Steps to Become a Franchisee
Franchising is a popular way of opening a business not only in Georgia, but also throughout the U.S. Many entrepreneurs have recognized its benefits. According to recent date provided by The Balance, there are about 758,000 franchise establishments currently operating across the country. Those franchises employ approximately 7.88 million workers.
Franchising is a great business model – for those who understand how it works and for whom it’s a good fit. It can be lucrative to buy a franchise and a great way for someone to get into business using a proven system. Even though the franchise comes with a system, it is still critical to (1) understand (very clearly) what you’d be getting into and (2) assess whether or not it fits your life goals and vision.
Below, you’ll learn some important steps and to take and what you can expect as you start the process of becoming a franchisee.
Consider the Upfront Costs and Fees of Opening a Franchise
Franchising has many benefits for new business owners because the parent company has already proven successful. You will likely be purchasing a business that already has committed customers due to the brand or name recognition of the franchise. Not all franchises are alike, however, and it is important to research the parent company and what you need to do to become a franchisee. Each franchise has its own franchise fee that you will need to pay up front. There will also be a number of additional fees you will need to pay once you are in the franchise system. The parent company will possibly have requirements for the assets you must have up front in order to be eligible to open a franchise. For example, if you do not have a minimum net worth, you may not be eligible to become a franchisee with certain brands.
According to HubSpot, the initial upfront franchise fee is usually somewhere between $20,000 and $50,000, but for some franchises, that fee is significantly higher.
Research the Franchise You are Considering
Beyond financial research, you need to look into franchise fees, net worth requirements, and the potential outcomes. In what areas has the franchise been most successful? What is their customer base? Look for information on the parent company’s website as well as from other sources. The International Franchise Association has a great search tool that can help you explore different industries and franchise opportunities.
Applying to be a Franchisee
The next step is to actually become a franchisee. The general application process will involve various steps, which often include discussing the franchise system in a meeting with the parent company, developing a business plan, and proving that you meet all of the necessary funding requirements. Sometimes the process of applying for a franchise involves a formal interview with the company. Most franchisors offer the opportunity for a “discovery day.” This provides the potential franchisee a chance to meet with the team of the parent company so that each side can determine if it can cooperate with the other. Once all of these steps are completed, you can submit your application.
Receive the Franchise Disclosure Document (FDD)
The parent company can provide you with the FDD early in the process. The FDD is a document that all franchisors in the United States are legally required to provide to prospective franchisees before the latter sign any franchise documents or pay anything. It’s a huge document, ranging from 125 to 350 pages (more information about the FDD is available here.) The parent company wants you to receive the FDD promptly because, by law, no deal can be made until you’ve had the FDD for a certain period of time. The FDD includes not only all of the disclosures required of the franchisor, but also the forms of the various agreements that the franchisee will be asked to sign, including a franchise agreement. Often, it will include a personal guarantee as well. (Learn more about the franchise agreement here.)
Review the FDD and Franchise Agreement
If your application is approved, you will receive a franchise agreement from the company to sign. This is the contract that will ultimately allow you to become a franchisee and to open your franchise - if you agree to the terms. You should always (always!) have a business lawyer review the franchise agreement before you sign and commit to the terms, which will include information about the rules and guidelines for operating the franchise, the ongoing costs and royalties you will be required to pay, and the support the parent company will offer you.
Knowing what is in the FDD and the franchise agreement is essential for your business future. Most franchise deals are for 10 years, so it would be wise to know what you’re committing to for the next decade of your life.
Many people don’t have the patience or time to read and study the FDD and Franchise Agreement. Some try to read them, but find them intimidating, difficult to understand, or both. You need a professional review of the FDD and franchise agreement. We provide this service at a flat rate, which our clients have found invaluable. Our FDD and Franchise Agreement Review service can truly give you peace of mind.
Contact a Business Lawyer About Opening a Franchise
Do you have questions about becoming a franchisee? Our franchising FAQ may be helpful. Need help clarifying the franchise documents? We can handle the FDD and franchise agreement review for you. Contact Nebo Law for more information.