Franchising Basics

In News by James Robert (Jim) Johnson, J.D.

You have a thriving business, and you want to expand it. You’ve even developed a loyal customer base. Your business concept is one you think you can expand and move into multiple markets. Still, expansion can be risky and expensive. So, how do you expand without creating too much risk? One option is to consider franchising, and many small, successful companies do.

Franchising can be a good way to open additional outlets while minimizing risk and capital outlays. Essentially, you license other people to use their labor and capital to open a business in the same model and under the same trademarks you use. It can help you expand from running a few stores to having hundreds or thousands in your system.

That said, running one or several stores is very different from being a franchisor. That step takes significant planning and business development, some of which may not be obvious. In our experience, many business owners think getting a franchise disclosure document is step one. It isn’t.

This article lays out some of the steps you should consider before spending money developing a franchise disclosure document.

  1. Document your current business operations. You’ll need an operations’ manual and possibly a construction manual showing your franchisees how to build out their business location and then how to run the franchise. Your manual may be 100 to 300 pages long and cover a range of details specific to your operations.  
  2. Create your franchise look. Your first store may not have a specific theme. When you franchise, having a distinct “look” may be critical to franchise success. Trademark and trade dress are critical to successful franchising. In addition to seeking registration of your principal trademarks, you should create sufficient trade dress (the “look” of your store) so your franchisees all convey the same image to customers.
  3. Plan for the staff you will need to run the franchisor business. The business of being a franchisor is much more complex than running one or more stores, and your staffing requirements will differ. By the time you get your first franchise agreement signed, you’ll need staff in place to support your franchisees.  
  4. Determine how you’ll make money off each franchised store. Typically, royalty fees are only part of the income a franchisor earns. You’ll likely want to capture income streams from the products you sell or that your preferred suppliers sell to franchisees. To operate as a franchisor, you will likely need to earn $45,000 to $60,000 per year per store. To be successful, franchisees will have to make a profit while paying you a portion of their income. As franchisor, your job will include helping franchisee contain their costs while supporting their efforts to make sales. Remember it is a good thing when a franchisee sells a successful store. A successful exit is often what a potential franchisee is looking for and what may motivate them to open additional units.
  5. Design and document a training program. The franchisor has the job of training new franchisee how to operate successfully in the system of stores. You’ll need to show them how to run most, if not all, aspects of the store.
  6. Establish standards for store locations. Determine why your store is successful, including in terms of location and customer demographics. You won’t select your franchisee’s store location, but you’ll want to give them guidance and help them assess a potential site.

There is much more to becoming a franchisor, but this is a great start. The team at Resolution Legal Group can help you with all aspects of organizing to franchise. For more information, please email