If you’ve been dreaming of owning your own business, but have no idea where to begin, opening a franchise is a great option. Starting a new franchise allows you to start a business while skipping the uncertainty of starting from scratch. This way you can be your own boss but not have to go through ownership on your own.
Let’s explore the world of franchising and the questions most asked by those considering starting a franchise business.
What is a Franchise?
When you start a franchise, you are beginning a business with the involvement of a franchisor, someone who already owns an established tradename and business system. A franchisee enters into a contract with the franchisor and pays royalties or fees for the right to do business using the franchisor’s brand. This arrangement is also called franchising.
What Type of Franchising Options Are There?
If you are looking into franchising, you are probably considering one of two types of franchising relationships: business format franchising or product distribution franchising.
Business Franchising
Most likely, you are familiar with business format franchising, which involves the franchisor providing the franchisee with an entire system for operating a business, including the trade name, products, and services. The franchisor will support the franchisee in many ways, including providing them with operating manuals, development support, and standards for branding and quality control. Businesses like McDonald’s, Starbucks, and many other brands you see daily are franchises operating under a franchisor-franchisee relationship.
Product Distribution Franchising
When most people hear the word franchising, they often think of business franchising. However, product distribution franchising is another way an individual looking to work under an existing brand can get started. This type of franchising deals with the distribution of goods in industries such as bottling, automotive, and manufacturing.
How Do You Start a Franchise Business?
Each state has different requirements when it comes to paperwork and legal requirements, but if you are looking to start a franchise business, here are three basic steps for getting started.
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Research Franchise Opportunities
Choosing the right franchise business for you is very important. You can find franchise opportunities on websites like Franchise Direct. During the search process, you can also check out the various fees for your particular franchise business.
Additionally, you will need to do some market research for your area to ensure the franchise isn’t in a competitive location with the same business. A lot of franchisors may not sell you the rights if they are already established in the same area. For example, you may see many McDonald’s in the same neighborhood, but you’ll never see two right next to each other.
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Account for the Financial Elements of Starting a Business Franchise
Once you have chosen your franchise business, the next things to consider are costs and fees. Here are the basic expenses associated with starting a franchise:
- Franchise Purchase Fee: $20,000 to $50,000
- Minimum Liquid Capital: If you are starting a service-based business, it’s a good idea to have $50,000 to $60,000 of liquid capital and $75,000 to $100,000 if you are starting a facilities-based business.
- Franchise Royalties: Royalties can be anywhere from 4% to 12% of your profits. This is the fee you will pay to the franchisor to operate your business. It’s the “rent” you pay to use the
- Additional Expenses: Running a franchise business will also involve expenses for renting commercial space, staffing, and anything else not provided by the franchisor.
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Put Together the Application & Paperwork for Opening a Franchise
There is a lot of paperwork needed to put together when applying to open a franchise in California. To start, you will need to fill out an application. A complete application will require the correct filing fee, a complete Franchise Disclosure Document (FDD), and all of the following required documents:
- Cover Letter
- Uniform Franchise Registration Application
- Verification/Certification
- Customer Authorization of Disclosure of Financial Records
- Uniform Consent to Service of Process
- Corporate/LLC Acknowledgement
- Supplemental Information Page
- Sales Agent Disclosure Form(s)
- Internet Ad Exemption Notice
- Franchisor Disclosure Document (“FDD”)
- Marked Copy of the FDD and Exhibits
- Audited Financial Statements
- Auditor’s Consent
- Financial Assurance
In addition to the application, you will need to put together and understand the franchise agreement.
What Information is Included in a Franchise Agreement?
The franchise agreement is a contract the franchisee makes with the franchisor so that they can run the business. This contract specifies the terms and conditions of the franchise relationship between the franchisor and franchisee. Before signing, the franchisee must read and understand the contract, including location and business standards. A franchise agreement must include the following information:
- Use of franchisor’s intellectual property including trademarks
- Term and renewal of the franchise
- Financial obligations
- Obligations and duties of franchisor and franchisee
- Advertising, marketing, and insurance requirements and costs
- Termination
Franchisor’s Obligations in a Franchise Contract
The franchisor’s obligations outline what is required of a franchisor in the franchise relationship. These obligations include:
- Providing the franchisee with a business model and system
- Ensuring the franchisee gets the necessary training to support their employees
- Assisting the franchisee when selecting a suitable location and with store design.
- Offering strategies for marketing and advertising the brand.
- Enforcing quality standards and brand consistency.
Franchisee’s Obligations in a Franchise Contract
The franchisee will also have their obligations to the franchisor outlined in the franchise contract. These obligations may include:
- What to pay the franchisor in initial and ongoing fees
- How the franchisee will be required to operate the business according to standards, guidelines, and services provided by the franchisor
- How to use branding materials correctly, including trademarks and logos
- Participation in franchisor training
- Compliance with laws and regulations
There are various types of franchise agreements, including master franchise agreements, franchise business formats, management franchises, and product distribution franchises. Each agreement will involve different obligations for the parties involved.
What is a Franchise Tax?
A franchise tax is an annual tax the state charges that franchisees must pay at specific points throughout the year. In California, a franchise must pay the same tax as any other entity on the 15th day of the fourth month after the beginning of the tax year. This tax is $800 for all California LLCs.
How Do You Franchise an Already Successful Business?
If you’re already a successful business owner, congratulations! It’s great that you’re in a spot to start thinking ahead about the future of your business by looking into franchising opportunities. Here are the crucial steps you must take when you franchise your business and hire new contractors to run their franchises:
- Make sure your business is ready to franchise
- Protect your business’s intellectual property
- Prepare a financial disclosure document (FDD)
- Draft a franchise agreement
- Compile an operational manual for franchisees
- File or register your FDD
- Set a strategy to achieve your sales goals
If you think you are ready to franchise your existing business, the experts at Burkes Brothers offer business consulting services to guide you through each step to ensure greater success for your brand.
Customize Your Franchise Strategy for Business Success
There are many paths to success, but only a few will be right for your business and service area. Our nationwide business consulting services are designed to help you evaluate your best plans of action. Take action today and plan for success when you reach out to the Burkes Brothers team for commercial loans, business planning, and more.
Discover Better Business Consultation
With plenty of resources and exceptional insights, Burkes Brothers provides business development services to entrepreneurs across the country. Based in Huntington Beach, CA, we’re prepared to work with you to construct an enterprise from the ground up. Contact us today to evaluate your business plans and commit to accomplishing your business goals.