How to Franchise Your Business
So you decided to franchise your business? What exactly do you do next? Before you jump into hiring a franchising consultant and franchising attorney you will need to understand the basics of franchising, the costs involved, and plan appropriately. Check out our previous article Here for an overview of what franchising is. There are 4 basic steps to franchising your business, these steps are: (1) Evaluate your company, (2) Plan your franchise, (3) Draft the legal paperwork required, (4) Bring in key personnel.
Evaluating whether you company is ready to franchise or not is an essential first step. While franchising can make your company very successful it can also financially ruin it. Before embarking on franchising your company you will need upwards of $40,000 to $50,000. Legal costs for developing and drafting the required documents is a large chuck of that figure but you will also need to factor in the costs for a CPA to perform a GAAP audit on your company yearly. On top of these initial figures you should be investing in advertising and marketing to sell some franchises. The average cost for a potential franchisor to undertake the franchising process is in the ballpark of $100,000. It is important to study and know that your company can absorb these costs months before any potential franchisee is on the horizon.
You will also need to plan extensively before even thinking about franchising. Our firm requires these basic documents be completed or at least in the process of being drafted before recommending any franchising potential: the company’s business plan (complete with marketing plan and demographics study), operations manual, CPA audit (GAAP), and our own internal franchising questionnaire. The operations manual should be the detailed instructions for every process in your company. A franchising consultant can help you build an operations manual with an eye towards efficiency and replicating success in your franchisees.
Even after the operations manual, audited financials are ready and you have a good franchising attorney you will need to make the important decisions regarding the franchising agreement. These include the franchise fee, royalty percentage, terms of the agreement, territory size (if applicable), the training provided, and how to vet potential franchisees. These decisions are crucial to your company’s future franchising success. A percentage lower and you could be losing millions in royalty fees while a percentage too high could strangle starting franchisees from becoming established.
The next step is to actually draft the legal documents. The Federal Trade Commission (FTC) requires anyone offering a franchise for sale to have a Franchise Disclosure Document (FDD) ready and available before signing on any franchisees. They also require it to be updated annually. Some states also require that you submit the documents to a state authority, who will review it and reject it if there are any deficiencies. This process alone can take several months, from the drafting to awaiting final approval in some states.
Finally, the last step will be to bring in key personnel who will focus solely on the franchise. Many franchisors sell the recipes or goods or equipment used by the franchisees daily. This will require staff to track and keep the logistics running for the system. Often it is also good practice to have staff available daily to guide and/or monitor franchisee performance. Being lax on your franchise terms can be costly to your brand and financials.
These are the five basic steps to taking your successful company into franchising. It is not a project that should be undertaken lightly or without comprehensive business and legal counsel. Reidel Law Firm offers flat fee business and legal services including full service franchising counseling. Use the contact form below or call (832)510-3292 to schedule your free consultation today.