Thinking about franchising your business? Franchising offers a powerful way to grow your brand, generate new revenue streams, and expand without the significant costs of opening and managing new locations yourself.
By granting franchisees the right to operate under your established brand, systems, and intellectual property, you can scale your business more efficiently. But success relies on careful planning, legal expertise, and the right strategy.
In this article, we’ll walk you through the basics of franchising: from understanding different franchise models to preparing your business, selecting franchisees, and managing the paperwork.
If you are ready to take the first step towards franchising your business, speak to our franchise lawyers, who have substantial experience in supporting first-time franchisors and can provide expert advice tailored to your growth ambitions.
Jump to:
- What is a business franchise?
- Franchise models
- The benefits of franchising your business
- Growing your business organically, through M&A or franchising
- Getting your business ready for a franchise
- Selecting a franchisee
- Paperwork needed to franchise your business
- What does it cost to franchise your business?
- Making money from franchising
What is a business franchise?
Franchising your business gives a franchisee the right to operate a business utilising the benefit of your established brand name, format, intellectual property rights (IPR), systems and processes, in exchange for payment of royalties and fees. Franchising is governed by a franchise agreement, which outlines the contractual framework for its operation.
Franchise models
There are three main franchise models:
- Franchise – this involves selecting a franchisee (also known as a unit franchisee) to operate a franchise business from a franchise outlet or within a defined area, with the franchisee having the rights to use the brand, trademark, intellectual property, and software.
- Master franchise – a master franchise allows the master franchisee to operate the franchise within their agreed territory. Also, it has the authority to grant sub-franchises to third parties within that region.
- Franchise development - the franchisee is given the right to open multiple franchise outlets in their territory. Rather than creating sub-franchises, these outlets must be opened, funded, and managed by the franchisee.
We recommend seeking legal and accounting advice when choosing the right franchise model versus other business models before proceeding with your franchise marketing plans.
The benefits of franchising your business
The benefits of franchising your business include:
- Growth – Franchising your business can be a cost-effective way to achieve growth, as it doesn’t require the same outlay as opening a new branch or expanding into another region or city. A franchisor doesn’t incur the expense of buying stock and equipment, paying employees, or procuring new premises. Those costs are borne by the franchisee who launches and runs the franchise business.
- Profit – The franchisee pays an initial fee to be granted the right to operate under your brand name and to utilise your intellectual property rights (IPR). Additionally, the franchisee will pay a royalty to the franchisor, typically as a percentage of the franchisee’s annual turnover.
- Reduced daily management – The franchisee manages the franchise business daily, whilst the franchisor provides support and overall management of the franchise network to ensure consistency, brand reputation, and to grow the network.
- Brand development – With more franchise outlets, your brand will develop efficiently and effectively, allowing you to ultimately attract higher franchise fees through the strength of your brand.
Growing your business organically, through M&A or franchising
Growing your business through franchising is a highly effective option for achieving growth and increasing revenue. The alternatives include scaling up through organic growth or mergers and acquisitions (M&A). The path you choose depends on your commercial objectives, your assessment of the risk, and your cost-benefit analysis.
Franchising isn’t necessarily the easy option, as you need the skills, time and energy to run your own business, monitor your franchise network, market the franchise model, and analyse the performance of the franchisees.
Franchising may require a lower initial outlay than organic growth, but it also demands the same level of organisational and managerial skill. Without a significant commitment, you risk damaging your brand if franchisees are not monitored sufficiently to maintain brand image and standards.
The success of the franchise model for growth depends on:
- Putting in place a business plan that details how you will start to franchise and maps out how you plan to expand and manage your franchise.
- Selecting suitable franchisees with business acumen and who share the same professionalism, vision, and passion as you do for your brand.
- Preparing a comprehensive franchise agreement with the help of a legal expert that meets your business needs and protects your brand.
- Preparing a franchise manual that covers the details (such as the premises decoration, employee uniform, and quality of goods, products, or services provided) and all the standards and obligations your franchisees must comply with.
Getting your business ready for a franchise
There are four key action points to get your business ready for a franchise:
- Achieve financial stability and profitability – Your business needs to have a proven track record of success. Without that, your business won't be attractive to franchisees.
- Conduct a pilot franchise operation – This involves operating a franchise outlet for at least one year to identify the strengths and weaknesses of the franchise model, as well as test the operational manual and business format.
- Value your business franchise opportunity – Without a professional valuation of your business and the franchise opportunity, you may either undervalue or overvalue the franchise.
The British Franchise Association (BFA) is a key trade association for the franchise industry, providing franchisors with expert advice on franchising. The Which Franchise website also provides general business advice about franchising.
Selecting a franchisee
Selecting a franchisee is similar to recruiting a senior executive. It isn’t like selling your business, as you will have an ongoing relationship with the franchisee.
Whilst you need your franchisees to have an entrepreneurial spirit, they also need to adhere to the guidelines so that all the franchises in the network remain consistent in branding and vision. Ideally, your franchisee will have experience in the industry or strong transferable skills, ensuring they possess the skills needed to successfully run the franchise business, while acknowledging that they don’t have total free rein.
Paperwork needed to franchise your business
- Company accounts – both annual and management accounts to help evidence the profitability of the franchise opportunity.
- A business plan – identifying how the franchise network will grow, either by region or country.
- A marketing plan and marketing material – a franchise lawyer should look at the material, as the law restricts the content of your marketing.
- A non-disclosure agreement so potential franchisees are contractually bound by a confidentiality agreement to keep confidential any financial or commercially sensitive information disclosed to them as part of the franchise negotiations.
- A franchise agreement – the franchise agreement is the backbone of your business relationship with your franchisee and therefore needs to be comprehensive, covering aspects such as fees, the length of the franchise, IP protection, dispute resolution, and provisions for terminating the agreement.
- A franchise manual – providing the details of how the franchisee should operate the business, from the required office or shop unit fit-out to the selection of employee uniforms.
For more information on the legal documents, refer to our guide to the legal aspects of franchising.
What does it cost to franchise your business?
The cost of franchising depends on the nature of your business and its size, but expect to budget for:
- General franchise research and development of the franchise product – you will need to conduct market research and test your systems and procedures before running a pilot operation.
- Planning – you need to think ahead to work out how much you will charge your franchisees and how you will map out your franchise territories.
- Franchise package development – you will need to prepare a comprehensive package that includes systems, procedures, training materials, sales literature, and operational manuals.
- Recruiting – to find and attract franchisees, you will need to make some investment in your prospectus, advertisement, publications, franchise exhibitions, and time spent on selection interviews.
Making money from franchising
There are five main ways to make money from franchising your business:
- Initial franchise fee – payable on the grant of the franchise.
- Store opening fee – where applicable.
- Monthly royalty – a regular fee paid by the franchisee, usually calculated as a percentage of the franchisee’s turnover.
- Training fees – proper training ensures the franchisee understands the importance of consistency across the franchise.
- Marketing contribution – the franchisee will contribute a percentage of the marketing budget for the entire franchise network, benefiting all franchise holders. Typically, this fee is a percentage of the gross turnover.
Our article on the legal aspects of franchising your business offers additional insights for those considering this route.
Laying the foundations for your franchising success
Franchising your business can be a rewarding growth strategy, but it’s not a shortcut to success. It requires solid financial foundations, a replicable business model, strong franchise documentation, and the ability to find and support the right franchisees. With the proper preparation and professional advice, you can build a thriving franchise network that strengthens your brand and boosts profitability.
If you need help creating a franchise model that works for you, contact our franchise lawyers to start your journey towards sustainable growth with expert legal support.
