Franchise your business: A quick guide for business owners

Wondering how to start a franchise? Imagine taking the heart and soul of your brand and packaging it into a concept that can be expanded far beyond your local storefront. Whether you're a seasoned business owner eager to build an empire or a budding entrepreneur eyeing growth, franchising can be a game-changer.

In 2024, the economic output of franchised businesses was estimated to be $897 billion.¹ Franchise owners have potential opportunities for growth and market expansion.

Before you take on the role of franchisor, use this guide as a starting point. From creating a business plan to financing and fees, we’ll cover some key steps and considerations on how to create a franchise.

What is a franchise?

A franchise is a business model that enables an established owner, called a “franchisor,” to expand by allowing another person, the “franchisee,” to operate a similar business under the franchisor's brand.

So, what is a franchise and how do you start one? It’s an opportunity for franchisors to grow their brand while franchisees benefit from a proven business model.

This approach to creating a franchise allows franchisors to broaden their reach and increase revenue without directly managing each location. At the same time, franchisees can operate their own businesses while benefiting from the franchisor’s proven concept and established reputation.

In exchange for ongoing support and the right to operate under the brand, franchisees typically pay royalty fees, often calculated as a percentage of sales.

For example, picture your doughnut shop, Doughnut Village, preparing to expand beyond your original location. By franchising your concept, you can enable franchisees to establish Doughnut Village locations in their local areas. As the franchisor, you expand your brand’s presence while collecting royalty fees. Franchisees benefit from brand recognition and established proof of concept.

Considerations of starting a franchise

Franchising can be a lucrative expansion strategy, but it's crucial to thoroughly assess whether your business is ready. Start by weighing the potential pros and cons of franchising your brand:

Benefits of franchising

If you’re considering learning how to start a franchise, you first may want to consider the benefits of doing so. Many people want more control over their careers and lives, but taking huge risks may not line up with those goals.

Once you start researching franchises and what they offer, you’ll quickly realize that some of the benefits of franchising include:

• Rapid expansion: Franchising can allow for accelerated growth as franchisees open and operate new locations.

• Additional revenue streams: Franchisors may receive revenue not only from the sale of franchise licenses but also from ongoing royalty fees.

• Reduced risk: Franchisees typically assume the financial burden of setting up and operating their locations, reducing the capital and operational risks for a franchisor.

• Brand awareness: Franchising can help a franchisor build brand awareness in new territories and markets.

Drawbacks of franchising

It’s easy to see the positives of starting a franchise, but like any major decision, you also need to consider the negatives. Like any business or work environment, conflicts will arise. Before you commit, make sure you understand the following drawbacks of franchising:

• Loss of control: Franchising means sharing control of your brand and business operations with franchisees. You may have less direct control over each franchise location.

• Quality control challenges: Ensuring consistency and quality across all franchise locations can be challenging.

• Franchisee conflict: Conflicts between franchisors and franchisees may arise over issues like royalties, territory disputes, or business direction, potentially leading to legal disputes.

• Brand reputation: Negative experiences at individual franchise locations can tarnish a brand's overall reputation.

Types of franchises

Franchises exist in various forms. From fast food chains to beauty salons, franchises provide unique opportunities in just about any type of field. They can also attract other potential business owners, leaving your brand in good hands.

Some franchises can be perfect for individuals who enjoy overseeing daily operations, while others might require less hands-on involvement. Additionally, the startup costs of certain franchises can be lower than those of others.

Some types of franchises include:

• Business services: These franchises provide professional support such as printing, accounting, marketing, or IT solutions. They cater to both businesses and individual consumers.

• Commercial and residential services: This can cover various services such as cleaning, repairs, landscaping, and pest control to help maintain properties for homeowners and businesses.

• Lodging: From budget to five-star properties, it’s possible to become a hotel or motel franchisee.

• Personal services: Spas, nail salons, massages, pet grooming, and daycares are some of the personal services that may appeal to those looking to become franchise owners.

• Real estate: Realtors and brokers typically start working for established real estate brands, but once you have some experience and capital, you could potentially become a franchise owner yourself.

• Restaurants: Restaurant franchises are highly appealing as they have an established business model and brand awareness. Those looking to enter the game can choose from quick service to fine dining.

• Retail: From clothing to groceries, retail franchises could potentially earn significant returns in the right market. That said, these businesses typically require more hands-on effort from the owners.

How to start a franchise in a few steps

When franchising a business, remember that the process and requirements can differ greatly based on factors such as location, business type, industry, and your specific goals. Here are some key steps to consider as you discover how to start a franchise:

Assess franchise readiness

Franchising a business doesn’t occur overnight, so how can you determine if your business is ready for franchising? When evaluating franchise readiness, consider the following:

• Do you have a proven business model? Ensure your business has a well-established and successful business model that can be replicated. Franchising works well with a clear blueprint for how the business operates and generates profits.

• What’s your unique selling proposition (USP)? Your USP differentiates your business in a crowded marketplace, attracting customers and potential franchisees. For example, it could be a restaurant offering a signature sauce or personal service with eco-friendly practices focusing on sustainability.

• Is your business financially stable? Assess your business’s financial health to determine if you have the resources to support the initial setup of a franchise program, including legal and marketing costs.

• Are you familiar with legal and regulatory requirements? Understand the compliance standards for franchising in your region as they can differ by state or city. You probably need to create franchise agreements, disclosure documents, and comply with particular franchise laws to safeguard your brand and franchisees.

• Are you equipped to offer adequate support and training? Develop a comprehensive training program and an ongoing support system for your franchisees to help them succeed and maintain brand consistency. This includes employee training, as the process needs to be consistent for the business model to succeed.

Develop a franchise disclosure document (FDD) and business plan

Franchising a business starts with a franchise disclosure document (FDD). An FDD is designed to disclose all the essential details about your franchise opportunity, including your business’s financial health, franchise fees and royalties, operational protocols, and potential risks.

The goal is to provide a transparent look into your business, helping prospective franchisees determine if the opportunity is right for them. Consult with a franchise attorney to create a legally compliant FDD that adheres to federal and state regulations.

In addition to an FDD, a franchise business plan outlines how to operate your franchise. It details key points such as your business goals, financial projections, marketing strategies, and operational procedures. It also can serve as a roadmap for success, helping franchisees navigate challenges efficiently.

Create a comprehensive franchise program

If you want to know how to start a franchise, you’ll need to create a comprehensive franchise program. This helps maintain consistency and all locations uphold the values and standards of the original brand. It entails designing detailed training modules, operational manuals, and support systems to guide franchisees in delivering a unified customer experience. A well-structured program also promotes growth by attracting potential franchisees who are aligned with the brand's vision and commitment to quality.

• Establishes brand consistency: A franchise program helps every franchisee operate according to the established brand guidelines, maintaining consistency in products, services, and customer experience.

• Builds trust: Consumers are more likely to trust and choose a brand they recognize. When franchise locations consistently deliver the same quality and experience, it can foster trust, potentially leading to repeat business and positive reviews.

• Maintains standards: It reinforces that the same high standards are maintained across all locations, which is crucial for brand reputation.

• Operating manuals: Operating manuals help franchisees follow the same procedures, marketing strategies, and quality control measures.

• Training program: A well-designed training program helps equip franchisees and their teams with the necessary skills and knowledge to run the business successfully.

As part of your franchise program, you also need to list the following risks as any potential franchisee will want to do their due diligence before signing on.

• Reduces franchisee risk: Providing franchisees with a franchise program helps reduce the risk of business failure. It equips them with a proven formula for success, increasing the likelihood of profitability and long-term growth.

• Franchise fees: These fees typically include an initial franchise fee (paid upfront), ongoing royalties (a percentage of sales), and marketing fees (for brand advertising). Including recent fees and sales numbers to potential franchisees can show that you’re being transparent, which could increase trust with the potential franchisee.

Marketing your franchise opportunity

Effectively marketing your franchise opportunity is crucial for attracting potential franchisees and enhancing brand visibility. You should emphasize your franchise's unique aspects and explain why it represents a great investment. While marketing strategies will vary for each type of franchise, there are several common approaches to inform people about your business.

• Online presence: One way for marketing a franchise is by doing it online via your website. Potential investors already familiar with your brand will likely visit your site for additional information. Have a tab or menu that lists the franchise opportunity and how to contact you to get started. Alternatively, use your social media presence to promote and engage with anyone interested in the franchise opportunity.

• Franchise directories: Listing your franchise opportunity on respected franchise directories and portals is important for increasing visibility. This approach allows you to reach potential investors who might not be familiar with your brand. Once they are exposed, they may become interested in what you have to offer.

• Discovery days: It may be worthwhile to host community events or webinars where you can talk about your franchise opportunities. These discovery days allow people to learn more about your franchise system and meet your team. While this approach takes a little more effort, it does give potential investors direct access to you where you can have a one-on-one conversation with them about the business.

• Franchise shows: By purchasing a booth at a franchise show, you can expose your brand to potential franchisees and entrepreneurs. Since these shows occur nationwide, you can target specific regions where you want to expand. The leads you generate at a franchise show can be more rewarding. Additionally, you can meet industry professionals who could help you expand your business.

Finance your franchise expansion

One of the aspects of learning how to start a franchise is financing. Scaling your business through franchising may require a significant amount of capital for the initial setup, marketing, and training development. Acquiring those funds isn’t always easy, but there are a few strategies you can tap into.

• Savings: Expansions don’t happen overnight. If you’re looking to become a franchisor, you should set aside funds for market research, legal compliance, training, and more in your budget. Having this money available will support you’re not affecting your monthly cash flow while planning your franchise expansion.

• Small business loans: Many banks provide small business loans specifically for franchise operations. This is appealing to banks because an established business model reduces the likelihood of default on your loan. If approved, the funds can be utilized for leases, equipment, marketing, and other startup expenses. if approved

• Franchise investors: Some private investors can provide capital for those looking to expand. Raising funds through this channel might be easier for some businesses, but the investors would be looking for equity for their contribution since the cost of starting a franchise can be significant.

Expanding into new lanes

Now that you know how to start a franchise, you can take your business to the next level. Franchising can be a win-win for everyone involved. It not only allows you to grow and expand your brand, but it may also empower aspiring entrepreneurs to fulfill their dreams of business ownership.

If you're considering franchising your business, remember that with the right strategy and commitment, you’ll be one step closer to success. Grow with PayPal and explore dynamic strategies to help reach your goals.