If you should own a business, but you’re unsure where to begin, franchising is likely to be a superb option. As an alternative of developing a brand latest business idea, you’ll be able to open your individual local branch of an existing business as a franchise. Here’s how it really works.
What’s franchising?
Franchising is a system through which individuals (referred to as franchisees) purchase the correct to make use of an organization’s (the franchisor) trademark. A franchise agreement typically goes beyond trademarks to incorporate the plan and method for operating the franchise business.
“It’s a playbook put together by the franchisor that features the systems, the processes, and the marketing,” says Teri Villanueva, a franchise consultant with FranNet. “After which an owner is available in and executes the model that’s already been created by the franchisor.”
Advantages of franchising
Whenever you open a franchise, you’re organising a business of your individual—but you’ve got a leg up and many support. A few of the advantages of opening a franchise include:
Brand recognition
Unlike starting a business from scratch, opening a franchise often comes with established brand recognition. Everyone knows McDonald’s golden arches mean inexpensive burgers and fries, and a blue-and-yellow IKEA sign signals inexpensive Swedish furniture.
Franchise owners are sometimes willing to pay a premium to hitch their wagon to successful, big-name brands.
Support and training
Before you open a franchise, you’ll receive extensive training in franchise operations. Franchises require consistency, so it’s within the franchisor’s best interest to show you methods to run what you are promoting.
This sort of support will be hard to seek out within the competitive world of solo entrepreneurship. Teri says franchising is especially attractive to people used to being part of a bigger organization. “When people leave the military or corporate America, you miss that camaraderie that you simply had,” Teri says. Joining a franchise offers the chance to attach with other franchise owners during training, conferences, and beyond. “You actually support one another,” she says.
Ease of financing
One in every of the toughest things about launching a brand new business is securing funding. “If any person starts from scratch, there’s really no track record for banks to have a look at,” Teri says. With franchising, the likelihood of getting approved for a Small Business Administration (SBA) loan or other financing is higher since the franchisor’s model has already proven to achieve success.
Drawbacks of franchising
Franchisors wish to expand their businesses and collect royalties, in order that they might downplay a number of the negative points of franchising. These might include:
Financial risk of owning a business
As with all business, there’s financial risk involved with opening a franchise. Although as a franchise owner you use under the franchisor’s name and business model, you’re investing your individual capital. If what you are promoting fails, the franchisor won’t bail you out.
What if the franchisor goes bankrupt? It is dependent upon your franchise agreement, but it surely’s possible your agreement will simply be voided, and also you’ll must work out what’s next on your individual. It’s a superb idea to have a lawyer look over the franchise agreement before signing anything.
Limited creative control
In case your reasons for becoming a business owner include expressing your creativity, franchising won’t be a superb fit.
“One in every of the things that some people may not like is that the franchisor dictates the services that you simply sell,” Teri says. “So in the event you say, ‘Hey, we could add this to the order, or possibly I might add this service,’ well, you’ll be able to’t.” In other words, it’s essential to be comfortable selling the products or service as is, without much of your individual input.
Royalties and franchise fees
To open a franchise, you must pay an initial franchise fee to the franchisor. You’ll also pay ongoing royalties, which may cut into your profit.
7 kinds of franchises
- Business services
- Industrial and residential services
- Lodging
- Personal services
- Real estate
- Restaurants
- Retail
When someone thinks of a franchise they often consider McDonald’s or another fast-food chain. But franchises are rather more than simply restaurants. In response to the International Franchise Association (IFA), there are about 806,000 franchise establishments within the US in a variety of industries. The IFA breaks franchises down into seven business lines:
1. Business services
Business services franchises exist to assist other businesses run easily or make it easier for consumers to get things done. They include accounting and tax-preparation franchises like H&R Block and shipping franchises just like the UPS Store.
2. Industrial and residential services
This category covers services needed to construct, renovate, and maintain homes and businesses. These franchises may or may not have a physical location and typically require equipment like a truck and tools.
Cleansing services like Molly Maid, plumbers like Mr. Rooter, and exterminators like Orkin are all franchises. This category also includes construction and renovation businesses like California Closets.
3. Lodging
Lodging franchises range from campgrounds like Kampgrounds of America (KOA) to hotels like Days Inn. These are sometimes a number of the most costly franchises to open due to their large real estate footprint.
4. Personal services
Personal services include every part from educational franchises like School of Rock to gyms like Planet Fitness, workout studios like Pure Barre, and spa services just like the NOW massage boutique and Drybar.
5. Real estate
A few of the biggest names in real estate are franchises, including Re/max, Sotheby’s International Realty, and the Corcoran Group. The actual estate industry also includes property management and residential inspection.
6. Restaurants
Whenever you consider franchising, fast food chains like Subway probably come to mind. And for good reason: McDonald’s is the largest US-based franchise when it comes to sales, generating greater than $118 billion in worldwide sales in 2023. (The biggest franchise system by variety of outlets is Subway.)
Quick-service restaurants (QSRs)—or restaurants that don’t have a full dining area—aren’t just the most important franchise industry, they’re also growing. In 2023, 21% of recent franchise concept lines were QSRs.
Restaurants that supply table service are referred to as full-service restaurants (FSR) and include establishments like California Pizza Kitchen, the Counter, and Ruth’s Chris Steak House.
7. Retail
Retail franchises sell goods. This business line includes retail bakeries like Nothing Bundt Cakes, grocery stores like Grocery Outlet, furniture stores like Loosen up the Back, IKEA, and La-Z-Boy, complement stores like The Vitamin Shoppe, florists like 1-800-Flowers, and secondhand shops like Plato’s Closet.
The way to open a franchise
Opening a franchise is different from starting your individual business from scratch. Here’s the way it often works:
1. Plan
Determine what you should get out of franchising. “Everybody has a very different driver,” Teri says. “I all the time ask, ‘What’s your why for business ownership? What do you wish the business to do for you and your loved ones?’”
Narrow your options by asking yourself practical questions like:
- How are you going to finance your franchise?
- What’s your net price and liquidity? (This can determine in the event you meet the franchisor’s specifications.)
- How long do you should own your franchise? (Franchise agreements typically have strict rules about how you’ll be able to sell your franchised business.)
2. Research
Once what you’re on the lookout for in a franchise, you’ll be able to start comparing your options. Teri says the research process can take a prospective franchisee anywhere from 60 to 90 days. You’ll get information from three fundamental sources:
- The franchise disclosure document (FDD), which is a public, legal document providing information just like the franchisor’s financials and expectations of the franchisee (including the franchise fee and royalties)
- Conversations with the franchisor’s representatives
- Talking to current franchisees about their experiences
3. Commit to a territory
When you’ve selected a franchisor, the subsequent step is to pay the one-time franchise fee to secure your franchise location. You’ll be able to’t open franchise locations just anywhere—the franchisor decides which regions are eligible for brand new franchises after which breaks those regions up into exclusive territories to forestall market oversaturation.
“When you commit to a territory, that’s yours and nobody else can are available in,” Teri explains. If what you are promoting is a brick-and-mortar, your physical location will likely be inside your territory’s boundaries. If you happen to don’t have a physical location, you’ll provide services inside your territory.
4. Attend training
The length and format of coaching varies, depending on which franchise you choose to open. Training may consist of a web-based course or in-person training at headquarters or a regional office.
Teri says that one in every of the largest misconceptions about franchising is that franchisees need experience of their industry. “[The franchisor is] going to coach you on whatever the particular industry is and the way the model works, the way it performs most efficiently,” Teri says. “So that you don’t must have experience. That’s what you’re paying for—the support from the franchisor.”
5. Set protocols for a smooth open
If what you are promoting is a brick-and-mortar, you’ll need to seek out a location and construct out the space. In some cases, the franchisor will aid you select a location. Other franchisors may require you to buy a location they’ve already chosen and built out.
If what you are promoting doesn’t have a physical location or operates out of a small office, then you definately’ll have the opportunity to open more quickly.
You furthermore mght might need to buy equipment, corresponding to a van for mobile pet-grooming, or carpet-cleaning machines for a rug-cleaning business, but some franchises require little greater than a laptop and a phone, corresponding to a travel agency. The franchisor may require you to buy equipment and materials from specific vendors.
When you open what you are promoting, the labor begins. “Regardless that the system’s been created for you, you continue to must get on the market and promote what you are promoting,” Teri says. “You could have to rent the correct people. You could have to spend on marketing and all those things.”
The way to start a franchise FAQ
Can anyone open a franchise?
Most franchise opportunities are usually not available to everyone. To open a franchise, you’ll need to satisfy the franchisor’s net price and liquidity requirements. For instance, you’ll need a net price of $3 million and $1.5 million money to open a Planet Fitness, but you’ll be able to start a travel agency from home with just $3,500.
What’s the difference between licensing and franchising a business?
The difference between licensing and franchising is that licensing involves paying to make use of a business’s trademark; franchising includes the trademark but in addition the business model and an ongoing business relationship. Licensing is common with products, while franchising is common with service-based businesses.
What fees do you pay for owning a franchise?
To own a franchise, you’ll pay a one-time franchise fee plus ongoing royalties and marketing fees. These fees vary significantly by franchise.
