How To Start a Franchise Business in 9 Steps

Maddy Martin
|
2023-02-14

Do you want to be a successful business owner? If so, one of the best ways to start out is investing in a franchise.

As opposed to starting a new business, buying a franchise comes with an established business model and brand image that entrepreneurs can capitalize on. This spares you the time and risk of creating a venture from the ground up, and gives new business owners a strong chance of success.

That being said, franchise businesses aren’t foolproof operations, and there are plenty of considerations to keep in mind before committing to this business model. In this article, we will detail how to start a franchise business step-by-step, and provide recommendations on helpful tools for franchise owners.

Read on to take your first step to becoming a franchisee.

What is a franchise business?

A franchise business is a business in which the owner or parent company (known as the “franchisor”) grants an individual (or “franchisee”) a license to run the business at an agreed-upon satellite location.

To understand the concept better, let’s take a look at McDonald’s.

Almost every single McDonald’s you see is run by a franchisee. The franchisee has been given a license to operate a McDonald’s location, and gains all the benefits of doing so, such as an established brand image, corporate marketing, and the yearly sales that location generates.

In return, the franchisee has paid McDonald’s an initial franchise fee, pays an established percentage of the yearly profits, and agrees to run the location up to McDonalds’ standards and regulations.

Startup costs and financial requirements

Before an entrepreneur gets a license to run a franchise location, they must meet a variety of financial requirements and pay certain startup costs. Some of the most common requirements include:

  • Personal assets: Before a serious franchising discussion happens, aspiring franchisees must show proof of liquid assets. This ranges from company to company — it may be as little as a few thousand dollars, or as much as $500,000 or more for a larger brand. A few examples of company-specific franchising requirements can be found on these pages from CMIT solutions and Fresh Coat Painters.
  • Franchise fee: Once personal assets have been verified and a franchisee is approved by the parent company, a franchise fee is required. This is the cost to grant the business license and usually falls in the range of $25,000-$50,000.
  • Operating expenses: These are the costs to equip a new franchise that the franchisee must pay. Rent, payroll, equipment, and anything else needed to run day-to-day operations falls into this category.
  • Royalty fee: To continue running the business, franchisees pay an ongoing royalty fee to the parent company. This is a percentage of yearly profits and can range from 4% to 15%.
  • Go-to-market expense: Depending on the business, franchisees may need to pay a one-time go-to-market (GTM) expense. This is a fee to open a new franchise location, and can include costs such as advertising materials, or expenses associated with setting up new distribution channels.
  • Marketing fee: Franchisees are typically assessed an ongoing marketing fee to help with marketing expenses incurred by the parent company. This is a percentage of yearly profits and can range from 2% to 5%.
Financial Requirements to Be a Franchisee

To get the exact figures for the franchising opportunity you’re interested in, contact the company directly or try networking with other franchise owners in the area.

Benefits of franchising

Despite the required initial startup capital, franchising can be more advantageous than starting a business from scratch in a few key areas.

Dedicated support

Once franchisees have made it through the vetting process and are granted a franchise license, the parent company is invested in their success. The franchisee receives an operational handbook, dedicated corporate support, and a business model that is proven to be profitable. 

Brand awareness

Arguably the biggest challenge in starting a new business is getting customers. A tremendous amount of time and resources go into outreach strategies to gain traction, make sales, and carve out a market share. Franchisees don’t have this problem.

When individuals buy a franchise, they are buying a successful business model and the established brand awareness that comes with it. The franchisee doesn’t have to spend time on advertising — in fact, oftentimes the parent company takes care of that independently. 

Advantages with vendors

Brand awareness is not only advantageous with customers, but with vendors as well.

When franchisees are negotiating supplies and prices with vendors, they have the backing of the parent company, which can result in lower prices and improved service. In some cases, the parent company even negotiates with suppliers on the franchisee’s behalf.

Types of franchises

Regardless of size, any company that has a profitable business model can start offering franchise opportunities. A few of the most common franchise models for both large and small companies include:

  • Food and beverage: Restaurants are often what comes to mind when people think of franchising opportunities. Fortune-500 examples are McDonald’s, Subway, and Wendy’s, while smaller franchises can include Dickey’s BBQ — or even any small restaurant in your area.
  • Business services: These franchises include anything that offers a service, from postal to accounting. Fortune-500 examples are UPS, H&R Block, and RE/MAX, while smaller opportunities include Fresh Coat Painters and CMIT Solutions.
  • Retail: Any storefront has the potential to be a franchise opportunity. Fortune-500 examples are 7-Eleven, Edible Arrangements, and Ace Hardware, while smaller opportunities can include businesses such as Salons by JC
  • Health and fitness: Gyms and other health-based businesses have been increasing in popularity for franchise opportunities. Fortune-500 examples are Orangetheory and Gold’s Gym, while smaller options include businesses such as 9Round.

9 steps to start a franchise business

After researching how to start a franchise business, it’s time to move forward in the process of becoming a franchisee. The following nine steps are a brief overview of what you can expect and questions you should ask yourself.

Step 1: Find an industry

Becoming a business owner is a huge financial commitment — make sure you’re selecting an industry you can dedicate your effort to day after day.

Write down a list of potential business areas you would like to work in, paying close attention to things you have a genuine interest in. It’s important to choose passion over profit in this stage, as the more motivated and engaged you are in the business, the more likely you are to succeed.

Step 2: Research competition

After you’ve selected an industry you would like to be part of, research the competition that’s already in your area. Ask yourself a few important questions: How many businesses like this exist around me? Are they profitable? If there’s nothing similar in the area, is there a reason for that?

Taking note of opportunities in your area can give you a good idea of potential franchise success.

Step 3: Evaluate costs

As we’ve touched on, becoming a franchisee requires a large financial commitment. 

Do you have the liquid assets to be eligible for your selected franchise opportunity? Can you secure funding for the operating expenses and other startup costs? Can you take home enough yearly profit after royalty fees for it to be a worthwhile investment? Is there software or other productivity tool you plan to use?

Asking yourself all of these questions and more will give you a solid grasp of the financial viability of the franchise opportunity.

Step 4: Create a business plan

Once you have decided on an opportunity, the next step is to create a business plan.

Many parent companies will provide business plans to new franchisees upon acceptance, but it’s a good idea to create your own to establish your unique strategy, and show the franchisor you are prepared and capable. Make sure to include sections such as market analysis, a management plan, and how you can build personal connections with your customers.

Step 5: Form a business entity

If you haven’t already done so, the next step is to form a business entity.

A business entity shields a business owner’s personal assets from risk — with the exception of a sole proprietorship — so it’s wise to set up an LLC or corporation. Most franchisors will have requirements for business entities, so if you haven’t set one up at this point in the process, check with the company to determine what to establish.

Start a Franchise Business in 9 Steps

Step 6: Complete the franchise license requirements

At this stage, it’s time to submit an application and move through the franchise licensing process.

This process is similar to interviewing for a job. The parent company will require an application, and typically will conduct multiple rounds of interviews to make sure you are a qualified and capable candidate to run a franchise location. If the process concludes and you’re deemed a good fit, you will sign a franchise license agreement. 

Step 7: Find a location

After you’ve signed your franchise license agreement, the next step is to find a suitable location.

The parent company will have guidelines for where the business can be located, and oftentimes they will help the franchisee find and close on a retail space. During the process, look for areas that have a good balance of foot traffic to affordable rent. Of course, if your franchise opportunity doesn’t need a physical location — or you’re running the business from home — you will skip this step.

Step 8: Order equipment and hire employees

Now that you’ve established a business location, it’s time to order essential equipment and start interviewing employee candidates.

Financially speaking, franchisees will pay for most of these equipment and hiring expenses, but the parent company may provide help in the form of preferred equipment vendors and hiring templates.

That being said, not all assistance needs to be bought or hired out — savvy franchisees can find opportunities to automate their business at every turn. A few key automation tactics that can save business owners time and money include:

  • Virtual receptionists: Virtual receptionists and other similar answering services can be an important ally for a franchisee. For example, virtual receptionists from Smith.ai can save a business over $30,000 a year in salary expenses while also qualifying leads, setting appointments, and acting as a professional first point of contact for an organization. This frees up time for franchisees to focus on the most profitable tasks for their business.
  • Automate communication: Beyond virtual receptionists, there are many opportunities for businesses to streamline common methods of communication. Anything from emails to documents and more can be automated to save time.
  • Think critically: Virtually any day-to-day task can be automated in some way with enough creativity. Think about any frequently performed tasks that take up most of your time — be it communication, data entry, management, or something similar — and find ways to streamline them whenever possible. 

Step 9: Open the doors

Once everything else has been completed, it’s time to physically or metaphorically open your doors for business.

At this point, you will have the necessary equipment, a capable staff, and best practices for day-to-day operations at your fingertips. Additionally, the parent company may have set up an advertising campaign to announce the new location in the community. From here, it’s up to you to run and maintain a successful business.

Grow your franchise with the help of Smith.ai

One of the best ways to become a successful business owner is to invest in a franchise. Learning how to start a franchise will get you thinking about the costs involved, potential franchising opportunities, and the opportunity for success in your community.

And you don’t have to do it alone.

From live receptionist services to lead qualification and appointment setting, Smith.ai offers franchise owners the tools and support needed to grow and maintain a thriving business. We act as a professional first point of contact, so you can focus on the most important and profitable day-to-day tasks. 

Book a consultation today to learn how Smith.ai can supercharge your communications, increase your bottom line, and help grow your franchise.

Tags:
Business Education
Franchise
Maddy Martin

Maddy Martin is Smith.ai's VP of Marketing. Over the last 15 years, Maddy has built her expertise and reputation in small-business communications, lead conversion, email marketing, partnerships, and SEO.

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