If you have entrepreneurial dreams, but the thought of starting a business from scratch seems daunting, a franchise can be the perfect opportunity. By buying a franchise, you get an existing brand with name recognition, and a formula for operating the business.
But you still have work to do. Here we’ll cover the steps that it takes to start a franchise.
Research and Choose the Right Franchise
There are literally thousands of franchises in the United States to choose from. You should start by considering what industries are of interest to you. It could be a fast-food chain or other type of restaurant, or a pet store, or retail clothing – the list is endless.
When selecting an industry, you need to research the direction of the industry as a whole. Is it growing? Is the industry going through any major changes? What are the predictions for the future of the industry?
Once you’ve selected an industry, you can start to look at specific opportunities. You’ll want to consider factors like the brand reputation of the franchise, its success rate and revenues, and, of course, the cash you need to start the franchise.
Understand the Franchise Agreement
A franchise agreement will define your relationship with the franchisor. It will include terms including:
- The franchise license fee and capital reserves required
- What support you’ll get from the franchisor
- What expenses you’re responsible for
- The amount of revenue you’ll pay to the franchisor
- Minimum performance standards for your franchise
- Marketing standards
- Any other requirements that you’ll need to meet
You should review the agreement with a business attorney so that you fully understand the terms.
Understand Your Market
Next, you’ll need to examine your market to understand if you’re filling a need in that market and what competition you’ll face. You’ll need to know if there is sufficient demand in your market for the franchise that you’re considering.
First, research the competition to find out if they’re having success in the market and who their target market is. Then, to test the demand for the specific franchise, you can post online surveys or simply ask people in your area if they would be customers of your business.
Now you’ll need to figure out exactly how much money you’ll need and where that money will come from.
Costs associated with starting a franchise, of course include the franchise fee, which can be as low as $10,000 or up to $5,000,000 or more. The franchisor may also require you to have a certain amount of liquid capital.
Other costs include the cost of the physical location and its preparation, equipment, furniture and fixtures, insurance, a marketing budget, and an operating capital budget.
Often, the franchisor will provide you with an estimate of your costs.
If you have enough capital in your personal savings, great! But if not, you may be able to obtain a bank or SBA loan, or even raise investment capital. Sometimes the franchisor will provide financing or have approved lenders that will work with you.
However, you will not be able to get financing for all the startup costs. You’ll need to have some personal capital in the deal.
To raise any kind of financing, you’ll need a detailed business and financial plan. The franchisor may be able to assist you with creating a plan.
Sign the Franchise License Agreement
Once you’ve secured financing, you’re ready to sign the franchise license agreement. You may want to, again, review it with your attorney to ensure that you understand the terms. You’ll pay the franchise fee at this point.
Form a Business Entity
The first step in putting together the nuts and bolts of your new franchise is to form a business entity with your state. You can choose to form a corporation or a limited liability company (LLC), both of which offer personal liability protection. LLCs are the more common choice because they are less complex and offer pass through taxation.
Pass through taxation means that your franchise profits pass through to you to be reported on your personal tax returns. The LLC is not taxed.
Forming an LLC simply requires filing a document with your state, but before you file you need to choose a registered agent for your business. A registered agent is responsible for receiving official correspondence on behalf of your business. Many franchise owners opt to hire a registered agent service to save them time and ensure that all correspondence is handled in a timely manner.
Choose a Suitable Location
Now you’ll need to find a place to build your franchise facility or a space to rent. Your franchisor may have certain requirements that you’ll need the location to meet.
You should find a location that one, has few competitors nearby, and two, is close to your target market. You’ll need to do some research on the demographics of the locations that you’re considering to ensure that enough people in your target market are close by.
The franchisor may need to approve the location before you can proceed.
Hiring and Training Staff
Next, you’ll need to build your team. The franchisor may already have a staffing plan in place that you can follow, with specific job titles, the number of people needed for various positions, and a pay scale.
Before you start advertising your open positions, you’ll need to have a training plan in place. Again, some franchisors will provide guidance and support for training employees.
Grand Opening and Marketing
Now it’s time to prepare for the big day! You’ll want to have some sort of event planned for your grand opening, perhaps offering special prices or some other kind of promotion.
You should have a marketing plan in place that you can now implement. Most franchisors offer some level of marketing support, so be sure to leverage what they offer. Combine those resources with your own marketing plan to create the most effective strategy.
Starting a franchise can be an excellent investment and tends to be less risky than building a business from scratch. It still, however, requires much preparation and some capital to get started. Be sure to have an attorney involved in making the franchise deal so that you fully understand the terms.