How to Start a Franchise
By Matt Dickstein
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
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
I Franchise My Business?
For help with your franchise disclosure document (UFOC), see
Franchise Disclosure Document.
ado, let me give you seven steps in starting your franchise
Step One –
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 –
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
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
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
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.
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.
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.
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
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 –
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,
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?
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.
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 –
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
If you want to read more about
franchising, try my main page
Attorney. From there you can link to other
pages and articles of interest.
me to schedule a legal consultation:
510-796-9144 legal consultation: