How to start a franchise: everything you need to know

If you dream of running your own business, a franchise could be a great way to get started. Franchises offer all kinds of benefits – namely, the chance to run your own business while being supported by a big business network.

But before jumping in with both feet, it’s crucial to do your homework. Here, we’ll explore how franchises work, the pros and cons, and the first few steps to get set up.

We’ll also look at smarter ways to cover expenses and get paid as a franchisee. For example, get a Wise Business account and you send money all over the world for tiny fees and the real exchange rate. This could come in very handy for recurring franchise and royalty fees, as well as other expenses.

We’ll look at this in more detail later - let’s start with the basics.

What is a franchise?¹

Franchising is a kind of hybrid business model. As a franchisor, you’ll enjoy many of the aspects of small business ownership, while being part of a larger corporation.

Here’s how it works. The owner of an established business wants to branch out and create a chain of businesses based on their successful concept. They could do this themselves, or they could sell their business concept and the right to run a branch of the business to a ‘franchisee’.

The franchisee usually pays an upfront fee to ‘buy’ the concept, along with ongoing royalties. But in return, they get a jumpstart on brand recognition and can skip many of the steps of setting up a new business from scratch. The franchisee gets to use the company trademark, business model and of course, sell its tried-and-tested products.

There may also be opportunities for training, development and advertising included as part of the package.

Why open a franchise?

For many people, opening a franchise might be a more affordable, lower risk option than building a business from scratch. But this business model isn’t for everyone.

Let’s take a look at a few of the main pros and cons of franchising².

Pros

• The chance to trade on the established reputation and brand image of the company
• Access to ongoing support and resources – including national advertising, training, development, business tools and health and safety procedures
• Experience in running a business is not always a requirement – full training is provided by many franchisors
• Potentially lower costs – even with the upfront fee and recurring royalties, franchisees often find it cheaper to buy an established business than start one from scratch. They may also find it easier to access finance than new, untested enterprises.

Cons

• Limited freedom or creativity on decisions about how to run the business, from suppliers to operating locations – the franchisor usually determines this
• Ongoing profit sharing with the franchisor – so you don’t get to keep all the money you make
• A formal, legally binding agreement is required – and franchisors don’t always have to renew this at the end of the franchise term. This means all of your hard work could go to waste.
• If the rest of the franchise suffers reputational damage, this could negatively affect your business.

How to start a franchise

If franchising seems like a good option for you, the first thing to do is research – and lots of it. You need to be sure you can work within the limits of a franchise, and understand everything this business model entails.

The next step is to choose a franchise. Needless to say, you need to choose very carefully. Do your homework to find a franchise that suits your skills, experience and way of working.

You should also look for a company that is performing well, offers plenty of support and benefits, and that has franchisee terms that suit you. There’s an enormous list of things you should look into, but here are just a few others³:

• Territory – and whether other franchises can open up in the same area
• Minimum product sales requirements
• Upfront fees and ongoing royalties
• Conditions of the lease of the franchise premises
• Projected cash flows
• Compliance with the mandatory Franchise Code of Conduct
• Performance of the franchise model so far – if you can, speak to existing franchise owners about their experience
• Franchise termination policies and conditions

The more research you can do, the more likely you’ll make a decision that pays off.

Now, onto the practical steps. It’s a good idea to develop a business plan, and seek professional legal advice at this stage. Your lawyer can check over the key documents provided by your franchisor.

This should include the franchise agreement, code of practice, disclosure document and lease agreement (if applicable)⁴.

It’s at this point that you’ll also be looking at securing finance for your business, if needed. When everything’s in place, you’ll start your pre-work training program with the franchisor – all leading up to your business’ first day of trading.

Wise Business

A crucial part of starting a franchise business is sorting out your finances. Money may be tight at the start, so you need to make sure every cent is spent wisely.

If you’re franchisor is international, there’s a chance you’ll get stung on expensive currency conversion fees when you send over upfront fees and recurring royalties. But you don’t necessarily have to use your bank – there is a cheaper way.

Open a free Wise Business account and international transactions become much cheaper. You can receive money from overseas for free, and there’s only a tiny transparent fee when you send royalties to your franchiser in another country. This is a whopping 19 times cheaper than using PayPal.

Better still, you’re guaranteed the real, mid-market exchange rate on every payment and currency conversion. So, you can say goodbye to the expensive mark-up your bank adds on top.

And if you need to buy business supplies, you can spend like a local with your Wise Platinum Business Mastercard anywhere in the world.

So, there you have it – all you need to know to start out as a franchisee. This business model isn’t for everyone, but it certainly has its benefits. Just remember that it always pays to do your research. Good luck!

Sources used:

Sources checked on 17-October 2020.