Are you looking to start your own business? You might want to consider becoming a franchisee in one of the fast-growing franchises available today. Franchising offers you a chance to build on an existing company’s name and reputation, which means you can hit the ground running as soon as you open your doors to clients and start earning revenue from day one.
The franchise business model can be attractive to anyone who would like to become an entrepreneur but who either doesn’t have the capital necessary to start their own company or would prefer not to take on all of the risks that come with launching a new venture from scratch.
But before you sign any contracts, it’s important to understand exactly what you’re getting into by franchising your business. Let’s take a look at everything you need to know about franchising to make sure it will be the right move for you!
What Is a Franchise?
A franchise is a business model in which businesses are run according to a set of predetermined rules and regulations. A parent company typically grants franchises to another company or individual, who then has the right to use the parent company’s trademarked name and logo. A contract typically governs the relationship between the parent company and the franchisee.
To protect themselves from liability, franchisors also typically provide their franchisees with ongoing training and assistance in exchange for a percentage of sales. Whether or not you should start a franchise depends on your unique skill set and goals.
Franchises offer several advantages over traditional businesses, including increased name recognition, a proven business model, and access to ongoing support from the franchisor. However, franchises also come with some disadvantages, such as high initial investment costs and less flexibility in running the business.
What is Franchising About?
Franchising is about relationships, brands, systems and support, and contractual relationships. To succeed in franchising, it is important to understand these concepts and how they work together.
Relationships
Franchising is all about relationships. It’s about finding the right franchisor to support you and provide you with the resources you need to succeed. It’s also about building relationships with your customers and employees. A successful franchise is built on trust, mutual respect, and a shared commitment to success.
You want a franchisor who will support you and provide you with everything you need to succeed. Look for someone who has been in business for a long time. While there are certainly new franchisors coming into the market all of the time, they won’t have as much experience as older companies.
Ensure your prospective franchisor has at least three or four successful locations under its belt—and ideally even more—to get an idea of how strong its system is and how many resources it can provide its franchisees.
Finally, ensure your potential franchisor is active in supporting franchises by attending industry conferences and trade shows, offering ongoing education programs for franchisees, and responding quickly to any complaints from those franchisees.
Brands
When you franchise, you are in business for yourself, but not by yourself. You are buying into a proven business model that has already been successful. And part of that success is due to the power of the brand.
A strong brand can give you instant name recognition, which is important when starting a new business. It can also provide customers with a sense of trust and safety. A good franchise brand will have a solid reputation that you can build on as you grow your business.
When you purchase a franchise, it is crucial that your business model is one that consumers will want to use. Consumer tastes change over time and what people want from businesses varies from place to place.
A franchise brand will give you immediate access to research on demographics, purchasing power, and past successes for your location or market. You can also speak with other franchisees in your area who have already been through any initial growing pains.
Systems and Support
When you buy a franchise, you’re not just buying a business model—you’re buying into a proven system that has been successful elsewhere. And part of that system is ongoing support from the franchisor. The whole point of owning a franchise is to have somebody teach you how to run it successfully.
So, when you purchase a franchise, it’s important that your franchisor offers training and mentoring services in addition to the initial help they give during your start-up phase.
Some good questions to ask before purchasing a franchise are: What type of training will I receive? How often will I be required to meet with my mentor? Will I be provided with mentors for each individual department within my business? What type of backup does the franchisor provide if something goes wrong?
Support is not just a matter of buying into a business model and training. Having ongoing support can also mean having access to funds if you’re in trouble or even a new location if your current storefront is doing poorly. Financial troubles happen to franchises and independents, and franchisors are legally obligated to help their franchisees. So, be sure that your potential franchisor has an adequate financial reserve and other types of backup measures in place.
Contractual Relationship
Franchising is a business relationship in which a franchisor licenses its brand, methods, and intellectual property to a franchisee. The franchisee then agrees to operate their business using the franchisor’s systems. This contractual relationship gives the franchisee the right to use the franchisor’s name and sell their products or services. It also obligates the franchisee to follow the franchisor’s business model and adhere to its standards.
The franchisor-franchisee relationship is governed by a Franchise Agreement, a legally binding contract that outlines the terms of the relationship. The agreement sets forth the obligations of both parties and the rights each party has under the agreement.
The Franchise Agreement also sets forth a schedule of fees and payments, called royalties. For licensing their intellectual property, franchisors receive a royalty fee as compensation. This is typically paid out monthly, quarterly, or annually.
A good franchisor will negotiate royalties based on your sales or profits. On top of paying royalties, franchisees are required to pay an upfront fee that covers costs associated with starting up their business and training from your franchisor’s staff. The size of these fees varies from one franchise opportunity to another.
Types of Franchise Relationships
There are several different types of franchises, each with its own set of pros and cons. The most common type of franchise is a business format franchise, which involves the franchisor giving the franchisee a detailed blueprint for running the business.
Product and trade name franchises are another popular type of franchise and involve the franchisor licensing the use of their products and/or brand name to the franchisee. Finally, there are also manufacturing franchises, in which the franchisor provides the franchisee with materials or products they sell. Here is a breakdown of the two main types of franchise relationships.
Business Format Franchising
Business format franchising is a system of franchising that involves licensing a company’s business model and name. It is the most common type of franchising in the United States. Under this arrangement, franchisees are granted the right to use the franchisor’s business model and name to sell its products or services.
The franchisor provides franchisees with training, support, and marketing assistance. In return, the franchisee pays the franchisor an initial fee and ongoing royalties.
Business Format Franchising is a popular way for businesses to expand their reach and tap into new markets. It is also a way for entrepreneurs to start their businesses with the backing of an established brand.
Product Distribution Franchising (Traditional Franchising)
A product distribution franchise is a franchise in which the franchisor grants the franchisee the right to distribute its products within a specified territory. The franchisee typically pays an initial fee and ongoing royalties to the franchisor.
In exchange for these payments, the franchisor provides the franchisee exclusive rights to distribute its products within the specified territory, marketing, and other support.
Product distribution franchises can be a good option for entrepreneurs interested in starting their businesses but want to do so with the backing of an established brand.
However, it is important to carefully research any franchise opportunity before investing any money, as risks are always involved.
Principal Features of Franchising
Franchising has several key features that make it an attractive option for entrepreneurs. For one, franchisors provide support and guidance to help franchisees get their businesses up and running quickly and smoothly. Additionally, franchisees benefit from the established brand name and reputation of the franchisor, as well as the economies of scale that come with being part of a larger organization. Other key features of franchising include:
Exclusive Right
The exclusive right is a salient feature of franchising. The franchisor grants the franchisee the right to use its trademark, trade name, and logo. The franchisee also has the right to sell products or services in a specified territory. This exclusive right is typically for a certain period, and it can be renewed.
Payment
In franchising, payment is typically a one-time fee paid by the franchisee to the franchisor. This fee can be for the franchise’s purchase, training, support, or both. The franchisor may also charge an ongoing royalty fee, a percentage of the franchisee’s sales. Payment terms vary from franchise to franchise, so it’s important to understand what you’re paying for before you sign any agreements.
Restrictions
Franchising typically involves restrictions on how the franchisee can operate the business. For example, the franchisor may dictate:
- The products or services that can be offered
- How the business will be branded and advertised
- Where the business can be located
- What hours of operation are required
- Who can be hired to work at the franchise
Franchisees must also adhere to any rules and regulations the franchisor sets. These restrictions help to protect the franchisor’s brand and reputation and ensure a consistent customer experience across all locations.
Specified Period
In franchising, the term specified period refers to the length of time a franchisee has the right to operate their franchise. The franchisor typically determines this period and is spelled out in the franchise agreement. Depending on the franchisor, the specified period can range from a few years to indefinitely. Some franchisors may even offer renewal options to franchisees wishing to continue operating their businesses after the period has expired.
Two Parties
In franchising, there are two parties: the franchisor and the franchisee. The franchisor is the business model owner, while the franchisee pays for the right to use that model. Usually, the franchisor provides support in areas like marketing and training.
Written Agreement
A written agreement is a contract between the franchisor and the franchisee. This agreement outlines the terms of the relationship, including the franchisor’s obligations to the franchisee and vice versa. The written agreement is typically for a specific term, after which it can be renewed.
Types of Franchise Agreements
Franchising agreements vary depending on the business, but there are some key things that all agreements should include. The first is the grant of a franchise, which lays out what the franchisor is granting the franchisee.
This should include all of the trademarks, copyrighted material, and other intellectual property used by the franchisee. The second is territorial rights, which define where the franchise can be operated.
The third is exclusive rights, which grant the franchisee the right to be the only one operating in that territory. The fourth is duties and obligations, which lay out what the franchisor expects from the franchisee in terms of running the business. The fifth is marketing and advertising requirements, which define how much money the franchisee must spend on marketing and advertising each year.
Individual
In franchising, an individual agreement is a contract between the franchisor and the individual franchisee. The agreement outlines the obligations of both parties and sets forth the terms and conditions of the franchise relationship.
One key component of individual agreements is a description of confidential and proprietary information that belongs solely to one party, namely, the franchisor or franchisee. A franchisor is prohibited from using business methods outside its specific franchise operations without a written agreement.
Likewise, a franchisee may not use confidential information a franchisor provides beyond its specific store location without permission. Additionally, these clauses are meant to protect each party’s intellectual property (trade secrets). Confidential and proprietary information has been upheld in court cases and FTC actions against franchises.
Area Level
In franchising, an area level is a designated geographic territory in which a franchisor agrees not to compete with or grant another franchise. The area level may be an entire country, a state, a province, or a city.
Sometimes, the area level may be smaller, such as a specific county or even a particular zip code. When deciding on an area level, franchisors must consider many factors, including the size of the population, the number of potential customers, and the competition.
For franchisors, establishing an area level is sometimes a prerequisite for their franchisees. Although it can help protect existing franchisees by creating geographic exclusivity, there are several disadvantages.
For example, franchisors lose out on certain opportunities, such as those that come from expanding into an adjacent market. This may mean that a new franchisee cannot open in another market unless it buys out all of your existing franchises at their area level. Sometimes, it may even mean that all new territories are off-limits.
Master Franchise
A Master Franchise agreement is a contract between a franchisor and a prospective franchisee. The franchisor grants the franchisee the right to sub-franchise business units in a specified territory. The Master Franchise agreement outlines the duties and responsibilities of both parties and the terms of the relationship.
Like any other contract, a Master Franchise agreement should be drafted and complete all of its terms. If there are missing details, it may provide an opportunity for a disgruntled franchisee or franchisor to take legal action against a party based on their interpretation of those details.
For example, if you’re granting exclusive rights to a particular territory and an existing franchisee decides to add more units in that area than are allowed in your agreement, they could potentially sue for damages.
On another note, if you’re purchasing more units in an already established territory as part of your sub-franchise plan and aren’t abiding by certain guidelines set forth by your franchisor, they may have legal recourse against you.
Four Key Ps of Franchising
No matter what business you’re in, the four Ps of success remains the same. In a franchise, these include People, Products, Processes, and Profitability.
People
People are key to the success of a franchise for several reasons. First, they are the ones who will be doing the work day in and day out. Second, they are the face of the franchise to customers and clients. Third, they are the ones who will be most invested in the success of the business. Fourth, they often have a network of people they can bring into the franchise.
Fifth, they usually have some financial stake in the franchise’s success. Sixth, they often have the knowledge or experience to help the franchise succeed. Finally, people are key because they are usually passionate about what they do and want to see the franchise succeed.
Product
Products are key to the success of a franchise because they provide a consistent and recognizable offering to customers. They also allow franchisees to leverage the strength of the franchisor’s brand to drive sales. In addition, well-chosen products can help a franchise stand out from the competition and build customer loyalty.
Deciding what products a franchise will sell is one of many key steps in developing a business plan. For example, if customers visit your store to purchase only one item, it might not be worth opening that location. This can help minimize costs and protect your investment in a franchise. As you plan your product offering, think beyond individual items and consider how they can fit into your broader business strategy.
Process
There are a few key reasons why having standardized processes is important for a franchise’s success. First, it allows for consistent quality control across all locations. Second, it helps to ensure that customers have the same great experience no matter which location they visit. Third, it allows franchisees to open new locations quickly and efficiently.
Fourth, it makes training new employees simpler and more streamlined. Fifth, it can help reduce costs by eliminating waste and inefficiencies. Sixth, it can help build brand equity by creating a recognizable and reliable product or service. Finally, standardized processes can make it easier to scale a business by replicating successful systems.
Profitability
Franchises are built on a model of profitability. For a franchise to be successful, it must be able to generate enough revenue to cover its costs and then some. The key to profitability is scaling. A franchisee must be able to grow its customer base and expand its reach to achieve profitability. If a franchise can’t scale, the company may end up folding.
Not every business can succeed at expansion, but franchises have a built-in mechanism that allows them to adapt constantly. And as long as they’re profitable with their core product or service, they’ll be able to keep expanding without risk of failure.
For instance, if a restaurant doesn’t make money on chicken fingers alone, they might add sandwiches or pasta dishes to their menu–or even open an ice cream shop next door.
Pros of Franchising
- You get access to an established market: Established franchises already have a track record and customer base from which they can continue expanding and growing.
- You get help from experts: There are many franchises consulting companies that will offer advice and support for entrepreneurs who want to start their own franchised business.
- You don’t have to invent something new: It can be very hard to start your own business when trying to come up with a product or service nobody has ever thought of. However, by starting your franchise, you’re allowed to provide something customers already know and love while also capitalizing on what works well in other similar businesses.
- The concept is proven: When starting your own business, it’s often difficult not knowing if what you’re doing will work because it hasn’t been done before. But investing in a tried-and-true concept that has been successful for others means less risk involved.
Who Should Consider Franchising
Franchising can be a great way to get into business for yourself, but it’s not for everyone. If you’re the type of person who likes working independently and being your boss, franchising may not be the right fit. However, franchising could be perfect for you if you’re the type of person who likes working within a system and following proven methods. Consider these factors before making a decision.
- What are your long-term goals?
- How do you work best?
- Do you want financial stability?
- How much time will you have available to devote to this new venture?
- Do you want full or partial control over your new business venture?
- Do you have any special skills that would translate well in this industry/sector?
Tips And Tricks for Those Considering Franchising
- You should talk with the franchisor’s top franchisees and ask them: What are your average weekly sales? How much money did you invest? What type of marketing materials do they provide? If a franchisee cannot answer these questions, it might be a sign that they don’t want to reveal their numbers or are doing something wrong.
- You should also research if the franchise company has any other locations in your area, how long they have been in business, and their growth rate (percentage increase of stores over time).
- Look at the qualifications for being an owner and ensure you meet all requirements. Some franchises require a down payment of $5,000-20,000 and liquid assets (cash on hand) of $25,000-100,000. They may also require that you take out a home equity loan or line of credit to fund your initial investment because many franchisors want 100% financing from new owners so they can control every aspect of the operation.
- Make sure that there is room for your success in terms of future sales and not just what they have done in their most recent fiscal year. If they’ve had 10% growth over three years, ensure that if you follow their plan, there is a good chance of similar growth for many years in a row because 50% growth over three years puts you at $600,000 per year. You might think to yourself: We can do better than that! And maybe so, but if they haven’t been able to beat $600k per year lately, it might be tough going forward.
