In any major world city — and even many smaller towns — you're likely to find numerous franchise businesses lining the streets. Chains like Starbucks, McDonald's and Walmart are everywhere nowadays, and for good reason: Many entrepreneurs pursue franchising because it allows them to run their own business while reaping the financial rewards of a well-known brand name.
When a company sells rights to an existing model of business and the goods it offers to another businessperson or company, they are creating a franchise. The exact definition of "franchise" varies because of the numerous statutes passed by the Federal Trade Commission (FTC) and individual states. Under the FTC Franchise Rule, a franchise is a contract or an 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.
Federal regulations exist to protect the rights of both the franchisee and the franchiser. The FTC helps oversee and enforce franchise laws to ensure entrepreneurs receive full disclosure on the state of the business they are joining, in addition to ensuring that the franchiser's brand is protected. [Should You Be a Franchisee? 5 Questions to Ask]
Early in the franchise purchasing process, franchisors must provide a franchise disclosure document (FDD) to the potential franchisee. Sometimes called an offering circular, the FDD outlines the fees, investments, and bankruptcy and litigation history of the franchisor company. There are also registration and relationship laws that govern registration of the franchise, salespeople and advertising, as well as grounds for terminating a franchise, notice and cure periods, grounds for nonrenewal and equal treatment. These also vary by state.
Benefits of franchising
Buying the rights of a franchise entitles the purchaser to the benefits of the brand. This means the products, marketing, advertising and the look and feel of a facility come with the business. These things, combined with yearly support in the form of training, discounted resources and business assistance, are a large incentive to join an established organization, especially for those new to business management or ownership.
The parent company is not only selling the rights to peddle their product, they are also providing a business model with a proven record of success. The model includes processes used to provide the product or service, reducing the learning curve for owner, managers and employees. Access to the training and support needed to create a successful business reduces your risk.
While securing funding for any type of business can be difficult, it can be easier to obtain money for a franchise than for an untested business concept. 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.
Factors for consideration
Franchising requires a significant financial investment in return for the benefits it gives entrepreneurs. For example, McDonald's requires potential franchisees to have a minimum of $750,000 in liquid assets and be able to pay 40 percent of the startup costs up front to be eligible for a franchise. According to McDonald's, startup costs of a new restaurant average between $956,000 and $2.3 million, depending on location and other features. 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. Before 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 storefront. All of those activities require an additional investment of money and time.
While the appeal of the franchise is an established name and branding, it also limits your business autonomy, that is, the ability to move and grow your business in different directions to take advantage of local business factors. 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. 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. You're also not able to add products that deviate from the parent company's standard offerings, even if there's demand in your local market.
If you like to do things your own way, and have an eye for opportunity, the limits of a franchise are something that requires careful deliberation.
Opportunities to watch
While fast food is typically referenced as an example of franchising, they are not the only types out there. Nearly every industry has a successful business practice being sold as a franchise, from retail stores and salons to employment services.
Based on top franchising opportunities lists from around the Web, here are 10 industries where franchise business is booming.
1. Children's enrichment. Parents want the best for their children, and educational franchises like Kumon, Goddard School and The Little Gym are helping the next generation learn and grow.
2. E-cigarettes. With more than 6 million e-cigarette users and counting, this is a new franchise field constantly evolving with new regulations. Examples include Lizard Juice, Vapor Shark and VaporFi.
3. Fitness. While large gyms like Crunch and Retro Fitness are going strong, selecting a niche missing in your area, like kickboxing or Pilates, can help you stand out.
4. Paint-and-sip studios. This entertaining concept, which allows participants to have a glass of wine while they take a group painting class, is growing fast for both new and established companies, such as Painting with a Twist and Pinot's Palette.
5. Pizza. A staple of the franchise world, competitors are still finding new and innovative ways to put together a pie or slice. Domino's, Pizza Hut and Papa John's still rule the market, but concept franchises like Kono Pizza and Project Pie offer a fresh take on this classic food.
6. Potatoes. The humble potato is a side dish no longer. Franchises like Potatopia are seeing success by using this ingredient as the main attraction.
7. Property management. Since 2008, the number of rental properties — and companies needed to manage them, like Real Property Management and Property Management Pros — have been on the rise, prompting growth and opportunity for those looking to fill that need.
8. Senior care. As more and more aging baby boomers require in-home or facility care, this field is evolving by offering services like advocacy and placement. Some franchise options include Caring Senior Service and Bright Star Care.
9. Spa services. More than just massage, full-service spa franchises like Woodhouse Day Spa and Hand and Stone include waxing, threading and spray tanning, and the market is rapidly becoming very competitive.
10. Vending machines. Vending machines have been popular for decades, but the success of these models — and the variety in potential product offerings — has recently made franchising a viable option, through companies like Fresh Healthy Vending and Healthier4U Vending.
Further reading on how to buy a franchise and current opportunities can be found on the following websites:
Updated June 12, 2015. Additional reporting by Business News Daily contributor Ryan Goodrich.