How to Franchise a Business: The Definitive Guide

by Brandon Boushy
How to Franchise a Business: The Definitive Guide

There comes a time in every entrepreneur’s life where they have to decide “am I content or do I want to continue growing my business?” If you’ve reached that point, you’re probably looking for new ways to increase your business and have wondered how to franchise a business.

Mike Andes, the founder of Augusta Lawn Care, started a franchise model two years ago and now supports over 60 franchises. Next year, he plans to reach 150 franchises and he has joined us to help you prepare your own franchise business model.

Mike shared tips with us on everything from how he prepared and set up his franchise to hiring consultants, creating his franchise model, systemizing the proper support, and ongoing operations. We’ll share concepts from him and other resources to help you franchise a business.

What is a franchise business?

A franchise business is a business structure in which the owner (a franchisor) creates the legal path to allow other people to use the company’s brand name and processes to offer products or services to customers in their area.

Often, a franchise business model is used with local businesses that are confined by geographical constraints. For instance, an Augusta Lawn Care in Georgia would not do work in California, nor could the business owner be at both locations on a daily basis.

There are thousands of different franchised businesses, many of which you can find on the International Franchise Association website. Reviewing how franchises operate in your industry is probably a good first step, but Mike told us:

I actually bought an Any Time Fitness franchise beforehand to learn about the franchise model before starting my own.

If there’s a franchise in another industry that you would love to have in your location, it might be a great way to get hands-on experience with a franchise. Let’s look at some other questions you might want to answer before going through the process.

How much does it cost to franchise a business?

Mike told us:

Takes a year plus and $100,000. You’ll need a Franchise Disclosure Document and Franchise Agreement, which means you’ll need a franchise consultant and a franchise lawyer.

He also mentioned that most people would disagree with him and say that you should expect two to three years and $500K, but he’s always liked moving faster than other people.

How to franchise a business with no money

If you are thinking about franchising an existing business but don’t have the $100K+ to start it, there are some options. The most common ways are:

A man applying for a loan online

  • Get a loan. (Check out our preferred lenders for loans up to $5M.)
  • Get a partner.
  • Convert to a C-Corp with a retirement plan, and buy your shares with the retirement plan. (This strategy is a legal strategy called ROBS. Learn more about ROBS.)
  • Wait until your business has been successful enough to self-fund franchising.

Mike told us:

The first 10 franchisees are the hardest to find. They are basically buying into you. After that, it gets easier.

He went on to explain that many franchisors never get to ten franchise locations. Instead, they go bankrupt and take down the franchisees with them. 

That’s why I suggest waiting until you can independently fund franchising a business before attempting to do so. If you are barely meeting day-to-day operations, a loan and the extra work will not make it easier.

Do franchise owners make money?

Yes, but not at first. You have to spend the start-up costs to create the franchise system. You’ll need new systems in place to support your franchise program, and then you’ll need a marketing strategy that may require $10 to 20K in commissions for a franchise broker to help you find new franchisees.

Mike told us,

If you are paying for advertising expect, $40K+ until you have 10 or more successful franchises. Each one gets easier though.

He also told us:

Most franchisors make the most money from making deals with manufacturers and forcing franchisees to buy from them. We don’t do that. They can buy from anyone.

He explained how his company earns money instead. His franchise fees are:

  • $4K initial fee plus $699 per month for a solo operator with no protected territory
  • $15K initial fee plus $1,200 per month for a franchise with a five-mile protected territory

This varies from most franchise agreements that take between 5 and 10% of revenue. He feels it adds a level of trust within his franchise network to charge a flat franchise fee because the business model shows that the franchising process helps them make more money with no additional gain for him.

Listen to the podcast below to hear the entire discussion with Mike:

How profitable is owning a franchise?

I crunched some numbers based on conversations with Mike and found his business model brings in 25 to 50% of the revenue that they would if he were charging a percentage of revenue. He’s still making $2 million a year and growing though

I also took the time to see how one of the most profitable franchising businesses, McDonald’s, performs. We’ll look at the different business models below.

Analyzing Mike vs. Percentage Models

I took the statements from Mike and combined them with information from his website. Then, I compared the first three years of his franchise revenue model including a 5% royalty and a 10% royalty. I used the assumption that in all scenarios, the revenue was $39,000 per month.

As you can see, his model makes 1/4 to 1/2 as much as the revenue share business model.

Mikes franchise business model breakdownAssuming that all costs are equal, Mike’s model lets the average franchise owner make up to an additional $100K profit over three years, but his profit margin is lower. Let’s look at another example.

Comparing Franchisor Profits with Corporate Store Profits: A Look at a McDonald’s Annual Report

McDonald’s had 36,521 franchise stores, and 2,677 corporate-owned stores according to their 2020 Annual Report. Their net income percentage was 24.63% overall, but I wanted to see what the differences were between running your own stores and selling franchises.

I used operating margin to establish this. When there were revenue or expenses on the Net Income Statement that were not directly attributed to franchises or corporate stores, I attributed 93% to the franchises and 7% to the corporate stores. 

McDonalds franchise AOM

As you can see, if a franchise can scale globally, it is nearly five times more profitable to sell franchises and support business owners than it is to open more corporate stores.

I hope these figures help you understand the potential difference in profitability between opening more corporate stores and selling a proven business concept to a prospective franchisee. Despite McDonald’s great performance, not every franchise opportunity can grow to its size.

Like Mike said, most franchise companies don’t reach 10 locations.

Keep reading to learn more about how to start a franchising business.

Requirements to start a franchise

Selling franchises is a lengthy process that can take about a year of planning and paying franchise consultants, a franchise attorney, and potentially franchise brokers. After franchising your business, you’ll also need to find new franchisees and support their operations by giving business advice and creating new business practices.

Let’s look at 10 steps on how to franchise your business:

  1. Prepare for franchising your business
  2. Create a Franchise Disclosure Document
  3. Create a franchise agreement
  4. Establish the initial franchise fee
  5. Establish the royalties
  6. Establish the training program
  7. Market your new franchise
  8. Screen potential franchisees
  9. Onboard each franchise owner
  10. Ongoing support

Ready to learn how to start a franchise?

Step 1. Prepare for franchising your business

The first step of how to become a franchise owner is preparing your organization for the franchise journey. In this step you will:

A notebook and a black eyeglasses on a desk

  • Write a business plan focused on the franchise relationship. It should include all the normal parts of a business plan but focus on a solid expansion strategy, brand recognition, marketing tools, business systems, and supporting franchisees. Learn more about business plans.
  • Hire an experienced franchise consultant and franchise attorney. 
  • If you aren’t already a limited liability company or corporation, change your business licensing to the standard for the franchise industry. Use Better Legal Services and the code UpFlip for $30 off.
  • Get funding, which we discussed earlier.

Once you’ve done all this, it’s time to create a Franchise Disclosure Document. Let’s discuss it now.

Step 2. Create a Franchise Disclosure Document

When you franchise your business, the Federal Trade Commission (FTC) requires you to provide a Franchise Disclosure Document (FDD) to qualified franchisees. You can find the full laws on the FTC website, but in general, an FDD needs to include:

  • Cover page with specific requirements
  • Table of contents, which is found on the same link as the cover page
  • The following sections (as seen on the FTC website):
    • Franchisor and any parents, predecessors, and affiliates
    • Business experience
    • Litigation
    • Bankruptcy
    • Initial fees
    • Other fees
    • Estimated initial investment
    • Restrictions on sources of products and services
    • Franchisee’s obligations
    • Financing
    • Franchisor’s assistance, advertising, computer systems, and training
    • Territory
    • Trademarks
    • Patents, copyrights, and proprietary information
    • Obligation to participate in the actual operation of the franchise business
    • Restrictions on what the franchisee may sell
    • Renewal, termination, transfer, and dispute resolution
    • Public figures
    • Financial performance representations
    • Outlets and franchisee information
    • Financial statements
    • Contracts
    • Receipts
    • Exhibits
    • Franchise Agreement
  • Any additional references not included in the previous section

This will need to be created with a franchising consultant and a licensed attorney well-versed in both federal and state laws because there may be specific requirements in each state. According to the Franchise & Business Law Group, most states have some requirements.

In addition, you are required to update the FDD for material changes quarterly, and after your annual report.

Step 3. Create a franchise agreement

A man at his desk holding a mobile phone

A franchise agreement is a legally binding contract that a prospective franchisee will sign before the franchise relationship is in place. This document will include many of the parts from the FDD including:

  • Initial fees
  • Other fees
  • Restrictions on sources of products and services
  • Franchisee’s obligations
  • Financing
  • Franchisor’s assistance, advertising, computer systems, and training
  • Territory
  • Trademarks
  • Patents, copyrights, and proprietary information
  • Your responsibilities in the franchise business operations
  • Restrictions on what the franchisee may sell
  • Renewal, termination, transfer, and dispute resolution
  • Public figures
  • Any other terms that are deemed necessary by a lawyer to protect the franchisor

The signing of the franchise agreement, combined with the payment of franchise fees is the point at which prospective franchisees become a franchise location.

Step 4. Establish the initial franchise fee

A new franchisee is required to pay upfront for the rights to operate their own business using the company’s intellectual property and business processes as outlined in the FDD.

Most successful franchises will be charging enough to cover the onboarding costs and the additional system resources that will be needed during the first year.

While you can find some companies that sell franchises for as low as $3,000, most will sell franchise opportunities for amounts between $10K and $100K. 7-eleven upfront fees are $1M, but they also provide all the equipment and finance up to 65% of the fees.

When structuring your franchise fees and royalties, consider the following:

  • What is my revenue and profit at my location(s)?
  • What is the maximum fee where the new franchisee can still make a 15% net income during the first year based on company-owned units’ performance?
  • What is my estimated cost of recruiting a new franchise location? Mike suggests assuming $40K for each of the first 10 new locations.
  • What is the level of investment that will encourage only truly committed business owners to apply?
  • What level of investment will encourage the growth of new locations?

After you answer these questions, you should have a nice range of values for what the combined cost of the initial fee, royalty fees, and marketing fees should be. Then, it’s just a matter of how to distribute it amongst the three concepts.

Mike’s structure for his franchise system is a good way to go when you consider how to start a franchise business. He gave examples of others like Jimmy John’s and Anytime Fitness that have been successful using a similar strategy.

Step 5. Establish the royalties

Royalties are monthly fees that the franchisor charges the franchisee for using their intellectual property, vendors list, and processes. But how much money should you charge?

As mentioned before, don’t focus solely on how much you make, but also on how it will impact prospective franchisees when they are considering your franchise opportunity.

Mike told us:

Franchisors typically charge 5-10% of revenue. We charge a flat model fee. We use the flat fee so our franchisees know that our interest is in helping them grow, not increasing our revenue.

He went on to tell us about problems that can occur when you run nationwide promotions and use monthly royalty fees:

Subway is involved in a ton of lawsuits with their franchisees because of the revenue sharing model and $5 footlongs.

That’s bad for the FDD, bad for Subway, and bad for the franchises. If you want to have any specials that might impact profitability negatively, you probably want to consider how to open a franchise with flat monthly fees.

Step 6. Establish the training program

A laptop and a black lamp on a white desk

You’ll want to start getting the training program and business systems ready for new franchisees to be onboarded. Whether this is having them come to your location or later having them go work with a top-performing franchisee, you’ll want to have everything well documented.

Mike told us:

The Anytime Fitness Training was two weeks and it was just too long. I got bored so when I created mine, I made it three days so that people don’t get bored and they can get right to work. Then we follow up routinely.

He also told us:

Follow-up and level of service is key to maintaining brand consistency. In addition to the on-premises training, we contact them when an issue is marked such as a drop in revenue. If they miss the coaching calls, that’s a red flag. If we don’t hear from them in 3 months, we know there is something wrong personally and we want to help them.

Knowledge Anywhere has a great article on how to create a great franchisee training program.

Keep reading to learn about marketing your new franchise.

Step 7. Market your new franchise

Mike told us that there are three methods of marketing to get people to reach out about how to buy into a franchise:

  1. Spend lots of money on online marketing. He warned us to expect spending of $40K per franchise for the first 10 franchisees.
  2. Hire a broker with big commissions. He warned that broker commissions can be up to $20K, which would make it where Augusta Lawn Care didn’t make a profit on a franchise until year three.
  3. Start building a network from the start so that you have a built-in audience from the start.

He told us:

I had it kind of easy. I pulled the trigger quicker than I would have otherwise to keep my highest performers and help them have something more to achieve.

Selling his first franchises to high-performing employees helped him get past the hardest part (the first franchise) because there were already multiple units by the time he was searching for franchisees.

Mike also told us that marketing support for new franchisees must be considered when you are learning how to own a franchise. He told us:

We create a lot of marketing content for Youtube, Facebook, Google, and Next Door including templates and tutorials, but they have to implement them. If they get a huge contract and we add extra clients, they won’t be able to keep up. That would hurt both the franchisee and the brand.

He went on to explain why he doesn’t run a nationwide marketing budget:

We show the climate so that makes it challenging for landscaping. We give them resources, but let them choose to use them or not so that they can make it localized as opposed to vanilla. That’s why we don’t charge a marketing fee.

He pointed out that, for most businesses, good market data would include some nationwide market data, but with the lawn care industry, it doesn’t work. It would be too generic.

Step 8. Screen potential franchisees

A man holding a white iPad

Screening is another important aspect of building your franchise network. The process will normally follow this process:

  1. Entrepreneur finds information about your franchise opportunity from a broker or online.
  2. The person submits information and schedules a consultation.
  3. The franchisor (or their representative) has a call with the interested party.
  4. If both parties are interested in working together, the franchisor sends the qualified franchisee the FDD and franchise agreement.
  5. Some do training first, then sign the agreement. Some sign the agreement first, then train. Mike requires the payment and signed agreement before training.

He gave a lot of advice on screening. here are some of the best tips he shared:

First, 50 I was the original call. We only accepted one out of eight applicants. We considered: Do I like this person? Would I want to work with them? Are they smoking on the call or anything that would look bad to a client?

He also advised about owners who want to own multiple franchise locations:

If you have more than one, you have to have a GM for each and you can only start one at a time. When you own multiples it is about people management as opposed to your personality. We have to be confident that you can guide people.

Some franchises may allow you to book a larger territory with a lower franchise fee per location, but Mike doesn’t really feel like that model is best for his brand practices. If quality is something you are heavily focused on, I suggest you follow his lead because you’ll be able to sell more franchises, and the franchisors will be more involved.

He also explained how the franchisor grew over time:

We have 20 employees on the corporate side now. Most are focused on taking calls, support, and payroll. There are three of us, including me, who are focused on sales.

Finally, he warned if you want to start franchising your business consider that:

My time is mostly spent on software, brand deals, and things that help everyone, not the one-on-one contact that I loved so much.

Step 9. Onboard each franchise owner

Onboarding is just setting up the systems for the franchise owner, providing training, and advising them in anything that they need assistance on like marketing or supplier suggestions. You’ll want to follow the policies you created in the FDD to make sure you are in compliance with your contract.

Step 10. Ongoing support

Ongoing support will vary among franchisors. It can include:

  • Marketing materials as discussed earlier.
  • Public relations guidance if there is a scenario that can impact the whole franchise system.
  • Updates on training.
  • Training for new products and services

Mike told us:

Supporting franchisees is the key.

You want to do everything you can to help them succeed.

Now that we’ve had a look at the process of franchising a company, there are some additional considerations for franchising your business in other countries. Keep reading to find out the challenges.

Opening and operating a franchise in a different country

A white sketch pad showing different continents of the world

Many franchises hope to go global and if they can, as it can be a boost to the brand. It also comes with a lot of challenges that Mike has experienced. He told us:

I wouldn’t have done it as early. The 12th one was in Canada and the laws are completely different for each of their 12 states. Be prepared for it to not be profitable for several years.

He also mentioned that international franchises have to deal with currency exchanges. He has dealt with it by keeping the costs in Canadian dollars but could see having to change that if he grows to other countries.

Also, be aware that the lawyer who assisted you in starting your franchise journey may not be skilled with international business law. You’ll also have new tax requirements for supporting new locations in other countries.

In general, there are over 300 cities that have over 100,000 people in the US. Franchising your business in other countries can wait until you have at least 100 franchises so you have a good base for international expansion.

Closing

We’ve answered the common questions people have about franchising a business, shared insight from someone who has sold more than 60 franchises, and provided a step-by-step guide on the process of starting your own franchisor. I want to leave you with this last piece of advice from Mike:

Go to franchise conventions, read books, and talk to people who have started bigger ones if you can. Learn everything you can.

If you found the podcast and our blog useful. Subscribe to our channels so you’ll get more great information on starting, selling, and buying businesses. 

What franchises would you like to know more about?


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Author

Brandon Boushy

Our lead writer, Brandon Boushy, has been a business consultant, business owner, and marketer since 2017. Brandon is committed to the pursuit of knowledge and continuous improvement. He measures his success based on how many business owners he helps succeed. Brandon started Raising Daisy Photography in 2017 with Stephanie MacIver. His role was focused on marketing, estimating, and managing customer interactions. He is also a freelance business researcher and has provided over 3,800 hours of business research for more than 50 clients. His blogs are read by over 2 million people every year. Brandon told us: "My motto is never quit learning. I bring this motto to everything I do, and find writing the best way to help share the data I obtain to assist business professionals pursue their dreams." He empowers companies to improve their communication and brand awareness through creative content strategies and blog writing.

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