Have you ever wondered how to start a franchise business? 

But, before understanding the steps involved in starting a franchise business, let’s learn why you should invest in a franchise. 

Franchising provides a safe and structured pathway toward success for new and experienced businessmen. Starting a franchise business allows businessmen to work with renowned brands while drawing support fostering their continued growth.

An individual starting their own business confronts various challenges. However, operating a franchise gives an investor the stability of an established brand while providing an opportunity to amplify their profits. 

But, how to start a franchise business?

It begins with identifying the investment category, researching the franchise brands operating in the segment, determining the investment source, addressing legal requirements, and building a team for success. 

Alongside this, you will also need to ensure that the location you have selected for opening your franchise has a large presence of your target audience, does not attract cannibalization from same-brand stores, and can generate revenue consistently. 

In this blog, we help answer the question of how to start a franchise business in 2024

An Introduction to How to Start a Franchise Business and Its Benefits

Simply put, a franchisee purchases the license to the trademark of a large brand to run a business to sell products or services. 

In a franchise business model, a brand helps an investor use its trademarks and intellectual property for a specified one-time royalty fee or recurring franchise fee. 

A mutually beneficial relationship is built between the two parties. The brand offers marketing and building expertise, while the franchisee pays for the recruitment, training, and stocking. 

Franchisor: The brand offers its products, intellectual property, trade name, and services to the franchise. 

Franchisee: The individual who pays a royalty fee or franchising fee to buy the right to operate the franchisor’s business. 

Benefits of franchising to the franchisor 

1. Rapid expansion without incurring capital expenditures from physically owning or renting stores
2. Stable revenue generation through royalty payments and franchise fees
3. Reduction in human resource management 
4. Lowered financial commitment or lowered financial investment

Benefits of franchising to the franchisee

1. Low chances of failure as the franchisors would be brands with a proven track record
2. Leverage the business expertise of the franchisors 
3. Experience is not a factor in successfully generating revenue
4. There is no trial period involved in identifying the brand’s target audience.

1. Legal and Financial Considerations 

All franchise contracts in India are enforceable by the Indian Contract Act 1872. 

To ensure the validity of the franchise agreement, the law requires both parties of the franchise agreement to have the capacity to consent to the agreement. It also specifies that the agreement should contain both an offer and the acceptance of the offer. 

Agreements should specify the exact nature of the contract between the franchisee and franchisor. This is because if the franchising agreement creates an agency relationship, the franchisor will be liable for the actions of the franchisee. 

Furthermore, the franchisee would have to compensate the franchisor, if the former does not follow the directions of the latter. 

Further considerations that a franchise should consider before signing a franchise contract are as follows,

1. Ensure that the upfront amount paid to the franchisor is refundable or taxable. 
2. Check the duration of the agreement 
3. Guaranteeing that the franchisor provides training and support
4. Mitigating any legal issues related to the use of the franchisor’s trademark and copyright
5. Examine the procedures for dispute resolution and settlement
6. What is the exit clause of the agreement can it be transferred
7. Ensure that you have the necessary licenses 

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Financial Considerations 

Franchisees should be prudent when investing in a franchise. While franchises reduce the chances of generating a loss in business, it is not a complete zero. 

Franchising involves a large upfront investment for the capital expenditure and the royalty fee/franchise agreement. Furthermore, the rule of thumb is to assume that the venture would not generate profit, requiring capital influx from the investor for the operation expenditure. Therefore, the franchisee has to ensure positive cash flow after the initial investment for the day-to-day operation of their business. 

2. Location Selection and Marketing Strategies

Knowing where to start a franchise is winning half the battle. 

The other half is pinpoint how to start the business. 

Location is a feature that is a fusion of multiple factors. From the socio-economic factors, and demographic factors, to the commercial factors. 

And, identifying the exact location for starting a franchisee store requires understanding the brand’s target audience. 

The target audience is the ideal customer for a franchisee’s business. 

For example, the target audience for a quick service restaurant (also known as fast food restaurants) could be young professionals between the ages of 18 and 35, college students, and families with young children. Determining the target audience’s profile helps retailers locate optimal sites for expansion. 

Based on this we can develop a vague picture of the target location. 

1. It should be easily accessible 
2. It should have a large foot traffic 
3. There should be a place for parking 
4. The location should also be next to competitors. This is because competition highlights the presence of the target audience.

While most brands help franchisees pinpoint ideal locations to open their stores, some brands require the franchisee to do the groundwork to find the right location. 

Consider the case of Aavin milk parlor in Tamil Nadu. Investors who wish to take a franchise should pay an upfront fee of ₹50,000. After this, the franchisee would be asked to identify locations to open a retail store. 

This would involve the franchisee scouring through their prospective location and identifying the location that best suits their requirements. This would be followed by the franchisor helping the franchisee with the lease negotiations. 

How to Avoid Cannibalization When Starting a Franchise Business

Prospective franchisee owners should be weary of cannibalization when determining the optimal location. 

This problem occurs when two stores of the same business open close to each other.

Imagine this situation, you and your friend both, sign a franchise agreement with a franchisor. But the two of you open stores opposite each other. 

Let’s consider that the location gets an average of 50 people every day. But, this 50 is divided between you and your friend. 

Now, consider if you had opened your store in a different location with the same number of people visiting it every day. 

Both, you and your friend would generate revenue from 50 customers instead of just 25 customers.

Leveraging insights derived from data-led AI platforms like GeoIQ helps investors identify profitable locations with low to no risk of cannibalization.

3. How to Leverage Data For Precise Audience Targeting

An advantage of getting a franchisee agreement is the name recognition that comes with the brand.  For example, you wouldn’t need to commit extra resources towards marketing efforts if you get a license from Amul or Aavin. 

But, if the brand is still relatively new and if the franchisee can capture market share employing marketing strategies.

Once you have earmarked a percentage of your budget towards marketing, comes the next question. Where would you spend it?

There are numerous options, from print ads to billboards. But where should you place your ads? 

One of the cost-effective way to get the name of your business out to your prospective customers would be to print flyers/brochures. Then comes the next question, where will you place these flyers. There has to be a physical boundary you need to define to ensure the highest return on your investment. 

For example, let’s imagine that you open a QSR restaurant in a location in Hoodi, Bangalore. 

Now, you will need to attract your customers. The first customers you can target live close to your business. But that is a very small market and the revenue generated does not satisfy the investment in the business. 

The next step in your strategy would be to identify those areas with the presence of your ideal customers and deploy targeted marketing strategies in those locations. 

Consider the following example of a restaurant that has been opened in Hoodi. 

The red pin on the map is the location of the restaurant. The different colors represent the number of customers who come to the restaurant from that location. (red is highest and blue is least) (This is your trade area)

As a franchise, you can use this data to target the locations with the largest clusters of the target customers. For example, in the image notice how there is a large section of customers coming to the restaurant from the West-North-West. 

Targeting your offline marketing campaigns here would return the highest ROI for your investment and also increase the revenue generated at your franchise.

4. Operations and Management

Improving your basics in human resources is fundamental to maintaining the brand identity and offering stellar customer service. 

Therefore, managing the quality of your staff is the second most important aspect of your franchise business, after identifying the ideal location. 

Most franchisors offer job training to employees hired by the franchisee, therefore, a franchise holder would only need to ensure strict adherence to the best practices. 

You achieve this by creating a Standard Operating Protocol that details your and your employees’ roles and responsibilities and ensures consistency and quality across all aspects of your business. 

Financial mismanagement is one of the reasons behind the failure of franchises. Tracking your cash flow and budgeting for potential changes based on future forecasts is necessary to ensure continued success with your franchise business.

Franchise owners should also ensure that they never suffer from a liquidity crunch and that at least for the first six months, they have the working capital to fuel their business. 

Franchisees can also lose money through good old-fashioned theft and financial misappropriation. Therefore, aspiring franchise owners must integrate cutting-edge technology into their businesses. This includes using point-of-sale systems, strong firewalls, and CCTV cameras to reduce the chances of shoplifting. 

5. Growth and Success Factors

Operating a franchise for a few months will help you determine the best practices to avoid pitfalls in your business.

Let’s consider the factors you need to consider to generate profit consistently.

1. Identify the right niche for your investment 
2. Choose the right franchise 
3. Adhere to the internal systems of the franchisor
4. Make customer service the anchor of your business
5. Invest in training your employees 
6. Monitor your finances, it doesn’t make for bad financial decisions to sink your business
7. Consider marketing activities where your target audience resides 

Furthermore, you can track the following Key Performance Indicators to monitor the success of your franchise.

Some of the KPIs you could use to measure the success of your franchise are listed below, 

1. Gross sale 
2. Store sale conversion 
3. Growth rate 
4. Average sales ticket 
5. Customer satisfaction 
6. Net profit. 

Conclusion and Next Steps

This blog only briefly highlights the various aspects a franchisee should consider when starting a franchise business. 

To develop a robust franchise business, the franchisee must pinpoint the ideal location for starting their store. 

A franchisee holder has two methodologies they can adopt to find a good location. 

1. They can either follow the gut instincts of the real estate brokers and hope that their beliefs convert into profit
2. The franchise holder can utilize solutions offered by data-backed location AI platforms like GeoIQ that help the franchisee identify the precise markets for their stores, providing property-level answers. 

GeoIQ has developed a data-led solution that leverages over 3,500+ location data variables to help retailers identify the exact location for a profitable expansion. 

Presenting RetailIQ

RetailIQ is a cutting-edge AI solution revolutionizing offline expansion for the retail sector. It is built on top of extensive location data and brand data to give street-level answers to expansion problems. 

RetailIQ is a powerful tool providing site recommendations to maximize success at the store level and minimize the risk of closure. It also helps identify the total addressable market, conduct competition analysis, better understand your target audience traits and their presence, and perform detailed site analysis and reports, all adding up to a successful expansion strategy.