will make it easier to get your business up and running. You will learn the basics of running a small business without worrying too much about marketing, branding, and other difficulties.

2. Lower failure rate

Franchise businesses have a low failure rate. When you buy into a franchise, you are investing in a proven business model. You also have a range of resources you can draw on to make your company work.

3. Brand awareness

One of the biggest challenges that all small business owners face is making their company known to the wider public. When you open a business franchise, your branding is ready-made for you.

4. More buying power

As a franchise owner, you will be able to buy your supplies at a lower price. Most franchisors negotiate contracts with vendors for their entire network of franchises. This will give you access to a range of low-cost goods, which will help you keep your overhead low. The flip side of this is that you may not be able to strike deals with other vendors who may be able to offer you an even better deal.

Getting Started

Here are some of the steps you will need to take to start your franchise business:

1. Identify an opportunity

The first thing you must decide is which kind of business you want to run. Hospitality, retail, health and wellness, DIY—these are some of the many industries that offer franchising opportunities. You must also decide whether you want to open a brick-and-mortar shop or do business completely or mostly online.

The best way to go about identifying opportunities is to make a list of the top five franchises you are interested in, and then compare them according to the following criteria:

  • Cost of licensing fees
  • Flat fee or portion of sales
  • Resources they offer
  • Financing deals

2. Research your potential competitors

Some of the bigger brand names will have stores everywhere. This does not necessarily constitute a saturation of the market. If, for example, you are thinking about opening a McDonald’s in an area in which there are already two of them, you may still get a decent amount of business if it is a neighborhood in which cheap fast food is in high demand. You may have less luck opening a hardware or beauty franchise in a place where the brand is well-represented by current stores.

The bottom line here is that you must determine market interest and determine if there is enough interest in the franchise for a number of rival companies to succeed. If the market is already saturated, you will struggle to make headway against the shops that are already there.

3. Research startup costs

The cost of starting a franchise varies. You should know how much money you will need to invest upfront to start trading. Here are some of the costs you should keep in mind:

  • Travel costs: Most companies require you to travel to their headquarters or a nearby corporate office to learn more about their brand and culture and will not pay for you to do so
  • Training costs: You may be required to undergo training at one of their corporate sites for several weeks, and, again, the company will not foot this bill
  • Initial licensing fee: The brand may require you to pay a one-time initial fee to open your franchise and this can be as much as $50,000
  • Local fees and taxes: Your city and state may charge fees related to building permits and other matters

4. Create a Business Plan

Although many of the basic offerings and operations of your franchise business will be decided for you, it is still important to develop a business plan. You may want to produce this document earlier in the process as it can help you raise the money you need to offset the startup costs mentioned above. Your business plan should include:

  • Executive summary: The franchise you intend to open and what will make your management of it unique
  • Market analysis: Present your target audience and how you intend to attract them to your franchise and make sales conversions
  • Management plan: How you intend to structure your business
  • Funding: How you intend to pay for franchise fees, labor, and supplies
  • Financial projections: An evidence-based estimate of revenue for the first 2-3 years
  • Marketing and sales plans: Your strategy for marketing your business and the tactics you will use to differentiate your franchise from others that may be in the area

5. Form an LLC or corporation

You will then need to establish your business as a legal entity. In most cases, the franchisor will insist that you create an LLC or corporation. This will separate your personal assets from those of the business.

If the franchisor has no particular rule about how to form the business, you will have other options, including making yourself the sole proprietor. However, this can be risky, as it makes you legally liable if the business falls into bankruptcy.

6. Choose a location

If you are opening a brick-and-mortar business, you will need to be very careful about where you choose to locate your franchise business. It should be affordable, visible, and near a highly trafficked location.

You should learn all about the location you choose; not just its current status, but future developments as well. If there will be significant construction work at or near the location you’re thinking about, it could impact foot traffic to it. Such a future development need not work to your detriment. If a new shopping mall will soon be built next to your proposed site, it could boost your prospects for new business.