Frequently Asked Questions
What is franchising?
Franchising is a powerful business expansion tool that a successful business owner can use to protect and grow their brand in other markets using other people’s assets. Through a contractual agreement, the franchisor licenses their trademarks and for a fee, franchisees own and operate the business according to specific guidelines that ensure consistency with the brand promise.
Do I have to have a proven track record with my business to turn it into a franchise system?
You must have at least one existing unit that is profitable to start the franchise development process.
How long does it take to become a franchisor?
Like other ventures, the length of time to complete the franchise development process will vary. Depending on the type of business, you can expect that within four to six months you will be ready to sell your first franchises.
What does it cost to franchise my business?
You should expect to pay between $60,000 and $100,000 to develop your franchise. Your investment will cover the costs for consulting with franchise attorneys and developing your franchise documentation, creating your operations manual, building your digital marketing strategy, training materials and much more.
What is a franchise fee?
A franchise fee is a one-time up-front fee that the franchisee pays to the franchisor in one of the final steps before the franchisor awards the franchise. The franchisor collects the fee to ensure that the franchisee is committed to investing in the success of their specific brand. The franchise fee covers the cost for rights to license the brand, follow the brand strategy and sell products or services created by the franchisor. The franchise fee typically ranges from $20,000 to $50,000, but it can be as high as $100,000 depending on the type of business.
What is a royalty fee?
The franchisor collects royalty fees that are based on a percentage of the revenue generated by the franchisee. Royalty fees can range from 4% to 12% or more, depending on the type of franchise. Franchisees pay the fees monthly, according to the Financial Disclosure Statement (FDD). The franchisees may also pay monthly fees to the franchisor for marketing and technology services.
What are the roles and responsibilities of a franchisor?
The franchisor is a different role than the sole proprietor. It is important to make this distinction and mindset shift. The franchisor owns the rights and trademarks of their company. For a fee, and after a vetting process, the franchisor awards franchises to people who demonstrate a commitment to their brand. The franchisor is the chief protector of their brand and is responsible for ensuring that franchisees uphold all quality standards. The franchisor trains and is a mentor to franchisees on the quality standards and the method to grow their businesses into profitable franchises
What is franchise development?
Franchise development is the process to transform a successful business model into a franchise system, expand market share and increase revenue. The process involves consulting with experienced advisors to build a solid business plan and sound legal foundation, as well as defining the ideal franchisee, building a detailed operations manual, creating the sales and marketing strategy to attract candidates and to promote the brand.
Why is an Operations Manual important?
A Franchise Operations Manual is the “how-to” guide of a franchise system and a key training tool for new franchisees. The franchisee must comply with the operations manual. It includes processes and procedures, guidelines, and standards. The manual ensures uniformity across all locations, so each franchisee consistently delivers on the franchisor’s brand promise.
Are there federal and state regulations for franchises?
Yes, there are regulations at both levels. Franchisors are responsible for being aware of and complying with the rules in every state they plan to do business.
At the federal level, franchising is regulated by the FTC's (Federal Trade Commission) Federal Franchise Rule, which requires all franchisors to provide a prospective franchisee with a Financial Disclosure Document (FDD). The FDD is required to be detailed and transparent to ensure prospective buyers make well-informed buying decisions.
State regulators ensure the FDD meets the regulatory requirements of their states, although the extent of their review varies. In Filing States, franchisors must file the FDD and pay a fee. No state approval is needed. The Filing States are Connecticut, Florida, Kentucky, South Carolina, South Dakota, Texas, Utah, Nebraska, and North Carolina.
Registration States require franchisors to file the FDD, pay a fee and request the approval in the states they wish to sell their franchise. The Registration States are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, Virginia, Washington, and Wisconsin.
Non-Registration States require franchisors to submit their FDDs and follow FTC guidelines to market and award franchises in that state.
Franchisors and their attorneys should review each state’s regulations and be prepared to address any questions that arise during the states' examination of the FDD. Depending on how many and which states a franchisor wants to sell franchises, the annual filing and review of an FDD can take several months to complete.