How to Start a Franchise System

In this article I discuss some basic building blocks in setting up your franchise system.  I lead you through seven early steps in the process.  Rest assured that you will need to accomplish many more steps on the way to franchising, but we have to start somewhere. 

I assume in this article that you have already made your decision to franchise, and now you only want a summary of how to get started.  If you are still at the threshold question, whether or not to franchise, please see my article “Should I Franchise My Business?”  For help with your franchise disclosure document (UFOC), see my article "The Franchise Disclosure Document."

Without further ado, let me give you seven steps in starting your franchise system.

Step One – Business Plan.  I know you are tired of hearing about business plans and perhaps this is a disappointing way for me to begin the article.  But I believe that a business plan is a great way to think through your venture.  This is the place to start. 

Step Two – Cheat.  Research your competition on the internet and copy what they do best.  Some call it cheating; I call it research.  I recommend that you read your competition’s Uniform Franchise Disclosure Documents (commonly called the UFOC).  The ideas you take from your competitors’ UFOCs will save you much in time, energy and resources.  It is probably one of the best investments you can make in setting up your franchise system.

To do this, use the California Department of Corporation's Cal-EASI free online database of franchise registrations.  If you don’t mind paying a little more for your data, go to frandata.com or franchisehelp.com.  These latter sites sell UFOC copies (as of last year, $2 per page for frandata; $190 per UFOC for franchisehelp). 

Step Three – Protect your Trademarks.  You should take the necessary steps to protect your franchise identity by registering your trademarks with the U.S. Patent and Trademark Office.  This work includes investigating who else might be using the same or similar names and logos.  Start your trademark registration early because a trademark can take months to obtain and sometimes longer.

Step Four – Sketch out the Franchise System. 

• Who are your Franchisees?  You should consider the basic characteristics of your preferred franchisees, including the minimum level of capital that your franchisees need to be awarded a franchise.  Once you know what your franchisees look like, you will know how to market to them.
• Franchise Fees and Terms.  Think through the basic terms of each franchise, including the fee structure, when the franchise term expires, the demands you will make of franchisees, and the ongoing value you will provide to franchisees to keep them in the system.  Consider also some type of advertising fund that franchisees will pay into for advertising of the brand.  
• Operations.  You need to systemize franchisee operations. These include the policies, procedures and standards that every franchisee will follow.  Your system will teach the franchisee how to set up and run the business.
  
  Usually the system is written down in an operations manual.  Your manual must be comprehensive. You do not have to be perfect, however, because your operations manual will change over time as the system changes.  Your Franchise Agreement will permit you to modify the manual from time to time.
• Training Program.  Create a training program that will teach the franchisees how to operate the system.  Some training programs last a few days and others last a few months.  Training can be done in the classroom, online or on-the-job, depending on your system.
• Management.  Your franchisees will need on-going support. You must have capable management to do this work, including site selection, lease negotiations, staff recruiting, staff training, marketing, customer service, etc. You also must inspect your franchised units periodically to make sure that the franchisees are following your system standards.
• Marketing Plan.  A franchisor makes money from selling franchises, so you will need a plan for marketing.  Franchise advertising is regulated in some states, for example, California, so be sure to consult a franchise lawyer early in this process. 

Step Five – Legal Compliance.  A franchisor is faced with a large volume of state and federal laws, and you will need to understand and be in compliance with these laws before offering or selling any franchise to anyone.  Among numerous other requirements, you must have a UFOC to deliver to your franchisees.  You must register the franchise in certain states, for example, California.  

In addition, you will probably want to form a new legal entity to be the franchisor, most likely a corporation or LLC.  A new entity will reduce your liability.  A new entity as the franchisor might also reduce the cost of getting audited financial statements, which will be required for your UFOC.  A new entity has no history for the accountant to grapple with, hence permits a faster and cheaper audit.

Get a business attorney with franchise experience to do this work.

Step Six – Save Your Money.  You need money to start a new franchise.  Some experts say that you need from $50,000 to $250,000 to get started.  Why so much?

First, you have start-up costs.  All businesses have start-up costs, for example, wages, rent, supplies, basic legal and accounting fees.  Franchisors have higher start-up costs, including the costs of a franchise consultant, franchise marketing, special websites, special design work, trademark protection, higher legal fees (for the franchise roll-out), higher accounting fees (for the audited financials to be attached to the UFOC), state registration fees (ranging up to $750 for certain states), and more.

Second, in those states that require registration of your franchise system, the state regulators require that you have the financial ability to meet your obligations to the franchisees without relying on their fees to be paid to you.  Your financial statements must show sufficient liquid capital, usually at a minimum $25,000, or sometimes 2X the initial franchise fee for new franchisors.

Although it’s possible to start a franchise roll-out on the cheap, it’s not a good idea.  Franchising is a pay-to-play game: Pay what it takes to do the job right.

Step Seven – Get Help.  You cannot set up a franchise system alone.  At a minimum you need a CPA plus a business lawyer with franchise experience.  You probably will need a financial planner, franchise consultant, marketing specialist and internet advertising specialist as well.  If you remember one thing only from this article, let it be this: When setting up a franchise system, don’t be cheap, do it right.

As always, this article only scratches the surface of franchising.  There is much, much more for you to do than I introduce here.  Be sure to get the legal, accounting, tax and other help you need to do the job right.  You can call me if you have any questions.

If you want to read more about franchising, try my main page "Franchise Attorney."   From there you can link to other pages and articles of interest.

Call me to schedule a legal consultation: 510-796-9144