Franchise your business: A quick guide for business owners

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 2023, franchised businesses generated a total output of $860 billion¹, providing owners with opportunities for exponential growth, market expansion, and the creation of a supportive network of individuals aligned with their vision.

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 for creating a franchise.

What is a franchise?

A franchise is when an established business owner (called a “franchisor”) allows another person (a “franchisee”) to open and run an identical or similar business under the franchisor’s established brand.

This business expansion model allows franchisors to grow their brand and reach new markets without directly managing every location. At the same time, the franchisee gains the opportunity to run their own business with the backing of an established brand and a proven business model.

In exchange for ongoing support and the right to operate under the brand, the franchisee often pays ongoing fees to the franchisor, such as royalty fees based on a percentage of sales.

Here’s a quick example: Say you run a popular doughnut shop called Doughnut Village, and you’re ready to take the brand nationwide. You may consider franchising your concept, allowing franchisees to open a Doughnut Village in their area. You, as the franchisor, can expand your brand and revenue through additional locations, while the franchisee gains access to your 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:

Here are some possible advantages of franchising a business:

• Rapid expansion. Franchising allows 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.

On the other hand, there may be potential risks and disadvantages of franchising a business:

• 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.

How to start a franchise in a few steps

When franchising a business, keep in mind that the process and requirements can vary significantly depending on factors like location, business type, industry, and your specific goals. Below are some key steps to explore:

Assess franchise readiness

How do you know whether your business is ready for franchising? When assessing 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 best 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.
• 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 legal and regulatory requirements for franchising in your region. You likely need to develop franchise agreements, disclosure documents, and comply with specific franchise laws to protect 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.

Develop a franchise disclosure document (FDD)

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.

Create a franchising business plan

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.

Here are some strategies for marketing your franchise opportunity to potential investors and franchisees:

• Online presence. Leverage a professional website and social media to showcase your franchise, share testimonials, and engage with prospects.
• Franchise directories. List your opportunity on reputable franchise directories and portals to increase visibility among potential investors.
• Discovery days. Host events or webinars where interested individuals can learn more about your franchise system and meet your team.

Create a comprehensive franchise program

Developing a franchise program is critical for maintaining consistency and ensuring all locations reflect the values and standards of the original brand. Here's why it's important:

• Establishes brand consistency. A franchise program ensures that every franchisee operates 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.
• 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.

In your franchise program, consider including information on the following elements:

• Franchise fees. These fees typically include an initial franchise fee (paid upfront), ongoing royalties (a percentage of sales), and marketing fees (for brand advertising).
• Operating manuals. Operating manuals ensure that 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.

Finance your franchise expansion

Scaling your business through franchising may require a significant amount of capital for the initial setup, marketing, and training development.

Start by creating a budget that includes costs for market research, legal compliance, training, marketing, and technology, among other expenses. If needed, you can seek investors, loans, or alternative funding sources like crowdfunding or franchise-specific lenders.

Expanding into new lanes

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.