Steps & Cost to Launch Your Franchise
You can’t launch a successful franchise system in one night; however, it also shouldn’t take a year. If you plan properly, hire the right professionals, and understand the necessary steps it can be done in 4 to 6 months. Most people either underestimate or overestimate the time and cost of launching a franchise. Each brand and system is unique; however, the process from one launch to another follows similar steps and best practices. Don’t be fooled by those who say it isn’t hard or intimidated by those who say it is impossible. Like Goldilocks finding the right porridge, the truth is somewhere in between.
1. Creating a Profitable Business
The process shouldn’t start until the owner feels that he/she has a profitable, well-run business that can be duplicated by others.
Zero to $3,000 (zero if you already have your Federally Registered Trademarks to the high-end estimate of needing multiple marks)
Franchise agreements are intellectual property licensing agreements that should be primarily based on a federally registered trademark. Securing your trademark can be done prior to the beginning of the project; however, all trademarks should be reviewed by an experienced Intellectual Property/Trademark attorney to ensure their enforceability and national validity. Trademarks are the keystone of your franchise system. Your name and logo should be formally searched nationwide to uncover potential issues upfront. It is much easier to deal with naming issues prior to launch. Close to half of potential franchise launches have issues with their name or logo, most of which can be solved.
3. Refine Entity Structures
$1,000 to $10,000 (low end if all you need is to form one simple entity to be your franchisor up to the high end where you may have to form the governing documents for investors)
Some of this work may already be done. The best practice is, at a minimum, to form a clean new entity to act as the new franchisor. If the franchisor has multiple owners, a strong well-written, operating agreement or corporate shareholder agreement is essential for the long-term health of the system. We will work with your current corporate attorney to ensure that the corporate structure is in line with industry best practices.
4. Franchise Consulting
$50,000 to $100,000
This is a crucial and necessary step in the process. The key to a successful franchise launch is to have experienced professionals guide you through the process and help you make the many business decisions necessary to becoming a franchisor. Business owners are moving from running and operating their core business (whether they own a service business, restaurant, pet store, etc.) to a new business segment, franchising. If you have never been a franchisor, you should seek guidance into best practices, structures, budgets and strategies on recruiting new franchisees and supporting those franchisees once they sign up. Having profitable, happy and engaged franchisees is the single biggest predictor of a system’s long term success. A good franchise consultant will get you ready. As part of their work, the consultant will deliver to you the following:
- Operations Manual (the table of contents is needed as part of the FDD)
- Strategic Plan (comparing competitive offerings, advising on royalty structure, territory, franchisee cost and the business points needed to draft the FDD)
- Training Program
- Proforma and budget for the first few years of your new system
This is the riskiest step in the process, if you make a bad choice here your system may never get off the ground. There are many companies that hold themselves out as “experienced” franchise professionals that make it sound so easy to franchise your business. Some will even say they will write the FDD and have their lawyer approve it. That is not only illegal, but it also puts your brand and all your intellectual property at risk. You are better off not franchising than trusting your intellectual property in the hands of a company that doesn’t have your best interest in mind. If it sounds too good to be true it probably is. We can recommend reputable consulting firms to work with who understand the nuances of franchising and what is at stake. Just ask us, we are happy to connect you.
5. Drafting the FDD & Franchise Agreement
$18,000 to $30,000 (depending on the complexity of the offering and if you will also have an Area Rep offering which will require a second FDD)
The Franchise Disclosure Document (the FDD) & the Franchise Agreement are required by law for all franchisors. These must be prepared by attorneys, or the new franchisor is at risk of having agreements that will compromise their intellectual property and/or will not be enforceable. It is also imperative that the attorney works directly for the franchisor and not through a consultant or third party. Preserving attorney-client privilege and the attorney’s duty to serve the client’s best interest is critical. Legal documents should be prepared by attorneys with a direct relationship and understanding of the client’s business.
This is the core of what we do as a law firm. We draft these documents to be enforceable, compliant and written in a matter that will help you grow. The FDD is the cornerstone of your franchise offering and can either aid in your growth or be a serious impediment and risk factor. It’s also a process, not just a templated document to be done once and forgotten. Beware of anyone telling you that these are boiler plate documents no one reads. And once written, they need to be updated each year and possibly filed with the states if you want to grow in registration states. The law firm that writes your FDD should draft it with these realities in mind. Experience matters. We have drafted more FDDs and filed for more franchise state registrations than most law firms who have a part time franchise practice combined. Because franchising is all we do, we do it well.
6. Financial Statements
$1,000 to $15,000 (the high end of the cost range is for full audited financials from a large accounting firm, the low end is for a simple unaudited opening balance sheet)
You will need separate financial statements for your new franchisor entity. Depending on the state(s) where you want to initially recruit franchisees, the financial statements may need to be formally audited by a CPA firm licensed to do audits when you launch. Most likely your local accountant is not able to do this and although it’s a pain and it’s expensive, it’s part of the rules of being a franchisor.
Eventually, you will need full audited financial statements as part of the federal rules of franchising so it’s better to develop a professional relationship from the beginning so your books and internal controls are setup in a way that won’t make a future audit difficult, time consuming and even more expensive. Even though you will only have a handful of transactions initially, a formal audit costs a lot more than just balancing your books. The audit rules demand that your CPA dive into your internal controls to ensure your financial statements are independent and reliable. The high cost of an audit is driven by the evaluation of how your books are generated, not by the number of transactions or the balance in your checking account. Because you are building a franchise system you should be using a CPA with franchise experience.
7. Branding & Marketing
$5,000 to $50,000
The value proposition of your brand for both the customers of the franchisees and the prospective franchisees you want to recruit are an integral part of any successful franchise launch. A solid message, website, and collateral materials will help you spread the word to the market that you are ready to grow. How will you recruit your first franchisees and what materials and messaging will you use to educate them about your offering? The cost estimate here is just for you to jump start your program, your franchise consultant will work with you to help you budget and plan for this cost on an ongoing bass.
Ready to Explore Taking the First Step to Start Your Franchise?
You will see from the above that the cost of the FDD, the part that we do for our clients, is only a small portion of the cost to become a franchisor. Our purpose here is to give you a better picture of the overall investment and the steps of becoming a franchisor. Each step is critical, and we are more than happy to recommend other professionals and give you our opinion on the professionals you want to use to work through each step of the process. It’s a team effort and building a world-class system takes a world-class team.
Do you think you’re ready to launch a franchise? Call Spadea Lignana Franchise Attorneys at 215-525-1165 for a free initial consultation on the feasibility of franchising your company.