How to Franchise Your Business in the US

June 24, 2024
Digital Transformation
Franchise Management

The way to get started is to quit talking and begin doing."

Walt Disney wasn't thinking about franchising when he said this. But, if you are looking for ways to expand and grow your business, consider franchising as a business model. Think McDonald's, and Taco Bell.

Franchising enables a business (the franchisor) to grant their brand, business concept, and operation method, to other business owners. In exchange, the franchisor gets an upfront franchisee fee and a continued share of a percentage of the franchisee's profits (royalties). 

Are you the owner of a brand or business in the US looking to actively expand via franchising? Read on to learn more about how to franchise your business.

Franchising: The Implications

Before diving into the nitty-gritty of how to franchise your business, let's take a look at the possible implications of adopting this business model.

The Upsides

Going down the franchising route has significant upsides for a business owner, such as:

  • You can expand into new markets faster than trying to do so yourself. 
  • Gain visibility and a stronger customer base with each new franchise. 
  • Create additional revenue streams that add to what your core business generates.

The Downsides

While franchising does have its fair share of advantages, there are a few downsides that you need to consider before you adopt this business model.

  • When you franchise, you relinquish a degree of control over the individual franchise's operations.
  • As a franchisor, you have to train individual franchises and provide ongoing support which is a significant investment in time and resources.
  • An individual franchise's bad performance can impact your brand's overall reputation

Pro Tip: Choosing the right franchisees and gauging their business acumen is crucial to the success of this business model. To learn more, read our detailed franchising guide here. 

The Five Franchising Models

There are five different franchising models that are widely used today. While they all retain the franchisor-franchisee relationship across the board, each model suits different business needs and operations.

1. The Business-Format Franchise Model

In the business-format model, franchisees mimic your business model as is.

  • The franchisees are given the right to use your brand name and business model, i.e., your standard operating procedure (SOP).
  • It is your responsibility as the franchisor to provide all the training and ongoing support to the franchisee. 
  • The franchisees pay the initial franchise fee, ongoing royalties, and possibly marketing fees. 
  • It is the franchisee’s responsibility to adhere to your operational standards and pay the agreed-upon royalty fees as per the franchise agreement.

This business model has worked for restaurants (e.g., McDonald's, Dominoes), convenience stores (e.g., 7-Eleven, Circle K), and retail (e.g., Ace Hardware, The UPS Store).

2. The Product Distribution Franchise Model

If you are a business that manufactures products and are looking to expand your distribution network, the product distribution franchise model would work best for you.

  • You grant the franchisee the right to sell your products (often within a set location).
  • You are responsible for the continued supply of products and, depending on the agreement, you allow the franchisee to sell your products under their brand.
  • The onus of sales and marketing falls on the franchisee.

Under this business model, you typically earn revenue from the purchase and resale of products rather than traditional royalty fees.

PepsiCo, Frito-Lay, Caterpillar, and Staples are some popular businesses that follow the product distribution franchise model. 

3. The Manufacturing Franchise Model

This model is ideal for business owners seeking to expand both their manufacturing capabilities and distribution networks.

  • You grant a franchisee exclusive rights to manufacture and distribute your products to your prescribed standards.
  • Under this model, it's your responsibility to provide precise manufacturing specifications and branding documents for the franchisee to emulate. 
  • The franchisee’s responsibility is to manufacture products to the prescribed standards. Responsibilities under this model also include handling the distribution and sales of said products.

With this model, you earn revenue either by getting a share of the profits or by selling the rights to manufacture their products.

Snap-on Tools and Ben & Jerry's are a few popular names where each franchise manufactures and distributes products to the franchisor's standards. 

4. The Conversion Franchise Model

Conversion franchising allows existing businesses to convert into franchises by adopting your business model and rebranding themselves.

Under the conversion model:

  • You offer your business model and provide all the necessary support for the transition. 
  • The franchisee, on the other hand, must ramp up their existing standards to that of the franchisor.

The franchisor generates income from ongoing royalties based on the franchisee’s revenue.

Conversion franchising works best when you are already a successful franchisor and want to establish your presence in a location dominated by small, independent businesses. By converting, existing businesses can capitalize on your brand name, and the support and training you offer to their benefit. 

The hospitality industry (e.g., Choice Hotels International and Wyndham Hotels & Resorts) and home services, where independent companies convert to your franchise (e.g., Merry Maid), are some organizations that follow this model. 

5. The Master Franchise Model

The master franchise model is one where you (the franchisor) grant rights to a franchisee for a large territory or region. This master franchisee will then build a network of unit franchisees within the specific territory. The master franchisee is responsible for developing and supporting unit franchisees.

Under this model, you receive a percentage of the fees and royalties from unit franchisees. Internationally known brands like Subway have grown rapidly using this business model in different regions. 

With the basics covered, let us look at how you can go about franchising your business in the US.

How to Franchise Your Business in the US?

If you are convinced that your business is franchisable and sure about which model works best for you, the following steps will guide you through franchising your business in the US:

Step 1: Secure Your Intellectual Property

When you franchise your business, you grant access to your branding and all the inner workings of your business to your franchisees. These can include branding, trade secrets, inventions, and more. 

Register your trademarks, and apply for patents and copyrights with the United States Patent and Trademark Office (USPTO) to secure your intellectual property from theft and misuse. 

Step 2: Prepare a Franchise Disclosure Document (FDD)

The FDD is a legal dossier that outlines your franchise’s blueprint and delves into your business’s background, financials, and the legalities your franchisees must be aware of according to the federal and state laws they intend to operate in. 

The FDD must be prepared per the Franchise Rule established by the Federal Trade Commission (FTC).

Step 3: Draft and Sign a Formal Agreement

Once your franchisee has had ample time to go through the FDD, the next step is to draft a binding contract, which in this case is called a Franchise Agreement. In short, it’s a binding contract that sets forth mutual expectations and operational guidelines.

This document will encompass key elements such as franchise fees, terms for renewal, termination conditions, and territory rights. It will also detail the timeline for opening, minimum performance standards, and supply chain specifics.

Step 4: File Your FDD

This step may vary based on individual states, some require you to register your FDD, others to file your FDD and some do not require either. It's best to hire a Franchisee Attorney to ensure that all your documents are in order per state and federal laws.

Is Your Business Ready For Franchising in the US?

Before you proceed, here are a few questions to ask yourself to understand whether you are ready to franchise your business in the US:

  • Is your business successful in the US?
  • Is licensing or franchising better for expanding your business?
  • Is your operating model franchiseable? 
  • Has it already been replicated successfully at a secondary location, preferably in the US?
  • Is there a demand for what your business offers in other states or regions where you are not currently operating?
  • Can you develop and sustain a support system for your franchisees in your chosen states in the US? 
  • Are you willing to give up absolute control of your business and take on the risks associated with this business model?
  • Are you ready to tackle the regulations and compliance needs imposed by the FTC?

Summing Up

Franchising in the US is a popular and powerful way to grow and expand your business. The decision to go down this route requires careful consideration, but, the sky is the limit for enterprising business owners who have a dream and the appetite for solving the problems that come with rapid expansion via franchising.

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