How to Franchise Your Business

PHASE 1: Strategy

This is an important first step and must be done before moving any further. A feasibility study — finding out whether your idea is practical or not — will help you determine if you and your business are ready to franchise or not. If franchising is not a viable growth option, you can return to the other common growth approaches discussed previously.

The Franchise Feasibility Study will walk you through how to do a simple step-by-step analysis on a worksheet to ensure that you and your business are ready to franchise.

This will include answering a few questions and doing some research on your top franchise competitors. I will help you determine your Franchise Readiness Score and, give you the green, yellow, or red-light regarding franchising your business.

You will want to do an initial review of your systems, software, websites, and marketing material to ensure that everything you have is completely franchise ready.

A Well-Known Brand

From #10 on my own list of great franchise stories (See References and Resources section at the end of the book), I thought of 7-Eleven.

It came to mind as I watched a YouTube video produced in and for Japan and, in the background, I saw the 7-Eleven logo on a storefront! Right there in Tokyo!

There are 60,000 franchise locations today. (Starbucks eat your heart out — it only has around 30,000). But 7-Eleven is also older, making its start fifty years earlier in 1927...mere months before the Stock Market Crash of 1929 and the Great Depression of the 1930s.

Since then, you must agree, the business has survived and thrived through prohibition, wars, recessions, and stock market ups-and-downs into the 21st century.

It all began with ice. Home and business refrigeration wasn’t widespread in those days, so blocks of ice did the job. Several ice companies merged for efficiency, and the newly formed Southland Ice Company of Dallas, Texas slowly added food items and sundries to the ice they sold. Over time, they became retailers.

The name they chose indeed refers to the initial opening hours of the retail stores. They didn’t expand outside of Texas until the late 1950s. Franchising began in 1964. In 1973, they licensed an affiliate in Japan, and by 1974 (one year later!) the corporation had 5,000 outlets worldwide.

I tell this story because it is important to understand that you don’t need to rush and grow by hundreds or thousands of franchisees per year, even though other brands have done it. You don’t have to ‘go international’. You don’t even have to add one franchisee per year (anytime, and especially if you are in a consolidation phase).

I also tell this story (I’m writing this during the COVID-19 shutdown days of spring 2020 and already told you how I weathered the Great Recession of 2008...) because when your concept is in high demand, the economic winds may blow, but you will be one of the likely ones that survives them.

Leave a legacy: Begin with your own solid, in-demand, profitable business. Then build, build, build — in a strategic manner.

PHASE 2: Legal

Creating a business in the USA is always going to require you to address some legalities. When you founded your own business, you surely incorporated it as a protective measure. To grow this same business as a franchisor, there are additional layers of legal steps to take — and they each likewise serve to protect the parties involved. The franchisee and you get protection from, in particular, two types of legal, signed documents.

Never skip available legal protections! Separation of business entities from your personal assets is crucial for many good reasons. From Denny’s to Choice Hotels to Pella Windows, franchisors do get in legal trouble. Trouble is not a given when you get legal counsel before launch; understand all the legal obligations you are entering into and ethically respect the agreements you have signed.

But you also need legal protections and advice when no trouble is on the horizon. You may just be managing, divesting, merging, and acquiring several businesses in the most efficient manner, as this following story partially demonstrates.

A Well-Known Brand

My favorite story about a franchise that made its way through many legal formations and reformations and still remains strong today is the Hilton Hotel story.

This is not a start-from-scratch story. Conrad N. Hilton bought a small Texas inn in 1919. From that purchase, he grew the Hilton Hotels Corporation. Conrad Hilton’s sons later followed their father into business. They gradually grew the number of their hotel locations. Then new business additions began.

In 1959, Conrad Hilton started the Carte Blanche credit card business, with son Barron in charge. The company lost $2 million in six years, before it was sold to Citibank. Barron was very interested in making gambling a part of the Hilton empire, and moved the company’s focus away from hotels. In 1964, the company spun off its international hotels to shareholders because Barron argued that the parts were worth more than the whole, a move that some questioned. In 1967, Barron convinced his father, the biggest stockholder of Hilton International, to sell his shares to Trans World Airlines (TWA) in exchange for that company’s stock.

All those permutations of the ‘family business’ required legal consultations, documentations, registrations, and protections available through the law.

While there is no reason not to expand the scope of a business, it is not typically what is done in the franchising world. Read on for the initial (and simpler than what Barron Hilton took his business through) legal formalities of becoming a franchisor.

In this step, you will provide the information for the 23 required items found in your Franchise Disclosure Document.

This document — the FDD — is the backbone of your entire franchise and is required by law to be given to your franchise prospects as part of the pre-sale due diligence process at least 14 days before they can legally become a franchisee of your concept. The FDD typically ranges anywhere between 25 and 50 pages. This initial FDD document that you end up with will be the draft you provide to your chosen franchise attorney.

Understanding the Franchise Disclosure Document

The FDD provides comprehensive information about the franchisor and thus allows the franchisee to make an informed decision on whether or not to work with the organization. The FDD is an agreement about a franchise opportunity and information about the franchisor. The FDD is not a legally binding contract — hence the name ‘document’. Its terms may change annually as the franchisor organization grows and evolves (see next section Franchisor Agreement for the binding contract).

Sections of the FDD

The FDD discloses information about the franchisor that is essential to potential franchisees about how to make a significant investment:

• Item 1: The franchisor and any parents, predecessors, and affiliates

• Item 2: Business experience

• Item 3: Litigation

• Item 4: Bankruptcy

• Item 5: Initial fees: A franchisor must disclose any fees charged to franchisees.

• Item 6: Other fees: This section must also include any other fees. Any hidden or undisclosed fees can be a source of dispute later on down the road, so a franchisor must be careful and fully transparent.

• Item 7: Estimated initial investment: The franchisee must be aware of what the low and high range of the initial investment must be, including an estimate of his working capital.

• Item 8: Restrictions on sources of products and services

• Item 9: Franchisee’s obligations

• Item 10: Financing

• Item 11: Franchisor’s assistance, advertising, computer systems, and training

• Item 12: Territory: While there is no obligation to give a franchisee any range or territory to do business, this is the space to indicate any geographical restrictions a franchisor is putting on the franchisee.

• Item 13: Trademarks

• Item 14: Patents, copyrights, and proprietary information

• Item 15: Obligation to participate in the actual operation of the franchise business

• Item 16: Restrictions on what the franchisee may sell

• Item 17: Renewal, termination, transfer, and dispute resolution

• Item 18: Public figures

• Item 19: Financial performance representations

• Item 20: Outlets and franchisee information

• Item 21: Financial statements: A franchisor must provide three years of financial statements to the franchisee as part of the financial disclosure document. This includes balance sheets, statements of operations, owner’s equity, and cash flows.

• Item 22: Contracts: This is where the franchisor outlines the franchise agreement. It may also include financing agreements, product supply agreements, personal guarantees, software licensing agreements, and any other contracts specific to the franchise’s situation.

• Item 23: Receipts: This is the last and final section of the FDD. Here, the franchisor will review the disclosure and business decisions outlined between the two parties and provide the franchisee with any additional information.

PHASE 3: Operations

Today’s businesses, as you already know from running a successful one, have many moving parts that we call ‘operations’. Let’s look at the primary moving parts of a business in this Phase.

The usual ones include, but are not limited to:

• Software/hardware is an ever-present aspect of running the business.

• Supply chain (your vendors) is a crucial moving part — one missed shipment or out-of-stock part and you could be in trouble.

• Staff (personnel or human resources), both on-site and remote, is a vital part of operations all about delivering your service or product.

• Customer service is about staff with customer-facing roles but also about call centers, email responsiveness, and other tools.

• Marketing, promotion, and advertising is multi-media and multi-platform; it demands daily attention.

• Accountancy and tax matters demand excellent record keeping.

All of the moving parts of your business were documented in your business plan, and now is the time to convert that documentation into manuals for your franchisees and their staff to learn from and continuously consult. Instead of one all-inclusive manual, franchisees are usually provided with a series of manuals.

Top Franchisor SAAS/Software

Welcome to Phase 4: Launch

At this point, you are ready to open the door to growth as a franchisor! You have completed your planning. Your legal documents are ready and filed. Your Operations and Training Manuals are complete.

You are ready to do the marketing, selling, and training that will open up new franchise locations with franchisees.

This phase is where things get fun and scary at the same time. You are ready to tell the world that you have a great franchise opportunity. This phase is about marketing — sharing the fact that you now franchise your concept and attracting qualified candidates to buy a franchise.

Marketing leads to the sale of a franchise to one or more candidates.

The sale leads to training, which in turn leads to finding and securing the best new location for the franchisee and building it out.

You will need to line up some financing options to help your franchisees with capital to get started with the launch and early months of their new business.

You will need to devote personal time to each new franchisee to ensure not only their success, but your own — as this following story helps to illustrate.

Start with Lead Generation

Top Franchise Finance Companies