- A franchise is a business model that allows owners to sell goods and services under an established brand as a part of a leasing agreement.
- Franchises offer various benefits that differentiate the model from typical small businesses.
- You’ll need to follow a legal process when starting a franchise to protect the franchisee and finalize the agreement with the franchisor.
- This article is for anyone exploring the potential of franchising a business.
More times than you can probably remember, you’ve likely visited a 7-Eleven, KFC, McDonald’s or Dunkin’ to enjoy the convenience and services of a brand you know and trust. These businesses are products of the business expansion practice called franchising. Their owners invested in a known brand in hopes of finding business success.
Franchising allows bigger businesses to branch out and grow while giving entrepreneurs and small business owners a chance to run their own operations with the help and support of a larger organization with a proven formula for success.
Franchising is a tempting way to find business success. However, it’s essential to understand what’s involved before taking advantage of this less risky – yet still rewarding – option for starting a business.
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What is a franchise?
A franchise is a business model where a business owner provides products or services under the branding and rules a parent corporation sets. The parent corporation assists its franchisees with marketing, inventory and support. When opening a franchise, the franchisee pays the franchisor royalties and usually submits an initial franchise fee to do business under the brand’s name.
Essentially, franchises combine working for someone else and working for yourself in two categories:
- Product and trade name franchising: Product and trade name franchising is when you buy or license the right to use someone’s product or trademark.
- Business format franchising: Business format franchising is more complex because the franchisor provides franchisees with a full range of services and support. The franchisor lays out specific rules and conditions, and the franchisee agrees to abide by them.
Key takeaway: Opening a franchise is an opportunity to start and run your own business without having to build a brand from scratch.
How is a franchise different from other small businesses?
Business franchising isn’t for everyone; many would-be entrepreneurs prefer to start a business from scratch. Both franchising and starting a new business have benefits and disadvantages, and being a business owner in any capacity is risky.
Here’s a look at how franchising differs from starting a new business:
- Franchises have less freedom. Starting your own business gives you the freedom to make every decision, small and large. This freedom allows you to create your vision, but it can be overwhelming. With a franchise business, you have less freedom but more support. You sign an agreement outlining all conditions. You receive the tools, support and structure to run the business as laid out by the franchisor. Franchisees usually lease all necessary equipment.
- Franchises enjoy instant brand awareness. When you start a new business, you’re tasked with building a brand according to your vision. Brand building can be challenging but rewarding. When you open a franchise, you enjoy instant brand awareness. Your brand is established; however, you don’t have the freedom to tweak it to your liking.
- Franchising startup costs can be high. Starting a new business and opening a franchise both require significant monetary investments. Business startup costs can range from a few thousand to tens of thousands of dollars. Franchise funding can be pricey; you’ll likely need to secure a loan or line of credit to cover franchising fees and real estate costs. However, you may be able to use your franchisor’s investor relationships to secure funding.
- Franchise business operations are standardized. Day-to-day operations are different for franchises and original small businesses. Franchises are meant to be the same regardless of where you go; think of the Subway or Chipotle assembly-line meal-creation format. A small business doesn’t have to follow any specific format and can operate how the owner wishes.Franchises have a large pool of buyers. If you want to sell your independent small business, you can enjoy significant profits if you find the right buyers. Selling a franchise means you’ll have a larger customer pool that wants to benefit from the brand name. If a franchise owner can’t find a buyer, the franchisor may be willing to buy back the operation. However, an independent small business owner may be out of luck if they can’t find a buyer.
Tip: If you’re applying for a franchise loan, concentrate on boosting your personal credit score because you won’t yet have a business credit score.
Benefits of opening a franchise
Franchises offer many benefits to owners, including the following:
- Franchises have access to proper training. Opening a franchise means you get a set of rules to follow and a parent company with resources. With provided guidelines, franchisors can give franchisees proper training in running the business to ensure the best chances of success. For example, McDonald’s famously has its Hamburger University, a training program to help people learn the McDonald’s way and maintain the company’s methods of running things.
- Franchises receive marketing help. Parent companies assist franchisees with marketing strategies and materials. In a world of social media, SEO and everything in between, running a business without marketing stress can be a significant benefit. Typically, franchisees pay a monthly fee to the parent company’s advertising budget, which is run by a team of experts.
- Franchises have the support of a big company. The parent company’s support goes beyond training and marketing. The franchisor may provide equipment and other resources to get you started and help you throughout your franchise tenure. If new features, products or equipment is needed to advance your business, your franchisor typically has the means to help. Other support resources include call centers, advice and support channels, and conferences.
- Franchise funding can be easier. A franchise’s built-in market and established presence can make lenders more comfortable because they’re providing money for a business with a proven track record.
- Franchises enjoy improved buying power. Your franchisor will likely be able to negotiate better rates for supplies and materials than you’d receive as an independent business owner.
- Franchises give you a faster ROI. With any business, return on investment (ROI) is crucial in measuring business success and growth. Franchise owners can open their doors more quickly and often have a built-in customer base. You’ll enjoy a faster ROI as customers flock to your store, knowing what products and level of quality to expect.
- Franchises can navigate legalities more easily. Parent companies can help franchises work with state and federal regulations to comply with laws and handle legal proceedings.
How to open a franchise
With an understanding of franchising’s benefits, here’s how to get started opening a franchise.
1. Research franchises and costs to find the right fit.
Fully research franchise options and determine which companies will offer you the best return on investment and provide you with the best chance for a consistent income stream.
Financing is a significant factor when choosing a franchise. Franchising is essentially leasing a business, so you must ensure it’s a financially worthwhile venture.
Consider the following factors when evaluating potential franchise investments:
- Average franchise revenue
- Starting capital
- Royalty fees
- Marketing fees
- Miscellaneous fees
- Rent costs
- Franchising fees
Did you know?: Read our reviews of the best business loans to help find funding for your franchise business.
2. Evaluate your franchise’s potential.
After factoring in franchise costs and determining if the franchise would provide a good ROI, consider its potential. For example, what competitors are in your area? Do your target customers live nearby?
Ensure there are no other franchises of the parent business near your location. Although some franchises can support multiple locations, such as Dunkin’ or Starbucks, it’s crucial to ensure you’re not setting up a competitive location that could underperform.
Key takeaway: To choose the right franchise, consider your personal goals, the industry you want to work in and the type of commitment you’re willing to make.
3. Create a business plan for your franchise.
To ensure you’ll be granted a franchise and ultimately secure funding, creating a business plan is crucial. You’ll present your business plan to investors and others to share your goals and profitability expectations.
4. Complete all necessary paperwork for your franchise.
To get the process going, the franchisee must prepare their paperwork and business arrangements. You’ll be asked to sign a franchise license agreement. Review and understand the agreement before signing it and committing to the franchise.
You’ll also need to choose your legal structure, such as forming a limited liability corporation (LLC). Franchisors require different business entities based on their overall structure, so work with the parent company during this process.
5. Choose a business space for your franchise.
Once you’ve established and solidified your business proceedings, it’s time to find a place for your business. Your franchisor may have requirements on necessary space, so consider your agreement’s conditions before securing a property lease.
When you choose your location, ensure you’re not too close to a fellow franchisee or company-owned building.
6. Hire employees for your franchise.
The next step is hiring employees. Your franchisor may assist you in the hiring process and offer training programs and resources. Whether it is an intranet system provided by the parent company or detailed job descriptions, the franchisor can help you with your search for employees.
7. Plan your franchise’s opening day.
With everything in place, it’s time to plan your opening day. When it comes to services like marketing, consult with your franchisor and engage in social media marketing and local press outreach. For in-store activities, check to see what is allowed within your franchise agreement. If possible, try to create a memorable first impression with the community.
Franchising can be your path to business ownership
Paving the way for a new business isn’t easy. However, opening a franchise brings the benefits of entrepreneurship with the resources of a large parent company. Business ownership at any level is risky, but franchising can bring career fulfillment with a measure of support. Conduct your franchise search thoughtfully, and consider hiring legal assistance to guide your path.