Should you franchise your business?

Learn what makes a good franchisor and how to get started.

According to the International Franchise Association, there are nearly 800,000 franchises in the United States. And there’s no reason your business can’t be one of them. The space is expected to continue expanding, with a growth rate of 2%, even in an unpredictable market.

Whether you already have a business or not, you may have thought about becoming a franchisor. But how do you know if your business (or business idea) is the right fit to become a franchise? If it does check all the boxes, how do you set it up as a franchise opportunity?

Is your business the right fit?

There are franchises in all industries – from business services and real estate to quick-service restaurants and retail stores. Becoming a franchisor allows you to grow your brand and leverage knowledgeable local business owners to expand while sharing the liability. While going the franchise route does compromise control a bit, it affords the opportunity of scalability.

When you lease out your brand to franchisees, you also set yourself up for additional forms of revenue, like royalties, contributions and other fees. Diversifying your revenue stream can be a major motivator to take the plunge.

Before becoming a franchisor, think about whether your business meets foundational criteria that make a franchise successful:

• Profitability – Your business’s ROI must be appealing if you want to attract franchisees. Think about your plans for growth and how you can expand your market and increase sales reliably. Your potential franchisees will want to see this opportunity clearly. Will providing your product or service to a new audience be enough or will you need to enhance your offerings? Before you franchise your business, consider consulting outside professionals to explore what the business will look like.
• Internal communication – It’s important that you, as the business owner, communicate openly with your franchisees. It’s a two-way relationship, one in which you must be approachable and willing to exchange ideas, and in which you and your franchisees solve problems together. This will ensure the quality and uniformity of the brand. Hire someone or a team dedicated to communicating relevant information with franchisees to make sure these lines are open. It should be a mutually beneficial partnership.
• Replicable processes – To preserve company culture and maintain a strong brand, your processes should be simplified where possible so they can be scaled efficiently and consistently. One of the reasons a franchisee is attracted to this type of business is they get the benefit of starting a business that‘s already organized and has the tools they need to hit the ground running. They’ll need your protection and support every step of the way.

Where should you start?

Once you’ve decided you want to become a franchisor, here are the steps to prepare your business:

1. Establish your franchise company as a legal entity and register your trademarks.
2. Issue a franchise disclosure document (FDD) and register with the states in which you’ll operate.
3. Write an operations manual to help business locations run consistently.
4. Define a thorough selection process to determine who would be best to join you on this journey.
5. Develop a marketing plan and identify clear growth goals for the business.
6. Make an effort to sell franchises as a means of growing your business. It might mean refocusing your attention to make this happen.
7. Engage in services that offer helpful tools, such as franchise brokers and digital marketing services.

Even if your business is a good fit for being a franchise, recognize that there are tradeoffs when offering your brand on lease. You may be exchanging the profit of opening your own additional locations for the partnership of other owners.

The bottom line is that diversifying your revenue may make being a franchisor a worthwhile endeavor. Consult with your advisor and other professionals about whether franchising your business aligns with your financial, professional and personal goals.

Sources: franchise.org; franpos.com; thefranchiseinstitute.com.au; investopedia.com

Raymond James and its advisors do not offer legal advice. You should discuss any legal matters with the appropriate professional. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.