Famous businesses like McDonald's, Subway, Hilton Hotels, and Marriott all operate on the franchise model. Franchisees own the individual locations, but the franchisees are given permission to operate by the franchiser. This means that franchisees must conform to their brand's corporate standards.
How to Start a Franchise:
Whether it's McDonald's, Subway, Hilton, or some other instantly recognizable brand, every franchise has a slightly different process, but they generally follow steps that include a formal application and an in-person interview. Use our guide to help you as you navigate the exciting prospect of becoming a franchisee.
Choose a franchise.
Identify your passion.
Franchise owners put a lot of hard work into making their business a success, so don't try to do something that doesn't interest you.
Talk to other franchise owners.
Ask other owners what their experience has been like. In particular, find out what kind of relationship they have with the franchisor and what level of personal involvement is required in their business.
Look into fees.
Find out how much the franchise fee is and what additional costs may be part of your upfront investment. Franchise fees vary from a few thousand dollars to $1M, so make sure you pick a franchise model that you can realistically finance.
Evaluate the local competition.
Is there too much competition? Has anyone else started a franchise that is similar to the one that you want to open? It will be difficult for you to make money in a saturated market, no matter how good the franchise model is.
Write a business plan.
Do your research.
Lenders and franchisers will be very interested in the details of your plan, so take lots of time to create a budget and research the market in your area.
Include all of the relevant sections.
A franchise business plan should include the following sections:
- Executive Summary.
- Business Description.
- Management Summary.
- Financial Plan.
Some franchises have a business plan laid out for you to work off of, while others will want you to present them with a business plan. If you need to draft your own plan, check out our business plan template.
Form a legal entity.
Choose between a corporation or LLC.
Your franchise should be set up as either a corporation or an LLC (Limited Liability Company). Creating a corporation or LLC for your franchise comes with a few distinct advantages:
- The business assumes liability, instead of you as the owner being held liable.
- The IRS has a different tax structure for corporations.
- Franchisors are more likely to work with an LLC or corporation.
- Your business may be able to qualify for special tax breaks.
File articles of organization.
In most states, you need to file Articles of Organization in order to set up a corporation. You can do this by contacting your state's Secretary of State department or small business office.
Get legal counsel.
If you are forming a legal entity for your business with the intent of becoming a franchisee, you should seek counsel from an attorney who can give you legal advice and direction from this point forward.
Explore franchise-specific options.
Some franchisors offer their own financial assistance programs to franchisees. This means that when you meet with a franchisor, they can present you with a variety of customized loan options to help you secure the money that you need to start your business. Do some research about the franchise you are interested in to find out if this is an option.
Apply for franchise loans.
Lenders like OnDeck, Funding Circle, and others offer a special category of loans called franchise loans. These term loans are designed to assist entrepreneurs with franchise fees and startup costs.
Partner with investors.
There may be people in your network who would be willing to partner with you by investing their money in your franchise. Share your business plan with potential investors if you want to seek private investment into your business.
Sign a franchise agreement.
Review and sign the agreement.
You can think of the franchise agreement as a legally binding contract. This document is usually drawn up by the franchisor. The contents of a standard franchise agreement include:
- Legal disclosures.
- Details about franchisee payments.
- Franchisee obligations.
- Relationship between the parties.
- Special provisions.
- Franchisor services.
Essentially, a franchise agreement outlines exactly how the business relationship between the franchisee and the franchisor will function.
Choose a location.
Consider the type of business you'll be operating.
If you are opening a fast-food franchise, you need a location that can facilitate a drive-thru, customer parking, and full kitchen/dining area. Not only that, but it should be in a busy place.
Beauty salons, real estate agencies, and retail stores may have totally different location requirements, so don't assume that there is a one-size-fits-all solution. The franchisor may be able to tell you which existing locations have been the most successful.
Ask the right questions.
Do your research before you decide on a location. Ask questions like,
- Are there competitors in the area?
- Is the property easy for customers to access?
- What kind of building does the franchisor recommend?
- Could the building be expanded if necessary?
You can advertise job opportunities at local job fairs, on your website, through social media, or with job posting sites like Indeed. The more exposure your job postings have, the better your chances are of attracting qualified candidates.
Train new employees.
Some franchises have their own training programs that you can use to train new employees, while others are more hands-off and leave all training initiatives up to the owner. In either case, owners and managers must be familiar with the franchisor's standards and methods of operation before leading their employees.
Franchise Metrics: Revenue Per Hour
Revenue per hour is a measure of how much money your franchise is generating per hour of operation in comparison to the amount that you are spending on labor.
To calculate revenue per hour, you first need to find out what your franchise's total revenue was for a given period. You can find this number by looking at one of your income statements.
Next, add up the total number of hours that your employees worked during the same period.
Finally, divide total revenue by total labor hours. The result is your revenue per hour or revenue per labor hour.
Fees for Popular Franchises:
$100,000 - $1,000,000
Wyndham Hotels & Resorts
$40,000 - $90,000
$12,500 - $25,000
$0 - $25,000
The UPS Store
$32,000 - $40,000