Introduction to the World of Franchising
Why does a company decide to franchise?
I remember when I first started in the franchise business, I was shocked at the various types of franchises that were available. Years ago, when someone said the word “franchise” your mind immediately pictured the golden arches or one of many other fast-food franchises. In fact, many people today, think that franchising is only about fast-food restaurants. Nothing could be further from the truth! There are franchises now for anything from personal care services, like Great Clips, to senior or child care services, like Brightstar Healthcare. So if a franchise can be in any industry, what are they really about and why does a company decide to franchise?
There are several ways a company can grow. They can expand their product line or add services. They can go after different markets by opening new locations. They can take their offering global or create another selling channel, like the internet. They can merge with another company that presents similar products or services. They can license their product or service….or, they can franchise their business.
I think the biggest reason to franchise, is for a company to avoid using their own capital to open new locations. Instead, they find people wanting to run their own business, and these “franchisees” contribute the capital needed to open the business location(s). That has an additional advantage….these franchisees have a vested interest and have more to lose if they don’t succeed, so they are more likely to be high-quality business-people, rather then just employees working for a paycheck.
Real estate developers also tend to favor franchises over other businesses. For example, when opening up a shopping center or strip mall, developers often like to strategically place well-known franchises in their centers because it can increase foot traffic.
If you consider the potential financial returns to the possible risks in franchising your business, the returns come out ahead in most cases, primarily because your capital investment is minimized.
Why does someone buy a franchise?
Business Ownership involves a number of day-to-day activities: helping customers, managing staff, accounting tasks, advertising just to name a few. While busy with those activities, an owner often has no time for long-term strategies or with dealing with complex situations that develop. A franchise can be the solution. With a strong franchise supporting you, they can provide a plethora of tools, software, procedures, strategies and experience. In addition, collaboration and assistance from other franchisees can give you added support in becoming successful.
What defines a Franchise?
A franchise is the agreement or license between two legally independent parties which gives:
- a person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor)
- the franchisee the right to market a product or service using the operating methods of the franchisor
- the franchisee the obligation to pay the franchisor fees for these rights
- the franchisor the obligation to provide rights and support to franchisees
Types of Franchises
There are 2 main types of franchises:
- product distribution – Franchisees simply sell the franchisor’s products. The franchisor allows the franchisee to use it’s trademark and logo, but does not provide an entire back-off support. Some examples of this are gas stations, car dealerships and food/drink distributors.
- business format – Franchisees use the franchisors product or service, and trademark. They also use the procedures and methods to conduct business as developed by the franchisor. There is often varying degrees of back-end support such as marketing plans, operations manuals, and computer systems and software.
Here are some categories of businesses with franchise opportunities:
Automotive, Home Improvements, Business Services, Maintenance, Child Development, Personal Care, Senior Services, Financial Services, Pet Services, Food Service, Recreation/Sports, Health/Fitness/Beauty, Retail, Technology
Types of Contracts
Business owners have different options when acquiring a franchise. Depending on their industry and investment levels, different arrangements are available.
- Single-unit franchise – A franchisee has the right to operate one franchise unit.
- Multi-unit franchise – The franchisee acquires more than one unit of the franchise, usually at reduced franchise fees.
- Area development franchise – This license usually grants the franchisee the right to open a certain number of franchises in a given area within a defined time limit.
- Area Director franchise (also known as, Regional Director and Master Franchise) – This franchisee has the rights to a larger area than that of an Area Developer. A master franchiser can also sell franchises and collect a portion of their royalties, making this arrangement the most lucrative option.
What are the advantages and disadvantages of owning a Franchise?
- Many offer pre-opening support which, depending on the franchise, may include training, site selection, design and construction, financing, and a grand-opening program.
- Ongoing support is typically provided and may include further training, national and regional advertising, operational assistance, supervision and management support and increased spending power
- Consumers may experience a certain level of quality and consistency because of the mandates of the franchise agreement
- The product or service provided is already established and is recognized by customers
- Collaboration with other franchisees can be beneficial
- A certain level of independence to operate their business is allowable
- Procedures are often defined and computer systems already developed and available
- A franchisee pays a one-time franchise fee, but then also has to pay ongoing royalties and advertising fees
- The franchisee is not completely independent because they must follow the mandates of the franchise agreement
- An unforeseen negative situation with the franchise could result in poor performance across the chain of franchisees
- The duration of the franchise agreement is usually limited and the franchisee may have no recourse as to the terms of the termination
What fees might I expect to pay if I owned a franchise?
Typical fees are as follows:
This is an initial, one-time non-refundable fee paid to the franchisor. This may provide training, site selection, lease negotiations, demographics, grand opening assistance and equipment/inventory/furnishings/signs needed for the business.
These are ongoing fees typically paid on a monthly basis and are often times a percentage of sales, either gross or net. They can also be fixed amounts per month. Typical royalty fees may be 3% to 35% depending on the franchise.
These are much like royalties but used specifically for advertising. They also are based on a percentage of sales or a flat amount. Typical Advertising fees may be 3% to 10% depending on the franchise.
The previous fees are almost always required by franchisors, but there may be more. These would be detailed in the franchise agreement. Some examples might be territory fees, training fees or additional marketing fees.
A franchised operation can be a win-win for both sides, the franchisor and the franchisee, whereas the franchisor can grow their business using other peoples capital and franchisees can run their own business with support of the franchisor. If I haven’t said it before, let me use the industry’s most quoted phrase, as a franchisee, “….you’re in business for yourself, but not by yourself…”.
Thank you for reading my page. If you have any interest in starting your own business, I hope that you will contact me.