An Introduction to Franchising: Accelerating Your Path to Financial Freedom
May 25, 2022
Millions of people dream of business ownership. But most people never take the steps to achieve it. The what-ifs can be paralyzing. Many wonder, what if I lack the experience? What if I can’t get customers? What if my business fails?
Here’s the good news. Franchising offers a lower-risk path to business ownership. You benefit from easier financing options and more predictable growth than startups. Let’s explore everything you need to know about franchising and how it can help you realize your dream of business ownership.
What is Franchising?
Many people are unfamiliar with the franchise business model. Let’s start with the basics. Here’s how the International Franchise Association defines franchising:
“A contractual relationship between the franchisor and the franchisee in which the franchisor offers or must maintain a continuing interest in the franchisee’s business in such areas as know-how and training; wherein the franchisee operates under a common trade name, format or procedure owned by or controlled by the franchisor, and in which the franchisee has made or will make a substantial capital investment in his business from his own resources.”
It sounds complicated, but it’s simple, really. A business (i.e., franchisor) licenses its trademarks and processes to an individual (i.e. franchisee) in exchange for a franchise fee and royalties. The franchise fee covers the cost of your training, initial marketing and advertising, and other expenses to start your business. The royalty fee allows you to use the franchisor’s brand, business model, and intellectual property.
Franchising in a partnership between two groups with the same aim—success. It’s a win-win situation for both parties. The franchisor can quickly expand into new markets through locally owned businesses. Then they provide support to help the franchise owner use their proven strategies.
Now, let’s dive deeper into the details of franchising—starting with the aspects that make it so appealing to entrepreneurs.
Advantages of Franchising
Franchising allows you to go into business for yourself, but not by yourself. You’re surrounded by a group of people who are dedicated to your success. The franchisor’s support systems reduce your risk and set you up for success.
The advantages of franchising include:
- You benefit from being a part of an established brand with proven success. Before franchising their business, the franchisor has developed, implemented, and fine-tuned their product or service. This allows you to avoid the common mistakes of most startups.
- The franchisor’s brand is an immediate value-add. Brand recognition can help reduce the cost of gaining customers and educating them about your product or service.
- You may have an easier time financing your business through small-business loans and other funding sources. When considering whether to lend money, lenders consider the franchisor’s experience and reputation. In some circumstances, you may even qualify for financing from the franchisor directly.
- You receive access to training programs before you open the business. Most franchisors also provide technical support and advice throughout the lifespan of your business.
- You receive marketing support to help you generate leads and grow your business. Through the franchisor’s extensive market research and proven marketing strategies, you can benefit from better targeting and more effective adverting campaigns.
- Bulk discounts are frequently available to you. Through economies of scale, the franchisor or their vendor partners can provide the resources you need to run the business at a reduced cost.
While offering many benefits, franchise ownership comes with set costs, franchisor oversight, and contractual duties. You will need to fulfill the obligations set by the franchisor.
You will pay for some, if not all, of the following franchise fees for the right to use the franchisor’s brand:
- The initial franchise fee is usually non-refundable. It can range from tens of thousands to hundreds of thousands of dollars. This earns you access to the licenses, branding, intellectual property, trademarks, and service marks of the franchisor. Renting or building a brick-and-mortar facility, as well as purchasing initial inventory, can also add costs.
- You may be required to pay royalties to the franchisor as a percentage of your revenue. Even if you’re losing money, you will probably continue to pay royalties for the right to use the brand’s name, image, and likeness.
- You may be required to contribute to a marketing fund. Besides promoting your business, these funds may be used for national advertising or to attract new franchise owners.
Franchisors often control how franchisees do business to ensure consistency across each location. These controls may limit your ability to make business decisions on your own.
- Many franchisors can approve or disapprove sites for brick-and-mortar locations. You may not get your preferred location. As part of the approval process, most franchisors perform thorough site assessments to ensure it’s a viable location.
- Franchisors may enforce design and appearance guidelines for consistency across the brand. This may limit your ability to customize signage, marketing materials, and more.
- The franchisor may limit the goods and services you can sell. These restrictions maintain uniformity between each of the franchise locations. For example, you may not change the menu if you own a restaurant franchise.
- Franchisors may require you to operate your business in a certain way. They may set your working hours and approve signs, employee uniforms, and advertisements in advance. They may also require you to follow specific accounting or bookkeeping methods to track performance.
- A franchisor may limit your business to a single location or service area. However, other franchise owners may not open competitive locations or serve customers in your area if you have an “exclusive” or “protected” territory.
- A franchise is a business model where the franchisor licenses its trademarks and processes to an individual in exchange for a franchise fee and royalties.
- Franchise owners receive a business blueprint of sorts, shortening their path to profitability.
- Franchising allows you to get into business for yourself, but not by yourself. You benefit from a comprehensive support system spanning operations, marketing, and other key aspects of the business.
- While offering many benefits, franchise ownership comes with set costs, franchisor oversight, and contractual duties. You will need to fulfill the obligations set by the franchisor. However, these guidelines, processes, and best practices are structured to help you succeed.