Five Tips to Franchise a Small Business

Franchising your business idea can be a rewarding and lucrative enterprise. It can also be quite overwhelming. Between meeting the legal requirements and finding the right business partners, new franchisors can get lost in the weeds. To make matters worse, there are plenty of companies to take your limited capital, but few actually deliver what you need to actually start franchising. This article will discuss five tips for starting the franchising process right.

1. 1

   Conduct appropriate market research and understand your competition

   It is important to have a good understanding of the established franchises in your industry. Do research on your competitors. Embrace your similarities and determine the factors that set you apart. Franchises in different industries operate in different ways — a restaurant franchise will be set up very differently than a house painting franchise. Understanding your industry will be key in creating a business that is attractive to potential franchisees.

2. 2

   Draft a compliant FDD and a helpful Operations Manual

   In most cases, you will need a franchise disclosure document (FDD) to offer and sell franchises. The FDD will contain certain disclosures required by the federal Franchise Rule. If you do not have a compliant FDD, you may face severe legal consequences, including criminal penalties and civil fraud claims, for selling franchises. Keep in mind that FDDs expire 120 days following the franchising company's fiscal year-end — every year you must update your FDD, file appropriate state registrations, and obtain an audit of the franchising company's financials.

3. 3

   Determine the appropriate sales strategy

   Decide early on your sales strategy, and the states where you will begin your franchise sales activities. Having a marketing plan will save you time and expense, and help focus your first efforts on a few target markets. Certain states require additional registration before you can offer or sell a franchise. Illegally selling franchises can result in high fines, being barred from selling franchises in that state, lawsuits, and even criminal penalties.

4. 4

   Keep proper books and records

   It is important to prioritize keeping good financial records, even when using an accountant. You are required to obtain an audit of the franchising company's financials on an annual basis. It is also important to keep good records of all executed FDD receipts and franchise agreements — franchise agreements are valid for many years, often 10 years or more, and it's hard to enforce an agreement you can't find.

5. 5

   Properly evaluate your first franchisees

   As an owner of a start-up franchise company, it is tempting to start selling franchises to anyone willing to buy one. However, your first few franchises are the best marketing tools you have. Many potential franchisees contact your current (or former) franchisees to obtain information about you and your franchise system. Perform a background check, obtain financial records, and require specific training before opening. Accepting unqualified franchisees may result in premature closures, serious noncompliance, and other legal issues that could hinder your franchise's growth.

There is no guaranteed formula for business success. However, starting with a solid foundation can certainly help! Set yourself up for success by utilizing thoughtful, strategic planning combined with solid support from your experienced franchise counsel.