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How to start a franchise

12 steps to launching your own branch of a popular brand or business.

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Young man hanging up an open sign in a shop

Opening a franchise allows you to flex your entrepreneurial skills without starting from scratch. You get to lean on the expertise of a proven business model while still being your own boss.

However, the startup fees can be pricey, with royalties due monthly or yearly, and you must sign a contract committing to the franchisor’s playbook.

How to start a franchise business

Starting a franchise can take three to four months from your initial research to the final purchase, according to advice from the Small Business Administration (SBA). After you’ve signed the contract, it could take another two to six months until you’re ready to welcome customers.

That said, running your own franchise can be rewarding — and lucrative. Look to these dozen steps that can guide you from conception to opening day.

1. List your top companies or businesses.

When putting together a list of franchises you’d like to own, start by thinking about your favorite businesses. Consider your strengths, weaknesses and passions against what you think could make you money.

Franchises are available in nearly every industry:

  • Business services
  • Convenience stores
  • Educational and learning
  • Entertainment
  • Health and fitness
  • Home healthcare
  • Pet care
  • Restaurant
  • Real estate
  • Specialty retailers
  • Travel agents

2. Research the franchise market.

Turn your eye to the market in your neighborhood or the community you intend to operate in. Consider leaning on the resources at your local Small Business Development Center or a business school at a nearby college or university.

You can gather information about market conditions in your area, including demand and predictions for economic growth, through the SBA, the Census Bureau and private market firms to help you choose which franchise to open.

Consider reaching out to people who own franchises that you’re interested in. Ask for advice about the process and their thoughts on whether the process felt worth it.

3. Evaluate investment and franchise costs.

After you’ve pinpointed a market, research and compare the costs associated with your top picks, including:

  • Franchise fees
  • Estimated initial investment
  • Ongoing royalties
  • Requirements for working capital
  • Estimated annual revenue

Some franchise owners — called franchisors — require a minimum net worth for franchisees that helps establish confidence in your money management skills, general experience and overall commitment.

4. Request a franchise disclosure statement.

After weighing your initial research, it’s time to zero in on a franchise and request company details. Reach out to the franchisor for a copy of its franchise disclosure document (FDD), which contains detailed legal information about its franchise group along with financial data like the average gross revenue of its locations.

Sometimes you can find FDDs available for free from online databases around the web. Just make sure you obtain the most recent version, as franchisors release a new FDD every year.

Also consider the retention rates for your chosen franchise. A retention rate is the percentage of locations that close each year, and it can provide valuable information about your chance of success. Located in section 20 of the FDD, retention rates are often broken down by state, so you can see how many were forced to close in your area compared to how many are in operation.

What else can I find in the franchise disclosure document?

The franchise disclosure document — commonly called an FDD — covers more than 20 elements to buying a franchise, such as fee requirements, estimated initial investments, a litigation history, proprietary and patent details and performance and revenue details.

It’s the legal information a franchisor is required to disclose to you, the franchisee, as part of due diligence before you invest in the company. The document was referred to as a uniform franchise offering circular until July 2007, when the requirement was updated by the FCC.

The franchisor is required to provide you with the FDD at least 14 days before you sign a contract, though it’s a good idea to request a copy earlier in your initial phases of research. You can typically download a PDF of the FDD, though some franchisors might be willing to send you a hard copy.

5. Consider forming an LLC or corporation.

Purchasing a franchise as a limited liability company (LLC) or corporation, rather than as a sole proprietor, provides financial and legal protection of your personal assets.

As an LLC or corporation, you aren’t held personally accountable for debt incurred by the franchise. As a sole proprietor, on the other hand, you are legally indistinguishable from your business — which means you must cover business debt out of pocket, if necessary.

The same goes for lawsuits: As an LLC or corporation, your personal assets are covered if someone decides to sue your franchise, while as a sole proprietorship, your personal finances might be on the line.

How to choose the right business structure for your company

6. Write a comprehensive business plan.

Now it’s time to draft a road map for your franchise. A good business plan can help you analyze costs, predict sales and estimate profits before signing an agreement. Thinking deeply about what to expect in the months and years ahead arms you with the information to confidently take the next step — or provide pause if you’re not quite ready.

A successful business plan typically includes seven key components:

  1. Executive summary
  2. Company description
  3. Product research
  4. Market research
  5. Sales plan
  6. Financial analysis and funding needs
  7. Financial projections

A business plan is necessary if you plan to apply for a loan to help with startup costs. Lenders want to know that you have a viable plan for turning a profit and sustaining your business over the long haul, because it helps them evaluate whether you’ll be able to pay it back.

7. Get the financing you need.

If you don’t have the initial investment costs at the ready, you may need to tap into outside financing to launch or run your franchise. Many banks, the SBA and franchise-specific lenders offer financial help for would-be franchisees.

Other options include crowdfunding or lenders based entirely online. Online lenders like Kiva and BlueVine aren’t part of the traditional financial industry populated by banks and credit unions. These digital lenders tend to leverage technology for more streamlined or automated approval processes. You could also use an online business marketplace like Lendio or Fundera to compare a network of funding options in one spot.

Some franchisors like the UPS Store, Chem-Dry Carpet Cleaning and Cruise Planners offer financing assistance, either through in-house programs or partnerships with third-party lenders. For example, Cruise Planners finances 50% of your franchise costs over the first 12 months, while Chem-Dry offers in-house financing for the initial licencing fee. This information is available in section 10 of the FDD.

Make sure that the funding option you choose meshes well with your business plan, as you’ll be required to pay back accumulating interest. You may also have to cover origination and late fees if you miss a payment.

8. Apply for the franchise and an interview.

How you apply depends on the franchise you choose. For example, McDonalds allows you to fill out an application online, while Chick-Fil-A requires an expression of interest form to get the ball rolling.

Plan to attend interviews with the company, which allows time to parse through important details and determine if you’re a match for the franchise.

Expect questions that cover your plans, experience, finances and support, including your:

  • Goals, timeline and territory
  • Previous franchise and industry experience
  • Reasons for choosing the industry and franchise
  • Personal support system
  • Financial capital and business plan
  • Leadership experience
  • An exit strategy

9. Review and sign the franchise contract or agreement.

If after your interview, you and the franchisor decide it’s a good match for the franchise, it’s time for the paperwork.

You’re required to complete a franchise contract, which is a binding legal document that details the commitment you’re making to each and the franchisor’s expectations around:

  • Location and territory
  • Equipment and operations
  • Royalties and ongoing fees
  • Advertising and marketing
  • Trademarks, patents and signage
  • Training and ongoing support
  • Quality control and insurance
  • Dispute resolution
  • Renewal rights
  • Termination and cancellation policies
  • Exit strategies

Franchise contracts come with terms of five to 20 years. At the end of the term, you can often choose whether to renew the contract or discontinue your franchise.

At contract signing, you’ll likely need to also pay any upfront fees or initial investment expenses. Talk with the franchisor about preferred payment methods so that you’re prepared.

10. Comply with state and local permit requirements.

Most state and local governments require you to obtain licenses before launching your franchise — including health permits, occupational licenses, tax registrations and business licenses — or face fees.

While most states require the franchisor to apply for business licensing, a handful of states require a franchisee to register:

  • California
  • Hawaii
  • Illinois
  • Indiana
  • Maryland
  • Michigan
  • Minnesota
  • New York
  • North Dakota
  • Rhode Island
  • Virginia
  • Washington
  • Wisconsin

You may also need to register for a license on a county or city level. Your franchisor should be able to help you anticipate permits required for your area and navigate the legal requirements. The SBA also provides information about franchise licences that depend on your industry and state.

11. Build your location and assemble your team.

The franchisor provides you with the essential elements of preparing your space — like signage, blueprints, fixtures and general decor — but you’re in charge of hiring contractors for the construction work.

You’re also responsible for hiring and training employees. Most franchisors provide training resources for franchisees, even sending a representative to help bring everyone up to speed about company branding, culture and expectations. Take their advice around recruitment and retention of qualified and motivated staff — especially those who may have worked for a branch of the franchise previously.

12. Stage a grand opening.

In the days and weeks leading up to opening day, you’ll want to generate an awareness of your brand within the surrounding community. Most franchisors provide a game plan in the form of marketing assistance, and it might even send a corporate team to help ensure that your grand opening goes smoothly.

When preparing for your big day, a few tips can help make it a success:

  • Choose a date with high traffic. Your opening date and time should be ideal for attracting as many people as possible.
  • Advertise to your local market. This might include TV and radio ads, print media, coupons or flyers, local apps like Yelp and Nextdoor, and even social media tools like Instagram, Facebook or Twitter.
  • Send press releases to local media outlets. Reach out to news stations two weeks in advance, then follow up a couple of days before you open.
  • Invite friends, family and city officials. In addition to a support circle of close family and friends, send a note to city council members and the mayor to invite them to your new business. This can cement your position as a member of the community.
  • Decorate the store with grand opening paraphernalia. Balloons, ribbons and grand opening signage attracts attention and generates a festive feeling.
  • Organize exciting activities on opening day. First impressions are everything, and you want to leave guests feeling positive about your business. Think about offering door prizes, a giveaway or even live music from a DJ or band.

How much does it cost to start a franchise?

Franchise costs vary widely depending on the industry and business you choose to invest in, not to mention where you live or plan to do business.

When calculating the cost of starting your chosen franchise, look beyond upfront fees to costs that come with everyday business ownership.

FeeRangeWhat it is
Franchise fees$10,000 to $50,000, depending on size of marketOne-time fee that covers your entry into the brand, including access to proprietary tools and systems
Royalties4% to 12% of profitsFranchisor’s royalties charged monthly or annually
Legal and accounting fees $1,500 to $5,000Optional cost recommended to help navigate legal documents
Buildout $1,000 to $100,000 or more, depending on franchise assistanceCosts toward physical location, including furniture, equipment, construction, zoning compliance and security
Working capitalEnough to cover 6 months recommendedMoney used to run your business in the months and potentially years before you see a profit
Inventory $20,000 to $150,000Costs to maintain consumer products or items required for business
Training and conferences$4,000 to $8,000Trainings, conferences and other franchisor opportunities, including travel
Business licenses or permits$50 to $400Fee for registering your business with your city or state

How to buy a franchise with no money

If you’re short on cash, you aren’t disqualified from starting a franchise — but you are going to need to explore funding and financing to get from planning to opening day.

Small business loan

Small business loans range from $5,000 to $5 million with rates starting at around 5%, depending on your creditworthiness, the industry and more.

Thanks to the Internet, banks and credit unions are no longer your only option. Digital lenders can help you secure small business loans directly, through brokers or on peer-to-peer platforms.

Compare top online loan providers

Personal loan for business

If you’re a first-time entrepreneur, it could be tricky to qualify for a small business loan. That’s where personal loans for business come in handy.

Personal loans typically come with fewer requirements than a business loan, with some lenders providing funding in a business day, though they often max out at $50,000. Expect rates from 4% to 36%, depending on your personal credit history.

Find a personal loan for your small business

Rollovers for business startups

A rollover for business startups — or ROBS — is an arrangement that allows you to invest money from your retirement account directly into your business without paying taxes, fees or interest. This might be an option if you have more than $50,000 in retirement accounts — though it comes with significant risk, because you’re putting your retirement financing on the line.
There’s also a higher chance than usual that your business will be audited, because the IRS views ROBS as a tax strategy — basically, a way to avoid paying taxes.

Rollover for Business Startups explained

SBA loan

Loans from the Small Business Administration (SBA) are known for low interest rates. The SBA offers 11 categories of business financing, from short-term funding to commercial mortgages. With the right background and business plan, you could qualify for up to $5.5 million. However, eligibility requirements are often strict, and the application lengthy.

How to qualify for an SBA loan

Home equity loan or HELOC

If you own a home, you might be able to borrow against the equity you’ve built up over time through a home equity loan or line of credit. These personal loans provide either a lump sum or pool of credit you can tap into over time, either way providing the money you need to pay for your startup costs.
However, because your financing is tied to your home, you risk losing your property if you’re unable to repay what you owe.

Home equity loan vs. line of credit

Business partnership

If you aren’t able to raise the money on your own, consider bringing another entrepreneur on board. Not only can partners ease the startup workload, but they can also assume part of the risk, taking some of the weight off your shoulders.
Keep in mind that a business partnership requires collaboration, and that your partner’s reputation will likely rub off on you — whether good or bad. You might also run into conflicts of interest, where a decision that’s best for the business is at odds with you or your partner’s personal wishes.

How to split profits in a small business partnership

10 of the most profitable franchises in the US

The success of your franchise is more than the brand you choose. Like any business, your location, consumer demand, economic climate and employees all contribute to your bottom line.

That said, these franchises have a strong record of generating six figures in income for their franchise owners, according to market research firm Franchise Business Review. Refer to Section 19 of your franchisor’s FDD to see a list of operating expenses and other details that can help you calculate an estimated profit

Company franchiseIndustryLocations in the US and CanadaInitial cash investmentNet worth requiredTotal startup investmentAverage annual gross revenue per franchisee location
City Wide Maintenance
Sales and management of janitorial services61$150,000$500,000$200,000 to $360,000$4.7 million
DreamMaker Bath & Kitchen
Specialty retailer36$100,000$200,000 to $400,000$36,500 to $334,925$4.7 million
The Goddard School
Early childhood education519$259,000 to $266,500$750,000 to 2 million$679,100 to $863,600$1.8 million for franchises open at least 18 months
Pinch A Penny
Specialty retailer255$70,000 to $150,000$350,000$289,375 to $411,200$1.3 million
Two Men and a Truck
Moving services381$80,000$160,000 to $400,000$179,000 to $585,000$1.2 million for stores open at least 3 years
FirstLight Home Care
Home healthcare240$49,000$200,000$112,881 to $199,376$1.1 million
The Maids
Residential cleaning1,255$50,000$250,000$64,100 to $154,300$1.1 million
Checkers & Rally’s
Restaurant630$250,000$750,000$203,600 to $945,000$962,028
NaturaLawn of America
Lawn care91$50,000$250,000$47,500 to $112,650$741,146
Critter Control
Wildlife control83$8,075 to $52,075N/A$63,525 to $169,575$582,828 for franchises open at least 3 years in midsize markets

Data is based on Franchise Business Review’s list of the most profitable franchises as of June 2020.

Buying a franchise vs. starting a business

If business is in your blood, deciding whether to open a franchise or start your own business depends on your experience, marketing skills and the kind of model you’re looking for.

Buying a franchiseStarting a business
Initial investmentHefty, but detailed in the FDDDepends on your business plan, though varies widely if you’re treading in new territory
Creative controlLimited — you’re held to branding, trademark, marketing and legal guidelines in order to keep your franchise licenseYou have full control over branding, marketing, merchandise and community outreach
Customer baseBuilt-in customer base due to brand familiarityZero up front, meaning you’ll build up your customer base from scratch
SupportCorporate team that can advise and assist you as neededNo built-in support team, so you may need to rely on community groups for local entrepreneurs
Ongoing feesRoyalties on an annual or monthly basisFull control over your business expenses, which could be a pro or con depending on the success of your business
Overall riskTheoretically, you’re using a proven system and can weigh the franchisor’s retention rate beforehandMore risk, since 50% of small business startups fail within five years
Ability to get financingMany franchisors provide assistance, either in-house or through a third-party partnershipYou’re on your own to secure the financing
Professional freedomFranchisor typically dictates requirements for your level of involvementMore professional freedom, because you can work when and where you’d like

Case study: Opening a Critter Control franchise

Let’s say you want to open a Critter Control franchise in San Jose, California — a city with a population of about 1 million people. At an average $582,828 gross revenue for that market, according to Critter Control, here’s what you could reasonably expect.

Franchise feeOne-time fee$70,100
Average estimated initial investment One-time investment$116,550
Operating costs56% of gross sales yearly$326,384
Royalties 8% of gross sales due annually$46,626

To estimate your profits in the first year of opening, you’d subtract the franchise fee, initial investment, operating costs and royalties from the average gross revenue.

Average gross revenue
– (franchise fee + estimated initial investment)
– operating costs
– royalties

= First year profit

$582,828
– ($70,100 + $116,550)
– $326,384
– $46,626

= $23,168

Using this equation, you can expect to pocket about $23,168 after your first year in business.

Because the franchise fee and initial investment are one-time fees, you should be able to make more money in the following year — some $209,818, assuming your average gross revenue stays about the same. As the business grows — and your gross sales increase — your profit is expected to increase over time, barring unforeseen circumstances in the market and industry.

Bottom line

Starting a franchise might be the right choice if you’ve got a solid game plan for raising funds and like the idea of following a tried-and-true business model. But if you’re still on the fence or want to research other options, browse our small business guides to starting, buying or growing a business.

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