10 Things To Know Before You’re Ready To Turn Your Business Into a Franchise

Turning a small business into a franchise can be an incredibly helpful step in driving the growth of the concept. By welcoming passionate local owners to the team and providing a handbook to ensure brand continuity, what was once a local business with just a few locations can quickly grow to have a presence almost nationwide.

However, franchising can be a costly process, especially if it’s done incorrectly or without the proper planning. In order to avoid taking on the franchise process before you’re ready, or to ensure you really are ready, consider these 10 things.

1. Is Your Business Ready for Franchising?

While franchising is a great way to drive growth, starting the process with a business model that is not strong and healthy is a great way to fail. When evaluating your business and yourself as a business leader, you should consider the profitability of the business, your ability to clone the business model, whether you’ve successfully expanded to additional units in the past and if you’re comfortable in a teaching role.

2. Can You Afford the Process?

After some time, franchising can be lucrative for the franchisor, but like any business, there are financial and time-related costs associated with getting started. Launching a franchise system does not have to be expensive, but prospective franchisors should investigate how much the process will cost.

Typically, a franchise attorney or franchise development consultant can provide insights into the process for a prospective franchisor. These professionals can also follow the business owner throughout the process.

3. Are Impounds and Deferred Fee Collection Stipulations Required In Each State?

Some states require franchise impounds, an agreement that requires the franchisor to deposit any franchise fees into a trust account until it can prove it has fulfilled its obligations in supporting the franchisee in the opening process.

This is an insurance of sorts, required when a franchise attorney or other state authority determines the franchisor may not be well-capitalized enough to support the openings it intends to take on. 

Some states do allow franchisors to include a clause about the deferral of the franchise fee in lieu of the impound agreement. In this case, the franchisee would not be required to pay the franchise fee until it’s operational and allow the franchisor to fulfill its obligations.

4. What Will Working Across State Lines Mean for Accounting?

Many franchisors choose to register in multiple states. While this drives growth, it also complicates the financials. It is highly advisable for franchisors to connect with accounting firms that focus on franchising. These professionals can provide advice regarding the various types of business registrations in different states and what each option would mean for the entity. 

National franchisors also need to consider the tax requirements of both the federal government and the governments of both the home state and any other state they plan to operate in.

5. What Will Your Discovery Process Look Like?

Successful franchisors have a clearly outlined, thorough discovery process. It will be important to develop the franchisee journey and outline each necessary step. This way, the franchisor can guarantee that each prospect has a similar experience and learning opportunity, and rest assured that all necessary steps will be taken in every case.

6. What Will the Franchise Brochure Process Look Like for You?

It is a common practice to provide an informational brochure of sorts after a prospective franchisee’s initial inquiry. The creation of this brochure requires a few considerations.

First, what do you want your brochure to look like? These assets can range in the amount of information they include and the intensity of design, and these variables also impact the cost of brochure development. The process can cost anywhere from a few dollars to thousands, depending on the intensity of the project.

Second, some states also require these brochures to be registered like any other advertisement. If you plan to operate in any state where this is mandatory, once the brochure is developed, it should be sent to the necessary registration authority so it can be approved prior to any distribution.

7. How Will You Evaluate Candidates?

In some cases, franchise candidates can make or break the system. While they are making a substantial investment and are subject to the conditions of the franchise agreement, it is often well worth the additional time and effort to evaluate franchisees on more traits than just their financial eligibility.

Franchisors should develop a straightforward application that asks fact-based questions like the applicant’s professional background, net worth and liquidity. It is highly recommended to have this application reviewed by retained counsel.

However, in addition to any paperwork, the leadership team should discuss the type of person that will be a great fit. How important is company culture? How will you protect the brand? Is there a way to evaluate whether the franchisee is in it for the right reasons? Often, these kinds of things are evaluated over the course of the discovery process as different members of the existing team interact with the prospect.

8. You’ll Need To Create a Franchise Disclosure Document and Receipt Process

Next is the Franchise Disclosure Document (FDD), a holy grail of sorts for many in the franchising world. This is a legal document that includes a wealth of information that will be pertinent to prospective franchisees as they work to evaluate the opportunity and make their decision. 

Information commonly disclosed in this document includes the following: 

• breakdown of the estimated initial investment
• contracts
• copyrights, patents, trademarks or other proprietary information
• financial performance representations and statements
• financing options
• franchisee’s obligation to participate in the ongoing operation of the business
• franchisor support, including advertising, training and technology
• initial and ongoing fees
• leadership team and its experience
• litigation or bankruptcy history
• outlet count and franchisee information
• parent company
• relationship to public figures
• renewal, termination, transfer and dispute information
• territory information
• vendor restrictions

Often, a franchise attorney will participate in the creation of the FDD to ensure compliance.

Franchisors should also obtain a signed receipt confirming the distribution of the FDD when it is shared with a prospective franchisee. To maintain legality and avoid unintentional misrepresentations or misunderstandings, franchisors should not discuss the contents of the FDD with the prospect prior to providing the document itself.

9. How Will You Protect Your Intellectual Property?

While the bounds of the franchisor’s intellectual property rights are often outlined in the FDD, maintaining those rights often requires a bit more work than simply outlining dos and don’ts in the franchise agreement.

Though the legal ramifications of a franchisee violating these terms are usually not worth the potential gain, it is important for the franchisor to have a monitoring process in place. The franchisor should stay in the loop about how its trade secrets, business strategies, logos and slogans are being used. Even if infractions are rare, a single violation can potentially do a substantial amount of harm to the business model. 

10. How Will You Determine Initial and Ongoing Fees?

It is relatively easy to look at the franchise fees and ongoing royalties other similar franchises require, but it is always a good idea for the franchisor to take some time to determine its own fees and related charges based on unique projections and understandings of the brand. 

This process, when done carefully, can contribute to the long-term success of the franchise system. It is important to evaluate the business model accurately and understand the true value of the support that will be provided and realistic projections of what the franchisees will be able to afford, especially when they’re first starting out.

Some franchisors expect to support their business by charging high fees and ongoing royalties, but that isn’t always possible, especially when the high numbers dissuade prospects before they even apply. In many cases, franchisors who offer “discount” prices are able to take over the market as their model is more accessible to a wider range of entrepreneurs. Whichever direction you decide to go in, whether you’re charging higher rates or offering a bargain, it is important to make the choice carefully and work to maximize profits and minimize internal costs wherever possible.

Franchising can unlock a remarkable amount of opportunity for yourself, your business and entrepreneurs nationwide. With a rich history and a strong place carved out for itself in the business world, the franchise model is an appealing one to plenty of business owners — and for good reason. Keeping these 10 factors in mind in the beginning stages of franchise development can help you to build the strongest model possible and set yourself (and your franchisees) up for long-term success.