So you have a great business idea and you’re thinking about franchising it. I don’t blame you – franchising can be a terrific way to grow your business quickly while leveraging other people’s capital. But it’s not as simple as putting up some “franchise opportunities available” signs. Launching a successful franchise model takes extensive planning, research, and good old fashioned hard work.

In this guide, I’ll walk you through the key steps involved in creating a franchise business from scratch. I’ll share tips and best practices gleaned from my own experience in the franchising world. Whether you’re a seasoned entrepreneur or just getting started, I hope this gives you a solid understanding of what it takes to build a thriving franchise system. So grab a coffee, put your feet up, and let’s get started!

What is a Franchise Business Model?

A franchise business model allows an existing business, called the franchisor, to grant access to its brand, business model, and systems to independent franchisees. Franchisees pay an initial franchise fee and ongoing royalties to the franchisor to open and operate a local franchise location. This allows the franchisee to capitalize on the franchisor’s established brand and avoid many of the risks and costs of starting an independent small business.

Some of the most well-known franchise models today include fast food chains like McDonald’s and Subway, hotel brands like Hilton and Marriott, and retail franchises like 7-Eleven and Supercuts. But franchising can be used for virtually any business that can be easily replicated, standardized, and systematized.

The franchisor benefits by being able to rapidly expand without large capital investments. And franchisees benefit from the training, support, and operational methods provided by the franchisor. It allows both parties to leverage each other’s strengths.

Benefits of Franchising

There are many potential benefits that a franchise model offers both franchisors and franchisees:

For Franchisors:

– Rapid expansion and growth of brand and locations

– Lower capital investment compared to company-owned locations

– Ongoing royalty income from franchisees

– Motivated owner-operators in each location

For Franchisees: 

– Capitalize on established brand and proven business model

– Training and support from franchisor

– Potential for higher success rate than independent startup

– Centralized systems and processes

– Ongoing support and shared best practices

Challenges of Franchising 

However, franchising also comes with some key challenges to consider:

For Franchisors:

– Lower revenue per location compared to company-owned

– Less operational control over franchisee-owned locations

– Providing high levels of support across many locations

– Maintaining brand consistency and quality standards

For Franchisees:

– High upfront franchise fee and startup costs

– Ongoing royalty and marketing fees

– Less independence and flexibility than independent business

– Franchisor requirements and operational standards

– Territorial restrictions limiting location and markets

Understanding these pros and cons can help determine if a franchise model makes sense for your business concept.

Steps to Create a Franchise Business Model

If you believe your business is well-suited for franchising, here are the key steps involved in creating a franchise model:

1. Choose a franchise concept and conduct market research

2. Develop the franchise business model 

3. Create the Franchise Disclosure Document (FDD)

4. Draft legal agreements and contracts

5. Recruit franchisees and sell franchises

6. Provide training and support to franchisees

7. Grow and expand the franchise system

Let’s explore each of these steps in more detail:

Choosing a Franchise Concept and Conducting Market Research

The first step is determining if your existing or proposed business concept is viable for a franchise model. The best franchise business ideas typically have these characteristics:

– Proven and successful business model

– Unit economics that are profitable and scalable

– Distinct brand identity that can be standardized across locations

– Relatively simple operations that can be systematized

– Low-cost startup model without excessive capital needs

– Broad customer appeal and large addressable market

Once you have a business concept in mind, conduct in-depth market research to validate the feasibility of franchising. This includes:

– Competitive analysis – Research your competition and positioning in the market

– Consumer research – Surveys, interviews, and focus groups to determine customer demand and preferences

– Location analysis – Evaluate ideal territories, real estate needs, and unit footprint

– Pilot testing – Open a company-owned location or locations to test operations

– Financial projections – Create detailed financial models and profitability forecasts 

Strong validation through research and pilot locations will give you confidence to move forward with franchising.

Developing the Franchise Business Model  

Now it’s time to develop the franchise business model and system to support franchise locations. This involves:

Creating the Operations Manual

Document all your standardized systems, processes, and know-how that franchisees will implement. This is essentially the playbook for your business. It should cover:

– Site selection guidelines

– Store layout/design

– Branding guidelines 

– Product/service offerings

– Pricing structure

– Staff training/onboarding

– Technology systems

– Inventory management 

– Ordering processes

– Marketing/advertising policies

– Customer service protocols

– Record keeping/accounting

– Safety/security policies

Defining the Headquarters Support Model 

Determine what ongoing support you will provide to franchisees:

– Training programs

– Field support representatives

– Operations guidance/notes

– Toll-free support lines

– Conferences/ongoing training

– Intranet portal 

– Marketing assistance

– Bulk purchasing/supply chain

Creating the Franchisee Criteria

Define the ideal franchisee profile and criteria:

– Alignment with brand values

– Restaurant/retail management experience  

– Sufficient startup capital

– Good credit rating

– Commitment to hands-on ownership

– Drive to follow system and procedures

Establishing Fees and Ongoing Royalties

Determine fair franchise fees that provide adequate revenue while maintaining affordability. Common options:

– Initial franchise fee – $15,000 to $50,000+

– Ongoing royalty – 5% to 8% of revenue

– Renewal fee every 5+ years  

– Marketing fees – 2% to 5% of revenue

– Transfer fee if a franchise is sold

Develop Legal Agreements and Contracts

Consult attorneys to develop the Franchise Disclosure Document, Franchise Agreement, lease agreements, supply agreements and other necessary contracts.

Pro tip: Join the International Franchise Association (IFA), which provides resources, connections, and credibility for new franchisors.

Creating the Franchise Disclosure Document and Legal Agreements

One of the most important legal steps in franchising is creating your Franchise Disclosure Document (FDD). The FDD is a legal document that discloses all details of the franchise model to prospects. It typically includes:

– Background on owners/executives

– Franchise fees and ongoing costs  

– List of current franchisees and their contract status

– Litigation/complaint history

– Franchisee responsibilities and requirements

– Training and support provided

– Territory, renewal, and transfer policies

– Financial statements for existing units

– Full franchise agreement

The FDD must fully disclose the details of your model so prospects can make an informed decision. It is heavily regulated by the Federal Trade Commission (FTC) and state laws. 

Work closely with an attorney experienced in franchise law to prepare your FDD – it is typically a 100+ page document. Your attorney can also draft your franchise agreement and other necessary legal contracts between franchisor and franchisees based on your unique model. 

Pro tip: File your FDD in all states where you plan to sell franchises to stay compliant with state franchise laws.  

Recruiting Franchisees and Growing the Franchise System

Once you have established your franchise model on paper and have a compliant FDD, it’s time to start recruiting franchisees!

Franchise recruiting methods can include:

– Attending franchise expos and conferences

– Running franchise recruiting ads 

– Promoting on your website

– Leveraging brokers

– Reaching out to investors and entrepreneur networks

– Using your existing customer base

– Getting local media coverage

Other tips for franchise sales:

– Focus on finding the right partners over pure revenue

– Thoroughly vet each prospect

– Make the value proposition clear

– Have candidates visit existing units  

– Check financial qualifications

– Consult experienced franchise attorneys

– Follow your franchisee criteria  

It takes time to build up a solid franchisee base and unit count. Aim for controlled, sustainable growth. Follow your operations manual closely across the new locations.

Provide extensive initial training along with ongoing support. Seek regular feedback from franchisees to improve your model.

Set clear milestones for reaching new regions and markets. Leverage buzz from existing units to fuel interest in new territories.

Providing Ongoing Support to Franchisees 

Launching new franchise units is just the beginning. You need to provide excellent ongoing support to set your franchisees up for success:

– Field support – Have franchisor reps regularly visit units to provide hands-on guidance and maintain brand standards.

– Training – Conduct initial training for all new franchisees. Offer refresher courses and advanced training as units mature.

– Franchisee intranet – Provide secure access to the latest versions of your operations manual, training materials, and brand guidelines.  

– Toll-free support line – Operate a dedicated phone line for franchisees to get help when needed. Track all support calls in a CRM system.

– Annual conferences – Host annual conferences to bring franchisees together to network, share best practices, celebrate achievements, and discuss business objectives.

– Local marketing support – Provide templates and assets for local store marketing. Offer co-op advertising programs.

– Surveys and feedback – Regularly survey franchisees on support satisfaction, challenges, and improvement ideas. Implement feedback to continually improve your model.

Providing this high level of support delivers huge returns by keeping franchisees satisfied and enabling locations to thrive.

Conclusion

Launching a successful franchise model takes extensive planning, research, and preparation. The rewards can be immense in terms of brand reach and revenue, but quality execution is critical every step of the way. Conduct thorough testing of your business model, create a detailed operations system, choose franchisees carefully, and provide unmatched support. Leverage the collective scale of your growing franchise while empowering passionate owner-operators to provide a consistent brand experience. With dedication and perseverance, you can create a thriving franchise system.