28 Oct How to Set Up a Franchise Business
If you’re ready to expand your business coverage area, or to open a second location, setting up a franchise business can be an excellent choice. In this article we will explain how it all works, so that you can decide whether a franchise model could be right for you.
What is a franchise?
A franchise is a type of business licence where a franchisor gives a franchisee access to certain business property, such as trademarks, processes and marketing systems in order to allow the franchisee to sell services or products under the franchisor’s business name.
One example is a chain of restaurants. A franchisee can get a licence to open a new restaurant using the franchisor’s name, logo and systems. In order to obtain this licence, the franchisee has to sign an agreement which details the relationships between the two parties.
Why should you franchise your business?
When you franchise your business, a local business owner will work independently to grow their business, and therefore also your business. The franchisee will work hard to protect their own assets, and is highly motivated to drive the business forward.
Using the franchise structure also allows you to expand your business to other areas with very few costs and a lot less capital, since the franchisee pays for most of the start-up costs. Additionally, the franchisee is responsible for the day-to-day management of the new location, often with little involvement from you.
Why would anyone buy a franchise business?
Starting a franchise can be beneficial for a franchisee, because they are starting a new business that already has a certain reputation attached to it. Its ready made and the franchisors should have made all the mistakes, so the franchisee doesn’t have to!
Opening a chain restaurant franchise can for example be easier than opening a small local eating place, as potential customers are more likely to know the franchise beforehand, and know what to expect upon arrival.
The franchisee also often has other benefits such as shared systems, processes, and training provided by the franchisor, and is generally considered to be easier to get started with.
The initial franchise fee will give them access to a successful and recognizable brand name, formal training, marketing strategies, and often a ready-made business model. Since the business model has been proven to work, it’s more likely to succeed, and therefore a lower risk than starting a new business with a new brand.
Contracts and agreements
When the franchisee and franchisor has agreed to a partnership, they will have to create an agreement for the relationship. These are often referred to as the franchisor’s terms and conditions required for the franchisee to be allowed to use the franchise.
The franchisor typically requires an initial fee in addition to a share of future profits. The contract can also include guidelines for marketing, pricing, hiring processes, opening hours, uniforms, training and more. The agreement will include both what the franchisor requires of the franchisee, but also in return what the third party can expect from the franchisor.
Some franchises use a standard contract which cannot be amended, but many franchises are willing to negotiate some terms. It’s important that both parties understand the requirements before signing a contract.
Is my business suitable as a franchise?
Ask yourself: “do I have a stable structure and business model that someone else could copy, and succeed with?”.
There are many things to consider when determining whether a business is suitable as a franchise. In general, you should be able to prove that the business model works and is profitable, that you have systems, tools and procedures that are transferable and well documented, that you’re able to support and train franchisees, and that your model is unique enough to be competitive in other local areas.
How to set up a franchise business
If you have decided that you would like to franchise your business, and you believe that your business is suitable as a franchise, you would typically start preparing a business plan for franchising.
This includes making a plan for where and how you want to expand your business, as well as establishing guidelines for the franchisees. This can be a lengthy process, and it’s important to get it right. I always recommend that you reach out to your accountant or lawyer for advice.
When the paperwork is sorted, and you have a structured plan in place, it’s time to recruit your new franchisee. Recruiting the right people is key here – your business could suffer if your first franchisees don’t perform as expected.
After signing your first franchisee, you will support them to get their business started. This is when you get to really test out the systems you have built. The more streamlined and intuitive you’ve made all procedures, the less involvement you have in this process.
If you would like to talk to one of our expert business advisers about setting up a franchise, book a free call, and we will be in touch.
Alan Davidson is a Chartered Accountant, director and founder of Pentins Business Advisers, entrepreneur and author of the Amazon best-seller “Achieve Your Business Vision”. With over 25 years of helping businesses succeed, Alan knows how to build a business with real value, while avoiding costly mistakes.