Many entrepreneurs are drawn to franchising — and understandably so. But before we dive into the ins and outs of how to open a successful franchise, let us first go through a few important definitions.
So Before We Learn How to Launch a Successful Franchise, What is Exactly a Franchise?
A franchise is an authorization allowing an individual or group (called the franchisee) to use a brand’s (called franchisor) own expertise, processes, and intellectual properties allowing the individual or group to sell a product or service under the brand’s name. The franchise agreement also requires the franchisee to pay the franchisor an initial fee and annual royalties or licensing fees.
Keep in mind that the franchisor is the mother brand or company (example: the McDonald’s Corporation) that grants permission to the franchisee (example: You who wish to open a McDonald’s franchise) to use its knowhow and name.
Everybody encounters franchises in their everyday lives. Their pervasiveness is a proof of the success of the franchising business model. Among the most popular franchises we can think of you can find McDonald’s (of course), Subway, KFC, Dunkin Donuts or Domino’s Pizza.
But the franchising model is not only found in the Food and Beverage industry. Here are other examples of highly successful franchises operating in a variety of sectors:
– Marriott International (Hotels)
– Century 21 (Real estate)
– Hertz (Car rental)
– Carrefour (Hypermarkets)
– UPS (Shipping)
– Ace (Hardware retail)
– GNC (Health supplements)
Here are some interesting numbers to back the case for the franchising industry:
According to Franchisedirect.com, around 300 new brands start franchising programs on an annual basis in the US
According to the same source, it is estimated that 1 in 7 businesses is actually a franchise
According to Francine Lafontaine in the 2018 Journal of Economics & Management Strategy, the franchise success rate is 8% higher than the independent business success rate in the first two years of operation
Opening a franchise is much easier than launching your own business, as you are leveraging a business idea that has already proven successful. All the same, mastering how to open a successful franchise requires a lot of research and due diligence.
Why is that? Glad you asked.
The reason is simple — not all franchises are created equal. Some businesses boast a stronger brand and a better track record of offering marketing support to its franchisees. For this reason, it’s important you pick the right franchisor.
How do you get there?
Don’t worry, we have laid it all out for you. Just dive right in.
How to Open a Successful Franchise in 6 Easy Steps
Step 1: Learning How to Open a Successful Franchise Always Starts With Doing Initial Research
Here are four important factors to consider when picking a franchise:
Personal preference – What sort of franchise you would like to run? For instance, if you are someone who eats, sleeps, and breathes fitness, you may be better off running a fitness equipment franchise than owning a pizza franchise. Remember, it is always easier to launch and manage a business that interests you on a personal level than start a venture in a sector that has no affinity whatsoever with your personality.
Know your budget – Every franchisor will require you to cough up an upfront fee and meet certain financial requirements. Go over your personal finances and start searching for opportunities within your budget range. There is a franchise for every budget and don’t be surprised to find out that many franchising opportunities require less than 200,000 USD to start. Do a proper research and make sure to align your final choice with your current capital constraints (unless you have the external support of partners for example). But don’t make money the sole determinant of your choice. If you are able to build a strong case for a rather expensive franchise opportunity following a thorough market research, you should definitely seek out partners or alternative funding options in case you cannot afford to bootstrap. More on this later below.
Market research – It is key to understand the target market conditions before you jump on a franchising opportunity. Where are you planning to launch your franchise? Who is your target audience in this geography? What about the existing competition? What about the regulatory framework? Conducting a proper market research is crucial to answer similar questions and validate the franchise opportunity
Internal policies – This is just as important as the other three. You might not want to sign a franchise agreement with internal brand policies that don’t match up with your personal management style.
Step 2: Prepare for the Franchise Discovery Day
Discovery Day is an in-person meeting between the franchisor and potential buyers. This is your big chance to find more out about the franchisor’s values, policies, and corporate culture. Likewise, the franchise company gets a chance to ascertain if you will make a good business partner. Therefore, it’s important you prepare well for the Discovery Day.
Experience demonstrates that not all franchisee applicants who attend Discovery Day are automatically approved. A third to a half of all applicants who attend discovery day are rejected on average and hence there is a number of steps you can take to maximize your chance to being accepted.
Prepare for Discovery Day as if you are going on a job interview with a potential employer. Make sure you highlight the relevant points in your professional experience and education and explain how they can benefit the franchisor.
It is very important to cite any previous relevant project or achievement that you have accomplished. For example, if you are applying to an F&B franchise and you have worked as a restaurant manager in the past, make sure to emphasize this point by explaining how you did a great job and what you have learned.
What exactly a franchise company looks for in a franchisee varies from one business to the next. In addition to specific qualifications (such as college degree, relevant experience, net worth, and trade certifications), a franchisor is likely to size you up on your commitment to their services or products and willingness to toe the company line.
Step 3: Review the Franchise Agreement
If all goes well, you may well have a franchise agreement in your hands by the end of the Discovery Day. This is a legally binding document that gives you the rights to start a franchise, as long as you follow the franchisor’s terms and conditions. It is a good idea to get a lawyer to advise you about the franchise agreement. This will ensure you have a clear understanding of what you are getting into.
Ensure the promises made by your franchisor are duly noted in the franchise agreement. For example, if the company promised you legal support in case of a lawsuit, make sure that the agreement mentions this clearly. The same holds true for rules related to pricing, suppliers, royalty fees, territorial protection, transfer of ownership, recruiting franchise employees, employee training, and more.
Step 4: Get the Necessary Funding
Once you have understood and agreed to the terms and conditions of the franchise agreement, it is time to get the required funding. Typically, you will have to submit the franchise fee along with the signed contract.
Here are some of the more common financing options available to you. Make sure you understand each option during your quest to learn how to open a successful franchise.
Rollover for Business Startups (ROBS) – A ROB is a creative way to use your retirement funds to start a business. You can use $50,000 or more of your retirement money as investment capital.
Traditional Bank Loan – You may also knock on the door of your bank for a loan. However, keep in mind that banks usually don’t like to fund startups. All the same, you can significantly boost your chances of success by preparing a well-thought-out business plan and presenting it clearly.
Franchisor Financing – Many franchisors provide customized financing solutions designed for their franchisees, usually through partnership with specific financial institutions or lenders. Using franchisor financing is one of the most preferred ways to fund a franchise, since it offers several benefits. For starters, such a program is likely to prove a one-stop shop for your all financing needs. Many such financing programs allow you to not only finance the upfront fees but also the necessary equipment. Another benefit of working with a franchise company that has its own financing program is that you may never have to look anywhere else for funding. That’s because no one knows the business as well as the franchisor themselves. They know the risks involved and other details far better than any other lender ever could.
Step 5: Pick a Franchising Location
After you have secured the funds and signed the franchise agreement, you must create a business operation plan. Start by picking the right location for your franchise. You can turn to your franchisor for help. Typically, franchise companies provide their business partners with guidelines and recommendations to help them locate a good location.
The obvious question at this point in time is, Should you lease or buy a property?
When you are just starting out as a franchisor, leasing may appear a safer option. However, if you plan to use the same location for many years, there may be an advantage in purchasing it, provided you can get the funding.
Step 6: Participate in the Franchisee Training
The next, and the final step, is to sign up for the necessary franchisee training. The franchisor knows the ins and outs of the system — after all, they are the ones who have created it — and as such are in the best position to train you for the franchisee role.
Typically, your training will start in a classroom-type setting — either at the franchisor’s headquarters or at some designated training facility — after you have signed the franchise agreement and paid the upfront fees.
A thorough training program is one that teaches you all that you need to learn about services or products, as well as about marketing, hiring and training staff, bookkeeping, preparing reports, and negotiating with suppliers.
Keep in mind that a major component of the franchise training is the operations manual. This is your reference document that includes all the vital and important information any franchisee needs to know even if they have no experience whatsoever with the brand. Hence, it is very important to spend as much time as possible with this document to make sure you are aligned with the brand that you now represent.
In addition to the standard onsite trainings, many brands invite their franchisees to receive an induction training at their headquarters. This allows franchisees to tangibly discover the values of the brand and in a way become part of the story.
Finally, it is very important to remember that proper franchisee training is not a one-off initiative done only at the very beginning, it is an ongoing activity that demands periodical follow-ups and continual updates to keep the franchisee up to date with the brand’s latest strategic orientations and operational best practices. So roll-up your sleeves and get ready for a lifetime of business education to keep your franchise strong, productive and competitive in an era where success only rewards entrepreneurs who continually learn, adapt and seek excellence.
We hope you enjoyed our step by step guide on how to open a successful franchise. before we part, here are a few more tips to make sure you are now on the right path.
To summarize, franchises are increasingly popular business opportunities that any entrepreneur can grab to start and grow a successful venture. Although it is true that a majority of franchises usually belong to the Food and Beverage sector such as restaurants or coffee shops, there are many other industries to consider when it comes to searching and finding your ideal franchise.
A franchise like any other business idea needs proper market research and business planning. You need to look at multiple important aspects to accurately evaluate the franchise opportunity including the target market conditions, the monetary and human resources you are putting on the table, the terms imposed by the franchisor and last but not least your long term objectives.
Do you want to launch a one-off restaurant outlet? Or do you wish to build a multi-city or even multi-country franchise business? As Steven Covey puts it, make sure you always begin with the end in mind.
And last but not least, keep in mind that starting a franchise will require from you a long-term commitment in terms of training and education to consistently keep your business up to date with the brand’s vision and high operational standards.