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Franchising: Definition & Top Opportunities

Subway franchise
Subway, such as this restaurant in Shanghai, China, is one of the top franchise opportunities. The sub shop hosts 216 franchises in China.
Credit: TonyV3112 / Shutterstock.com

Franchises exist all around the world, from each McDonald’s or Starbucks you see on every corner to the massive Wal-Marts that sprout in many cities. When a company sells rights to an existing model of business and the products it offers to another businessperson or company, they’re in effect creating a franchise. Many entrepreneurs pursue franchises because it allows them to sell under the name of a well-known brand, and offer the products it is best known for, all while reaping the financial rewards.

Franchising definition

The definition of franchise varies from state to state because of the numerous franchise registration statutes passed by the Federal Trade Commission (FTC). California was the first state to pass franchising laws, from which other states framed their own regulations. A franchise is ultimately a contract or agreement between two persons and entails the following:

  • The franchisee is given the right to engage in the business of offering, selling and distributing the goods and services associated with a marketing plan or business model prescribed by the franchisor.
  • The operation of the franchisee’s business must follow the plan or system associated with the franchiser’s branding.
  • The franchisee is required to pay a franchise fee.

Top franchises

While fast food is typically referenced as an example of franchising, they aren’t the only types out there. Nearly every industry has a successful business practice being sold as a franchise, from retail stores to salons. Everything from Sears to Supercuts is sold to aspiring entrepreneurs seeking the support of an established brand combined with the relative freedom of a local business.

The top 10 franchise opportunities for 2013, and their startup costs, according to Entrepreneur.com, are:

1. Hampton Hotels — $3.7 million to $13.52 million

2. Subway — $85,200 to $260,350

3. Jiffy Lube Int'l Inc. — $196,500 to $304,000

4. 7-Eleven Inc. — $30,800 to $196,500

5. Supercuts — $103,550 to $196,500

6. Anytime Fitness — $56,300 to $353,900

7. Servpro — $134,800 to $183,450

8. Denny's Inc. — $1.18 million to $2.4 million

9. McDonald's — $1.03 million to $2.18 million

10. Pizza Hut Inc. — $295,000 to $2.15 million

[Related: 5 Franchises You Can Own for Under $100,000]

Investing in a franchise

Acquiring franchising rights isn’t as simple as submitting a request and there are several factors to consider when deciding which franchise to buy. It requires a significant financial investment in return for the benefits it gives entrepreneurs. Buying the rights of a franchise entails you to the benefits befitting to the brand. This means marketing, advertising, recipes, the look and feel of a facility and the branding that comes with the business. These things, combined with yearly support in the form of training, discounted resources and business assistance, ultimately entail an initial and yearly cost.

For example, McDonald’s requires a minimum $750,000 investment to be eligible for a franchise. Once the money is raised, the entrepreneur is given all rights to receive the training and support needed to operate their business branch on a daily basis. Then, for an added yearly fee of 4 percent of revenue, the franchisee will continue to benefit from the support services of the franchising company.

After having paid the initial investment fee, the franchisee can begin setting up the business premises to sell products under the franchise’s brand name. Prior to launching the business, the franchisee is expected to propose a store location, business model, business opportunities and royalties. Once the terms of the franchise contract are agreed upon, the entrepreneur can begin setting up the store front.

Autonomy in a franchise

All franchises reap the rewards of the parent company, gaining access to training, support and products needed to make a business successful. Whether it’s the packaging for food, uniforms for employees or marketing materials for advertising, the franchise is based on the model of the franchising company. For example, McDonald’s franchises are expected to use the same employee uniforms and food packaging to retain a consistent brand no matter the location.

Franchisees are expected to follow the same business model as the parent company, but still retain some level of flexibility to take advantage of local business factors. While franchisees are purchasing the rights to sell the franchiser’s product, they’re buying the right to a business model with a proven record of success. Pricing can be adjusted depending on the region, but franchisers normally set a minimum price level to keep one franchise similar to other local franchises.

Franchise regulation

Federal regulations exist to protect the rights of both the franchisee and the franchiser. Prior to purchasing a franchise, entrepreneurs are given a disclosure document from the FTC that outlines the fees, investment, bankruptcy and litigation history of the company they’re purchasing the franchise from. The FTC helps oversee and enforce franchise laws to ensure entrepreneurs receive full disclosure on the state of the business they’re becoming a part of, in addition to ensuring the franchiser’s brand is protected.

Securing money for a franchise investment

Securing the funding for a franchise is difficult, though lucrative from a credit standpoint. Creditors are much more willing to give loans to entrepreneurs seeking to invest in a franchise because these business models are proven and have significant support over a standalone business. Purchasing a franchise is considered a low-risk investment for banking institutions, which means that securing the funding at a reasonable price and interest rate is much more feasible for prospective business owners.

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