While every franchise operates a bit differently, most follow a similar process. Here’s a step-by-step breakdown of how a franchise is created and how it works once it’s up and running:
1. Franchisor Develops the Business Model
A franchise begins when the owner of an established business decides to expand by franchising. They work out the details, such as how the system will operate, where they want to grow, and who they want as franchise partners. From there, they create a complete franchise package that includes training, operational manuals, marketing support, and ongoing assistance, all designed to help the franchise partner run their business smoothly. The franchisor also sets up a legal framework, including a franchise agreement, which outlines the terms, obligations, and rights of both parties.
2. Franchise Partner Gets In Touch
Once the franchise owner is ready to expand, they’ll start promoting the franchise opportunity through directories and marketing channels to attract potential partners.
When a prospective franchise partner reaches out, they’ll have a conversation with the franchisor (and possibly others if they plan to invest alongside an associate). They’ll go over important details like the franchisor’s financial performance, brand reputation, and the industry as a whole to make sure it’s a smart investment for everyone involved.
It’s common practice for franchise partners to seek legal advice before moving onto the next step.
3. Franchise Partner Signs the Franchise Agreement
The partnership officially begins when the franchise partner signs the franchise agreement, a legally binding contract that details key aspects like the length of the franchise, royalty fees, operational guidelines, territory rights, and the use of intellectual property. Check out our guide to learn how these agreements are usually structured.
At this point, the franchise partner usually also pays an initial franchise fee. This fee grants them the rights to use the franchisor’s brand name, business model, and products or services. It also covers the cost of initial training, support, and sometimes even equipment or supplies needed to start the business.
4. Franchise Partner Receives Training and Support
Before the franchise partner can start running the business, they need to have the right tools and know-how on hand. The franchisor will provide comprehensive training, covering everything from daily operations and brand standards to customer service, sales strategies, and product knowledge.
Franchisors also provide ongoing support, which might include advertising, regular check-ins, troubleshooting help, and updates to business practices. All of this is designed to help the franchise partner succeed and maintain the quality of the brand.
5. Franchise Partner Sets Up Their Franchise
The franchisor typically helps the franchise partner find and secure the right office or commercial space, making sure it’s branded to match the business guidelines. The franchise partner then takes care of purchasing or leasing any necessary equipment (usually outlined by the franchisor). Finally, the franchise partner brings on board and trains their staff to meet the franchisor’s standards.
6. Franchise Operations Begin
The franchise partner opens the business, often with a marketing push, sometimes supported by the franchisor. This could include a launch event or special promotion to generate buzz.
The franchise partner is now responsible for running the business day-to-day, following the franchisor’s prescribed business model. This includes managing staff, handling customer service, and meeting sales goals. They must also be ready to adapt to market changes or any updates to the franchisor’s business model.
Maintaining the brand’s image is key, so the franchise partner must stick to the franchisor’s guidelines for marketing, operations, and customer service to protect the brand’s reputation.
7. Royalty Payments and Ongoing Fees
On top of the initial franchise fee, franchise partners are usually required to pay ongoing fees, often in the form of royalties. These can be a flat fee or a percentage of the franchisee’s sales revenue. These payments help maintain the relationship with the franchisor, who continues to provide resources, support, and access to the brand. Franchise partners may also contribute to a national or regional marketing fund, managed by the franchisor to promote the brand on a larger scale.
8. Shared Marketing
Franchisors often run joint marketing and advertising campaigns that benefit all franchise locations. These help boost brand awareness and attract customers on a national or regional level, easing the pressure on individual franchise partners to handle all the marketing themselves.
Franchise partners typically contribute to a marketing fund that covers the costs of these large-scale campaigns, which may include TV, radio, social media, and print ads. In some cases, franchise partners can also do their own local marketing, as long as it follows the franchisor’s guidelines.
9. Performance Monitoring and Compliance
Throughout the time the franchise partner runs their business, especially in the early stages, the franchisor may conduct audits or inspections to check brand standards are being followed and quality is maintained. They’ll also review the franchise partner’s financial and operational performance to make sure targets are being met.
If the franchise partner encounters difficulties, the franchisor will step in with additional support or corrective measures to help get the business back on track.
10. Expansion or Termination
The franchise agreement typically lasts for a set period (usually 5-10 years). When the term ends, the franchise partner can choose to renew the agreement, expand their business, or exit altogether. If they decide to sell the franchise, they can do so with the franchisor’s approval.