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Everything You Need to Know About How Franchises Work

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Franchising offers an alternative path to entrepreneurship without starting from scratch. You leverage an established brand while retaining independence. Learn how it works and get tips on starting your own franchise.

January 10, 2023
Author: NCH

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How Does a Franchise Work?

Franchising is a process that duplicates the original business to service cities around the country or the world. A prospective business owner pays a sizable fee in a franchise operation. The percentage of gross sales has the right to introduce the franchise into another market.

The business should be based on a concept with interest or excitement such as the trademark technology or a fresh kind of fast food to be successful. A franchise has to capture public interest and potential franchisees. It is much easier to franchise a market with a unique appeal.

There are two parties involved in a business franchise:

  • Franchisor: A company that allows individual entrepreneurs to operate their business in other locations
  • Franchisee: An individual entrepreneur who wishes to own a business franchise location

How Do You Buy a Franchise?

While franchising seems easier than thinking of a new business from scratch, franchisees still need to go through an application process and prove they have enough funds to support their venture. The costs vary per brand, and the franchisor will still need to approve the new franchise owner. Aspiring franchisees will have to pay an initial fee to the franchisor to cover the startup costs.

The franchisor will also help with the following:

  • Finding a location
  • Negotiating a lease
  • Learning how to operate the business
  • Getting the unit up and running

Types of Franchise Ownership Models

While franchising wants you to adhere to certain brand standards, it is also a flexible business model. Let’s take a look at the different types of franchise ownerships below.

Single-unit

The most common type of franchise refers to a franchisee owning and operating one franchise location.

Multi-unit

Once a single-unit franchise succeeds, many franchisees decide to invest in multiple locations.

Master or Regional

Franchise owners take on some of the responsibilities of the corporate brand by branching out to other interested franchisees within their designated territory.

Important Steps on How to Start a Business Franchise

Once you’ve decided on what business to franchise, here are some things you need to know:

1. Do Your Research

Start planning to evaluate the costs and identify the resources you need to proceed and sustain your business after you’ve gauged several franchise opportunities in your area. To get into this new venture, make sure you’re legally and financially ready.

Employ a team of experts who will take care of the legal documents and financial requirements. Well-executed market research will guide you in determining your target consumers and competitors. This will also help you come up with the best unique selling point.

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2. Draft a Business Plan

Whether it’s a franchise or a new business you’ve come up with, it’s important to create a business plan. Every business starts with a vision, including short-term and long-term goals, considering the costs and budget you’ll need to make it work.

Draft your business plan with the structure of the business you want to franchise in mind. The key to a successful business franchise is the ability to familiarize yourself with the ins and outs of the history of the company and how it has evolved over time.

3. Get the Franchise License Agreement

You’ll need to secure a Franchise License Agreement in order to run the business. Before signing the document handed over to you by the franchisor, make sure you understand all the requirements and business standards needed in your location. Both the franchisor and franchisee must agree on how to uphold the business.

By way of this agreement, the franchisee will receive the rights to use the trademarks and service marks, and other intellectual property of the business. You will pay a designated licensing fee and royalties for the agreed duration, depending on the contract. It also indicates the limitations, termination rules, and other agreements.

4. Form a Business Entity

Aside from securing your license, you will also need to form an LLC to meet the requirement of having a business entity based on the overall business structure. A Limited Liability Company (LLC) is a business structure in the U.S. used to protect the owners against corporate losses, debts, or liabilities of their organizations.

You can separate your business assets from your personal assets if you form an LLC for your business. This way, you can also start categorizing your business expenses.

5. Select an Amenable Location for Your First Business Space

Once you’ve secured your business operations in place, it’s time to look for a business headquarters. Make sure to consult with your franchisor about the guidelines on what kind of space you’ll need, specifically the size and setup. 

Find an ideal location to maximize the target market of your franchise. If you’re planning to franchise a restaurant, there may be specifications about the ingredients, appliances, and amenities in line with the brand, so consider these factors when looking for the ideal location for your franchise.

6. Hire Employees

If you’re done arranging all the needed documents for your franchise, you can begin looking for employees who can help you. Aside from specifying the business standards, the franchisor might also have guidelines on what specific job descriptions and position titles you need for the business. Look for an internal job posting system for employees to relocate from other locations.

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Whether you need to register your business, build business credit, create a business plan, or just talk to someone about how to save money on taxes – we’re here for you. For more than 30 years, we have been providing the highest quality of service to our clients. We have helped our clients form thousands of business entities in all 50 states.

Subscribe today and get access to endless business resources to help you thrive in any economy. To learn more, contact a Nevada Corporate Headquarters representative at 1-800-508-1729.

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