An Introduction to Franchising: Accelerating Your Path to Financial Freedom
May 25, 2022
Millions of people aspire to be business owners, yet many never take the first step.
You're about to discover everything you need to know about franchising and how it can help you fulfill your lifelong dream of business ownership.
What is Franchising?
According to the International Franchise Association (IFA), franchising is defined as:
A contractual relationship between the franchisor and the franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee 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.
In layman's terms, the franchise owner (i.e., franchisor) licenses its operations to an individual (i.e., franchisee)—along with its branding, knowledge, and products or services—in exchange for a franchise fee.
Franchisees receive a blueprint of the franchisor's business model. This way, they can shorten the path to success and avoid spending time and money starting a business from scratch. On the other hand, the franchisor can expand much more quickly by licensing their operations and providing support to the franchisees.
When it’s done effectively, franchising is a win-win situation for both the franchisor and franchisee.
Advantages of Franchising
The biggest advantage of being a franchisee is that you’re in business for yourself but not by yourself. You’re surrounded by a group of people dedicated to your success, with a proven support system to reduce business risks.
Other advantages of franchising include:
- You benefit from being a part of an existing, established brand with demonstrated 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 associated with starting a new business.
- The franchisor's brand can serve as a benefit both before and after you invest. Familiarity with an established brand can help reduce the cost to acquire customers and educate 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 or not 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. Many franchisors also provide technical assistance and supporting staff who may offer advice throughout the life span of your business.
- Franchisors often provide marketing support to help you grow your business and retain customers. Through the franchisor’s extensive market research and proven marketing strategies, your can benefit from better targeting and more successful 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.
- And so much more!
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 in exchange for the right to use the franchisor's brand and benefit from their assistance:
- The initial franchise fee, which can range from tens of thousands to hundreds of thousands of dollars, is usually non-refundable. This provides 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 out-of-pocket costs.
- You may be required to pay royalties to the franchisor as a percentage of your revenue. The average royalty percentage is 5 to 6 percent of revenue, but these fees can range depending on the franchise and industry. Even if you are losing money, you will likely continue to pay royalties for the right to use the franchisor's name.
- You may be required to contribute to a marketing fund. In addition to 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 maintain the ability to approve or disapprove sites for brick-and-mortar locations, and you may not get your preferred location. As part of the approval process, some franchisors perform thorough site assessments, and a site they approve is more likely to attract customers.
- 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 be able to 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, approve signs, employee uniforms, and advertisements in advance, or require you to follow specific accounting or bookkeeping methods.
- A franchisor may limit your business to a single location or service area. However, other franchisees may not be able to open competitive locations or serve customers in your territory if you have an "exclusive" or "protected" territory.
- A franchise is a business model where the franchise owner (i.e., franchisor) licenses its operations to an individual (i.e., franchisee)—along with its branding, knowledge, and products or services—in exchange for a franchise fee.
- Franchisees receive a blueprint of the franchisor's business model, accelerating their path to financial freedom.
- Franchising allows entrepreneurs to be in business for themselves but not by themselves, with proven support systems for marketing and business operations.
- 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. The intention is to provide guidelines, processes, and best practices to help you grow a successful business.