Have you ever wanted to close your eyes, snap your fingers, and have your business appear out of thin air? While we can’t promise it’ll be quite that easy, we can help you with what you need to know so that purchasing a franchise doesn’t feel like you’re stepping over the muddy and ruthless waters of building a business. In a few steps, you can be well on your way to being a business owner minus the blunders of starting from scratch.
What Is a Franchise Business?
A franchise is a business that’s working with a brand to distribute products. Imagine owning an ice cream store with your own name and homemade recipe. Now imagine a Cold Stone Creamery® across the street, with preexisting flavors, ingredients, and a brand name. That second one? A franchise! (Particularly, a business format franchise, but we’ll get to that later.)
How Does a Franchise Business Work?
A business owner will purchase a franchise (either as a business format or their products directly) and sells them under the franchise’s name. This is different from white labeling when a business will purchase a product and then stick its own brand name on it.
Why Start a Franchise Business?
- Can be great for a business owner who loves to manage but doesn’t love the start-up process of growing a brand
- Equips business owners with things that have already made existing franchises successful
- Provides expertise from an already-established business with not as much trial-and-error as from a start-up
- You’ll need a hefty start-up cost; tens of thousands of dollars, typically
- Rules and regulations for particular franchises can bar a business owner from working how they want
- Big business faux pas in the public eye can be the reason people stop frequenting your store, even if you weren’t involved in its HQ controversy
What Are the Types of Franchises to Choose From?
Many people who have a general understanding of franchises might just think of McDonald’s or Subway chains as franchises, but there are actually a few different types. Franchising professionals may break down franchise types on a deeper scale, separating them into 5 different categories instead of 3, but we’re going to keep it simple and organize it based on how franchisors let a franchisee use their name and products.
- Product Franchise — A franchisee can sell a brand’s products by either paying a fee or purchasing a minimum number of them. Sometimes, they’re limited to just the brand’s products, and other times, they have the option to sell a competitor’s brands, too.
- Manufacturing Franchise — The franchisor will let a franchisee sell their products, only under their trademarked name. If you’ve gone to a car dealer where that sells Hyundai cars, then you’ve been to a manufacturing franchise. While it’s not technically a full-on Hyundai store, the dealer sells brand-name cars under their own business.
- Business Format Franchise — Perhaps the most commonly known franchise type. You’ve probably come across this stopping at a Chick-fil-A® or a Dunkin’ in your neighborhood or on a road trip
13 Steps to Starting a Franchise Business
1. Know Your Why and Conduct Market Research
Before starting your franchise company, consider why you want to open a franchise in the first place. Is it because you’d love being a business owner, but want the outlines, breakdowns, and manuals to make it happen, or because you love a store and want to bring it to your area? Maybe you’ve always wanted to run a cafe, but know that the franchisors of Panera Bread will set you up for success much more than if you tried it on your own. Or maybe you’d like to manufacture children’s toys, even if it’s under a big-brand toy name.
After this, ask yourself another question, but instead of, “why,” ask “who?”
Who will want to buy your franchise products or come to your franchise? What market is searching for what you’re looking for, and is their desire for it deep enough for your investment to be worthy? You’ll dive more into your market research in step 3, but before doing anything, do ensure your market will spend money on or at your franchise, especially before you put money into it.
2. Choose Your Franchise Business (and Know the Rules!)
Let’s go back to those 3 types of franchises. If you know your “why” and have an idea for your business, then chances are you’re pretty confident about what type of franchise business you’re going into. After all, even though they all fall under the “franchise” title, selling products, manufacturing products, and running a store are 3 very different ventures for 3 very different franchise business owner types.
While picking the right franchise type isn’t challenging, you will need to know the rules and regulations for each type. Franchise laws and regulations will differ depending on the company and the state you’re running your business in, and while we’d love to give you a comprehensive list of where to search, it’s best to get the information directly from the source, since rules are always changing.
3. Develop a Business Plan
Now’s about a good time as any to get going on your business plan to steer your business’s ship in the right direction. There’s no one right way to write one, but a business plan template can be easy to plug your existing business notes into.
4. Establish Your Target Market
That market research you did in step 1 isn’t going to get forgotten about. As a business owner, knowing your target market is key to knowing how well your franchise will sell to others. Think about the people who need your product— confused car buyers, hungry pizza shop dwellers, or fashionistas yearning for a chain boutique in their small town— and let it drive your business’s direction.
5. Estimate Your Projected Costs and Choose a Pricing Structure (if Needed)
Having a deep enough understanding of your target market will also tell you another thing— how much they can afford to spend on your product. Are they big spenders, able to drop tens of thousands of dollars on a new car, easily, or are looking for a fast, simple way to get a fulfilling bite to eat for lunch?
Knowing this will help you with two things:
- Estimate your projected costs, as in how much it’ll cost actually to purchase your products or franchise.
- Establish your pricing structure, as in how you’ll price your products (if they’re not already set via a business format franchise).
6. Establish a Legal Structure
Here’s where we get official. If you haven’t already, establish a business structure to legitimize your business and separate your assets in case any legal issues came to your business. Here are a few business entity types, many of which we help business owners form:
Sole Proprietorship and General Partnership
An unincorporated business type that doesn’t require paperwork or forming, but also doesn’t protect your personal assets against legal issues that might come against your business. A sole prop is for a single owner, and a general partnership is for more than 1 business owner.
Limited Liability Company (LLC)
An incorporated business type that requires paperwork and filing but gives you an Employer Identification Number (EIN) that allows you to open a business bank account. It also protects your personal liabilities, creating a formal business structure to protect you from any liabilities.
A structure where two or more entrepreneurs go into business together, but are only held liable for the amount of money they invested in their business.
An incorporated business that’s either an S-corp (which an LLC or LLP can file as on their tax returns) which has fewer than 100 shareholders or a C-corp, which is for larger organizations and owned by stockholders.
7. Choose a Store Location (for a Business Format Franchise)
If you’re working in a business format franchise, then your target market will help you with yet another element: establishing your store location. Consider a few of these factors:
- Accessibility and Visibility — How close (or far) will your store be from your downtown, the highway, or other stores? Making a store accessible will make it that much easier for your target market (downtown dwellers? Road trippers in need of a quick stop less than a mile off the road?) to spend money with you.
- Symbiotic Business “Partners” — What other businesses around could help bring more traffic in the door? Is there a local pizza shop that would complement your Carvel perfectly, having families stop in for a treat after dinner?
- Demographic — This comes hand-in-hand with knowing your target market, but it’s still important to mention since potential customers will make or break your business.
8. Create an Operation Strategy
An operations strategy will determine the day-to-day procedures of your franchise. As a business format franchise, you might already be given an operations strategy to follow. But as a manufacturing or product franchise, you’ll need to create it yourself so those working with and for you follow clear guidelines that adhere to your business goals and values.
9. Develop a Marketing Strategy and Start Marketing Your Franchise Business
Did you think we were done talking about your target market? Definitely not.
Your marketing strategy must be an ongoing system that meets your target market where they are— whether through street posters, Facebook ads, or billboards. If you’re still building up your budget for ad money, start with something free, like a social media account, and connect with locals through Facebook groups organically to bring more brand awareness around your business.
(Just because people know what a UPS store is doesn’t mean they know you just opened one around the corner from their house.)
10. Source and Secure Funding
If you don’t have funds saved to invest in a big franchise investment like purchasing cars, bulk products, or an entire business format franchise, find funding through your bank, the Small Business Administration (SBA), private lenders, or investors. It’s worth researching lending options for franchises and as a general business.
11. Review and Sign the Franchise Agreement
You’ll likely have to go through a ton of paperwork to cross all the Ts and dot all the Is for the franchisors to establish a legally binding contract. Make sure you have a copy of the agreement to reference when you need it.
12. Purchase Insurance and Pay Attention to Business Compliance Requirements
Keeping that copy of the franchise agreement will encapsulate some of the business compliance requirements you’ll need to know— but don’t stop there. Collect all the details and regulations so you’re never in the dark about how your business complies with the law.
This also includes getting business insurance, which you can get with the help of a professional insurance provider (if the insurance requirements aren’t listed in the regulations). After all, you’ll need different insurance for a car dealership than for a restaurant or a retail store.
13. Recruit and Train Staff
If your franchise equipped you with a training manual, then you’re halfway to onboarding your staff to help your franchise grow! If not, it’s time to create one yourself, using the guidelines and values you pride your business management on.
Find a training manual template online, or find a training tool if you already have guidelines in place to make staff onboarding a breeze.
Franchise with doola by Your Side
Get a dedicated doola bookkeeping team for your franchise business, so you never have to tediously track finances again. Whether you’re selling your favorite Honda cars or helping people stay fit with a Planet Fitness gym, we’re right by your side every step of the way!
How much does it cost to open a franchise?
The average franchise start-up ranges between $100,000 and $300,000, according to ADP.
How to get a business loan to start a franchise?
Some businesses offer their franchises lending options; if they don’t, a budding franchise owner can apply for commercial business loans or look into SBA loans.
Can a foreigner open a franchise?
Yes. Two programs allow this: the E-2 visa, where the business owner needs an active management role, and the EB-5 visa, for a more passive investor who creates at least 10 full-time jobs for full-time US workers in that franchise.
Do franchises pay taxes?
Yes, just like other businesses, franchises have to pay taxes.