How To Create and Grow a Franchise

Franchising is a tried-and-true strategy for successfully growing a business. A business owner can start a franchise by filing a Franchise Disclosure Document, which allows the company to sell the concept to qualified entrepreneurs who then replicate the established business model and follow the guidelines in exchange for the payment of fees and royalties to the franchisor. 

Now, as the world emerges from the COVID-19 crisis, there may be a large number of qualified candidates looking for new franchising opportunities. 1851 Franchise spoke with franchise industry experts to learn more about how a company can franchise its business and take advantage of this demand.

How to Create a Business Worthy of Franchising

The first step to creating a franchise is creating a business model with strong and consistent sales. Above anything else, franchisees want to see a concept that is continuously making money over a period of several years. 

“Typically, a business is ready to franchise when they have a unit or pilot location that is performing well and the public is taking to it,” said FranNet Vice Chairman and Principal Blair Nicol, CFE. “They should have already duplicated the concept a few times, that way they have a replicable model that has been proven to work anywhere.” 

In order to create this replicable model, Nicol says first-time franchisors also need to heavily document how they’ve successfully established the concept. “Prospective franchisors need to create a system of procedures and operations that somebody else can follow,” he said. “It may not be polished or totally complete, but they need to document how the business started, how it should be run, how it should be staffed and more.”

For example, an operations manual with product lists, employee handbooks, vendor tips, storefront appearance guidelines and more will need to be provided to each franchisee. 

How to Create a Franchise Opportunity

Once a concept is ready to franchise, the next step is to create a business plan that outlines the number of franchises a company wants to sell, which markets they are targeting for growth, how fast they want to expand and more. Prospective franchisors will also need to evaluate the amount of staffing and financial capital required to successfully sell those licenses and onboard incoming franchisees.

“It is important to remember, if franchisors do this right, they are going to be in for at least $100,000 in legal fees, operation manual costs, trademarking, training, registration, FDD creation, marketing and more, before they ever sign their first franchisee,” said Valerie McCartney, vice president of franchise sales & development at The Broken Yolk Cafe. “Most people who have only opened up one store don’t have that kind of capital lying around to spend.” 

Nicol agrees being properly capitalized is essential. “Typically, a franchisor does not become royalty sufficient until around 75 to 100 open units,” said Nicol. “That means it takes quite a bit of capital to create and grow a franchise successfully. Sometimes a franchisor will also hold on to their pilot location for too long. Oftentimes, franchisors will need to sell their pilot location and use those funds to focus on the franchisor side. ”

Then, it’s time to create a Franchise Agreement and Franchise Disclosure Document. These documents outline the responsibilities of franchise owners, fees and tax responsibilities, financial performance history, rules pertaining to trademarking and much, much more.

“Creating an FDD requires outside help,” said Nicol. “Prospective franchisors will work with a legal team and accounting team to properly outline the FDD. All financial statements and spreadsheets will need to be in a row. The FDD will also need to properly outline the initial investment to open specific locations. The legal team will work directly with the franchisor to help them establish best practices.”

How to Continue Franchise Growth

Once the franchisor starts selling franchise agreements, Nicol says there are several ways to promote healthy growth. “A common mistake emerging franchisors make is taking the first person who is willing to write a check,” said Nicol. “That is the wrong thing to do — the first few franchisees will be the validators for future franchises. From a support level, young franchise brands also need to grow around where they are based. If a franchisor is based in Portland, Oregon, for example, the first few franchisees need to be in the Pacific Northwest to promote regional growth. The legal team will also advise franchisors where to grow in the United States based on registration states and competitive threats — a franchisor may want to come to market faster if a competitor has plans to come first.” 

From there, emerging franchisors need to hire a good, tenured corporate support team to provide ongoing support and training to all new franchisees. If growth stalls after the first few locations, Nicol recommends taking a hard look at the marketing strategy for bringing in new franchise leads. 

“Franchisors should consider brokerage groups, digital marketing tools, as well as tier referral systems where franchisees can refer other franchisees to the brand,” he said. “Finding the right franchisees is key — if you have a good franchisee who believes in the brand and has the operational and financial capacity to expand into multiple units, for example, it can be super advantageous to the overall growth of the brand.”

With the right plan in place, franchising can increase a company’s revenue through franchise fees and royalty payments paid by the franchisee, as well as expand brand recognition as the franchise reaches new markets and customers.