Some entrepreneurs prefer to open a franchise rather than their own business because it seems easier. The benefits of a franchise include operational/marketing support, brand equity, and a proven track record. However, even franchisees need time for research and the proper due diligence. To help, we’ll walk you through the process of opening a franchise.
While opening a franchise can be less risky than starting a business from scratch, setting up a business entity can help protect your personal assets if your franchise location should fail. Incfile helps you quickly and easily form an LLC, S-Corp, C-Corp, or other entity for your franchise. You get a free business tax consultation, article preparation and filing, next business day processing, and more for as little as $49 + state fees.
Here are the 7 steps to take when opening a franchise:
1. Do Your Initial Research
The first step when you want to open a franchise is to learn more about franchising in general, including how it works, what to expect, and how to select from all options available to you. Websites like FranchiseGator can help you find franchise opportunities that match your specific needs. For more information, you can also read our ultimate guide on the top websites to find franchises for sale.
Once you’ve identified a few franchises to open, do your research and choose to open a franchise that fits your needs. The following are important factors that you need to consider when choosing a franchise:
- Personal preference – What type of franchise business you would like to own (e.g. food business, technology-related products, other kinds of services)?
- Cost of the franchise – What is the total cost of the franchise (including the franchise fee, property lease, training expenses, equipment, insurance, and more)?
- Internal policies and other rules/guidelines – What are the franchise’s internal policies and regulations? Do they work with your personal management style?
For more information on picking the right franchise for your specific needs, you can read our ultimate guide on how to choose a franchise.
Once you have chosen the franchise you want to open, you have to know every detail about their franchising terms and conditions. Initial research usually begins online – you can visit the franchise’s website and find out more information about them. You may also want to view other sources aside from their website, such as reviews and testimonials from their previous and existing franchisees.
Franchise Disclosure Statement
As soon as you let the franchisors know you are interested, they will provide a Franchise Disclosure Document, also known as a Uniform Franchise Offering Circular (UFOC). It outlines the franchising rules, fees, your responsibilities, and other important information including their financial and legal history. It’s important to read these rules and regulations and ensure that you can fulfill your obligations to the franchise.
2. Attend Discovery Day
Once you choose a franchise, the franchisor will invite you to Discovery Day, a day-long event where you can meet personally. This is your chance to know more about the franchise’s corporate culture, values, policies, and the people you will be dealing with. Likewise, the franchisor will also have the opportunity to get to know you better and size you up as a potential business partner, so you have to be prepared for discovery day.
This is usually the day when the franchisor decides whether they want to work with you or not. What exactly a franchisor looks for varies from business to business. Besides specific qualifications (like a college degree, business experience, trade certifications, and enough capital to invest), a franchisor will want to know that you’re committed, enthusiastic about their products and services, and willing to follow their policies.
A typical agenda for a discovery day involves group presentations, one-on-one meetings, and visits to existing franchises. Make sure to make the most out of discovery day and get your remaining questions answered. After discovery day, franchisors will usually expect you to make a decision fairly quickly.
3. Review Your Franchise Agreement
Considering all goes well with discovery day, the franchisor will then present you with the franchise agreement. This is the formal contract that gives you the legal rights to open a franchise, conditional on a long list of rules and regulations. It’s usually wise to consult a lawyer with franchise experience to help with your franchise agreement.
Note the promises made by the franchisor during your meetings and see if they are outlined in the contract. For instance, if the franchisor promised to provide legal support in the event of a lawsuit, ensure that this is clearly outlined in the contract. The same goes for rules on suppliers, pricing, transfer of ownership, protection of territory, royalty fees, hiring of staff, training, and so on.
Talk to the franchisor and thoroughly discuss the contract and your expectations with them. If there are any discrepancies between the verbal promises and written contract, bring them up with the franchisor. They will most likely tell you that the verbal promise was made in error and those included in the contract are the actual terms. Negotiate the terms when necessary.
4. Get the Right Franchise Funding
Before you sign the contract, you need to make sure that you have enough funds to cover the franchise cost and other expenses involved. Franchisors normally expect your franchise fee payment to be sent with the signed contract. You may want to consider applying for startup business loans to help finance your startup franchise.
Here are few of your financing options to start your franchise:
ROBS (Rollover for Business Startups)
A Rollover for Business Startups (ROBS) lets you use funds from your retirement account to invest into your franchise without paying early withdrawal penalties or taxes. ROBS are usually faster to obtain than almost any other startup loan. Also, it is relatively simple to set up a ROBS and because it isn’t a loan, you don’t have to pay back debt or interest. For more information, you can read our ROBS ultimate guide.
A Rollover for Business Startups (ROBS) lets you use a minimum of $50k in your retirement account to buy a new franchise business. Sign up for our free informational ROBS webinar and get a complimentary 30-minute franchise financing consultation.
An SBA loan is one of the best ways to cover your startup franchise costs. Because these loans are guaranteed by the government, they have low interest rates, typically between 5% to 9%. Unfortunately, new businesses may find it difficult to get approved for funding. However, if the SBA has previously approved loans to the franchise you’re opening, the review process may be streamlined.
Traditional Bank Loan
Another option is to get a traditional bank business loan. However, it may not always be a reliable option since many banks turn down startups. To increase your odds, make sure to come in with a strong business plan that is focused on franchises. Also, be prepared to present your business plan clearly.
Some franchisors can directly loan you the money you need to open a franchise with them. Sometimes, they partner with a financial institution or lender to provide loans. The benefit of getting a loan from their partner lender is that the lender is already familiar with the brand’s business model, and you might also get help filling out the application and fast financing.
Other Funding Options
Typically, obtaining financing to buy or open a franchise will require a credit score of 680 or higher (you can check your credit score for free here). If for some reason you cannot obtain funding from the sources mentioned earlier, there are other franchise financing options which you might want to consider. These include microloans, crowdfunding, and angel investors to name a few. Another good options for funding amounts of $20K or less, are small business credit cards. Check out our ultimate guide here.
Once you’ve obtained funding for your franchise, you’ll need a business checking account to keep your personal and business assets separate. Chase is an excellent option to suit your banking needs. They have 5,100 branches, 16,000 ATMs, a mobile app, and an easy-to-use website. Receive a $200 welcome bonus when you open an account today.
5. Choose a Franchise Location
With your funding in place, you can now sign your franchise agreement and start planning to operate your franchise business. At this point, the next step is to choose a location. The franchisor will usually provide some guidelines and recommendation to help you find an ideal location based on their business analysis.
Franchisors may have some strict requirements when it comes to a commercial real estate site, which includes the minimum square footage and a certain number of parking slots required. Further, most franchisors have some territory requirements.
For instance, the location of a restaurant or storefront may have to be within a certain distance of other franchises. Typically, the larger the franchise the smaller the protected territory. You might also want to choose a location based on traffic, which can increase your sales. Read our guide on how to determine foot traffic and use data to choose the right franchise location.
Buying vs. Leasing Your Location
Most franchise owners are torn between buying or leasing a property when they open a franchise. For a start, franchise owners will lease a property because there’s lower risk and it requires less money upfront. However, if you’re planning to stay in the same location for 7 years or more, consider buying commercial real estate instead. For more information and a real-life example, read our article on buying vs leasing commercial real estate.
There are commercial real estate loans which can help you fund your property purchase. These include SBA 7(a), SBA 504, Conventional Bank Loans, Online Marketplace Loans, and Hard Money Loans to name a few. Average rates range from 3.5% to 18% depending on the type of loan and your qualifications as a borrower. To better understand these rates, you can read our article on commercial real estate loan rates.
For those looking to lease property, it’s important to do the following:
For Retail Spaces
- Pay close attention to the 5 location criteria (is the area safe, accessible, near your target customers, near competitors, and near compatible businesses?)
- Try to estimate the square footage you need as accurately as possible
- Negotiate your rent without extending the lease for your retail space longer than you’re comfortable
For Office Spaces
- Only pay for the quality you need. B-class and C-class buildings are less glamorous but can function all the same
- Pay attention to the location of employees, clients, and other specific business needs
- Negotiate your rent without extending the lease for your office space longer than you’re comfortable
To learn more about leasing, read our guides on how to find and lease retail space as well as how to lease an office space. You can also use a property aggregator platform like LoopNet.com to search both retail and office spaces. The advanced search menu lets you filter by a variety of different criteria and property types.
6. Take the Provided Franchisee Training
The next important thing that you must do is to take the necessary franchise training programs provided by the franchisor. Depending on the franchisor, this may occur before you sign a lease, or while you’re in the process of finding locations.
A good training program will not only teach you everything you need to know about products or services – it should also train you in marketing, negotiating with suppliers, hiring and managing employees, and operations including the filing of permits, bookkeeping, creating reports, and more. It usually lasts 1 to 2 weeks, with a combination of classroom and on-site training with equipment.
7. Prepare for Opening Day
With everything in place, the final step is to open a franchise is get your franchise prepared for business. Other remaining tasks may include remodeling of interior, leasing or purchasing equipment, filling inventory, advertising your open jobs, hiring staff, and getting your employees trained. Read our guide on how to find employees online for more information on how to hire the right staff.
Hiring good employees is one of the most challenging parts of starting a business. The good news is, there are many different ways to find quality employees, both online and offline. Also, various online hiring platforms have been made available for those who need to hire both low-skilled and professional workers.
How to Plan a Grand Opening
Ideally, you should spend up to 20% of your first year marketing budget for the opening ceremony. This is because the novelty of the grand opening makes this advertising budget go much further than it does later in the year. Ask your franchisor what other successful franchisees have done for their opening ceremonies. Additionally, you can read more about how to plan your grand opening with our ultimate guide on grand opening ideas.
Bottom Line – How to Open a Franchise
A franchise doesn’t totally take the risk out of starting a business. While it provides a proven model to follow—from products/services, branding, and daily operations—it can leave you pretty limited. When you choose to open a franchise, it’s important to thoroughly read and understand the disclosure document and franchise agreement, and seek legal advice from a franchise lawyer.
Don’t forget to also protect your personal assets by forming a business entity for your franchise business. Incfile offers free business tax consultation and can prepare and file your incorporation documents for just $49 plus state fees.