A franchise lets a successful business grow its reach while earning revenue from work it has already done. The established company becomes a franchisor when it agrees to sell the right to use its trademark, products, and business systems to another individual or group (the franchisee).
Along with an initial fee to buy into the franchise, the franchisee typically pays ongoing royalties to continue operating that business. The franchisor, meanwhile, typically supports the franchisee’s efforts by providing training, marketing, and other types of ongoing assistance. This helps ensure the established company’s brand standards are kept up and that the company continues to be associated with quality products or services.
Allowing individuals with little or no business experience to enter into a proven business system, franchising is a popular option with entrepreneurs. The franchisee puts in time and labor to launch the new franchise, but their learning curve is shortened as they can benefit from the support and resources of an established brand.
How did the franchise business model get its start?
You may think Ray Kroc originated the franchise business model with McDonald’s in 1955. Yet, this business strategy is credited to Isaac Singer’s efforts a century earlier. Singer, in the late 1850s, wanted to grow his sewing machine business. Since he couldn’t be everywhere at once to sell the machines and show people how to use them, he sold licenses to other entrepreneurs around the country. His company still exists today with a global presence and multiple brands.
Pros and cons of franchising your business
Franchising your business offers both advantages and disadvantages. You’ll want to weigh both sides before deciding whether this is the right choice for you.
Franchising pros
- Grow your business: The Singer example provides one of the main reasons you might want to franchise your business. The franchise business model provides opportunities to reach new markets with someone else investing their money and labor force.
- Build brand recognition: Franchising helps you reach new customers more quickly than you might by opening only company-owned locations. This means you can expand brand awareness in new franchise locations. The franchisee must follow your established business systems and brand standards, which can help maintain consistency as you grow.
- Increase revenue: Your franchisees pay an initial fee and ongoing royalties, which provide a reliable, ongoing source of revenue. The average initial franchise fee ranges from $25,000 to $50,000, according to Franchise Business Review.
- Access new talent: The individuals franchising your business can bring local knowledge and creative ideas. Your business could benefit from the fresh insights.
Franchising cons
- Upfront investment: To ask franchisees to abide by your business operating model and brand guidelines, you’ll need to systemize and standardize them first. This can require dedicated time and effort on your part, which could detract from your ability to manage your ongoing business affairs. You may also need to seek out legal and financial advice, which can be costly.
- Loss of control: The franchisee is meant to adhere to your business system and brand standards, but you have to trust that the independent owners will act in the best interests of your overall business.
- Lack of consistency: As you are expanding into new markets, your business expectations may be challenged in regions with different cultural norms.
- Possible personality conflicts: You’re going into business with any number of individuals or groups who can have very different goals from yours. The business started as your baby, but now you’ll need to communicate and collaborate with a wide range of people.
- Legal/financial implications: You’ll need to create a legal and financial franchising structure that can be complex and time-consuming. You also need to ensure compliance with all relevant laws and regulations for all the regions in which you franchise.
- Profit sharing: The franchisee is proving your business could make money in that market, but you are only earning the royalties (after the initial fee is paid).
Identifying the ideal franchise business type for you
There are several types of business franchises, each with its own advantages and disadvantages. Learn the distinctions between five common types before deciding which approach is best for you.
- Business format franchise: Probably the most common type of business franchise, this sees franchisees using the franchisor’s established system (e.g., brand name, products, services, and operating procedures) in day-to-day operations. Examples: Fast-food restaurants or business services centers.
- Product distribution franchise: In this type of franchise, the franchisee sells the franchisor’s branded products to customers. However, they do this under their own name. Examples: Appliance retailers or car dealerships.
- Job franchise: In this model, the franchisee is often the owner-operator and employee of the business. They may hire a few people, but these businesses are typically small-scale and often mobile. Examples: Cleaning or lawn care services.
- Conversion franchise: The franchisee already owns their independent business, but they agree to convert it into a branch of the franchisor’s business. The franchisor expands, and the franchisee becomes part of a larger brand. Examples: Hair salons or dental clinics.
- Investor franchise: Investors provide the necessary funding and resources to launch the business but are not typically involved in the day-to-day operations of the franchised business. They hire an onsite team for that. Examples: Gyms or hotels.
Top global franchises
Entrepreneur magazine annually ranks the top global franchises. Here are the top 10 from 2022.
- KFC, Food
- 7-Eleven, Convenience store
- McDonald’s, Food
- Dunkin’, Food
- Taco Bell, Food
- Pizza Hut, Food
- Kumon, Tutoring
- Hampton by Hilton, Hotels
- Anytime Fitness, Gyms
- Century 21 Real Estate, Real Estate
How to become a franchise business?
Becoming a franchise business takes many steps, starting with the obvious: Develop a business that people will want to franchise. Assuming that’s done, you’ll need to take the following steps.
Evaluate your business
Just as you did a lot of research to develop your business plan initially, you’ll need to take a hard look at your business operations, financials, and brand awareness to gauge your market potential.
You’ll also need to consider the alternative, opening more company-owned locations. Knowing your business objectives will help. If you want to grow rapidly, franchising may be the better route. But, if growing business profits is your aim, you may want to expand on your own so all sales go to you.
Develop your system
Franchising requires you to have a comprehensive, standardized system. You’ll need to establish your unique brand standards, operating procedures, and training programs. You’ll also need to develop marketing materials and legal documentation. Consult with legal and financial advisors to ensure compliance as well.
Franchisees will expect a franchise disclosure document (FDD) from you. Required under the federal Franchise Rule, the FDD describes your business history, management structure, legal status, and intellectual property. The FDD also outlines estimated fees for opening, operating, and terminating the franchise and details any financial assistance you might offer. You would also include data on existing franchises as well as a discussion of rights, requirements, obligations, and restrictions.
Recruit franchisees
Recruit franchisees by reaching out to your network, advertising, and attending franchise owner shows and events where you can showcase your brand and business model. You might also partner with franchise brokers.
Screening franchisees is critical. You might get caught up in expansion mode and the excitement of seeing your business go national or global, but your franchised company will be represented by the individuals you select. Develop a system to help you screen potential franchisees to gauge their active interest as well as their integrity, intelligence, and energy.
Train and support franchisees
After recruiting your franchisees, you’ll need to train them in your business operating system and brand standards. You’ll also want to provide ongoing support that helps them to operate their branches of your business successfully. This might include leadership development, marketing support, legal know-how, or operational assistance. Your business might also provide technology systems or help franchisees save money by negotiating purchase prices using your economy of scale.
Visit your franchises
As your business franchise grows, keeping consistent quality and standards can be more difficult. Monitor your franchisees to ensure they’re following your system. As you expand, you might also host your franchisees for continued training and ongoing development. This is a way to show your appreciation and bring together your many individual franchisees to create a shared community.
Get into the franchise business
Launching a business franchise can expand your business and generate additional revenue. But you’ll first need a unique brand, effective marketing strategies, and standard operating procedures that other motivated entrepreneurs can leverage.
Becoming a franchisor may be a great next move for your business. With careful planning and the help of legal and financial advisors, you can successfully navigate this complex and challenging process. Moving on to the next step of selling a franchise business? Read all about it here.
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