Entrepreneurs looking to pursue a business venture often ask the question what is a franchise? Many have a loose definition of what a franchise is, but the international franchising association provides a more technical definition.
Franchising is a business model in which the goal is to expand goods and services through a licensing agreement. One party acts as a franchisor while another is the franchisee. The franchisor is the person or company that allocates a license for the franchisee to conduct business under stipulations of the franchise agreement. Operational systems like a brand, trademark, operating methods, support, and use of products & services are outlined in the franchise agreement. In other words, a franchise is a business concept where a party buys the rights to use a proven method of operating. Think McDonald’s, The UPS Store, and Dr.PhoneFix. These franchises are staples within the United States economy. Business format franchises account for more than 13.2 million jobs, $1.6 trillion in economic output and 5.8 percent of the Gross Domestic Product (GDP).
At 20.8% of the entire franchise industry, are quick-service restaurants. Quick-service restaurants like Jimmy Johns, Chipotle, and Panera Bread are examples of franchises within this sector. Owning a quick-service restaurant typically requires costly initial investments. Yet owners can collect an equally high return on investment (ROI). Next, at 12.6% are maintenance franchises. Sectors like lawn care, tech repair, and cleaning services fall into this bracket. The startup costs are lower and industry growth is reliant on market trends and technological development. The third most popular franchise model is personal care. Franchises devoted to consumer demand from cosmetics to fitness clubs operate within this sector.
Finding the right franchise takes research into the marketplace to find a good investment. You should also identify your own interests and skill-sets.
How to Get Involved in Franchising?
The way it works, is an individual looking to become a business owner researches through the 3,000 various franchise concepts available. You can begin searching online—perusing different franchise portals for an initial research. Identifying what industry and sector you are interested in will require some introspection. Figure out what your professional skills are and where your passion lies. Once this person hones in on a few franchises that fit their goals, they can begin more intensive research. Attending ‘discovery days,’ visiting headquarters, and speaking with current franchisees is part of this process. Once you decide to move forward with a particular franchise you sign the Franchise Disclosure Document (FDD). Once this happens the opening process begins.
The franchisee pays a franchise fee and ongoing royalty fee. Royalty fees can be annual, quarterly, or monthly. Some franchises also charge for a marketing royalty fee or sell marketing packages.
Types of Franchise Models
Business Format Franchises
The Business format franchise model is the most typical format. This model account for 80% of the industry. The system of this model operates with a franchisor selling the rights to the brand, trademark, and business systems to the franchisee. The franchisee develops this package to provide services and products to customers. Underneath the umbrella term business format, are various operational models—methods of how business is conducted.
Single-Unit Franchise Model
A single-unit franchise model system is when a single-party buys a brick-and-mortar location from a franchisor. The franchise owner operates the store within the terms of the franchisor’s regulations. Once a shop becomes successful the franchise owner can expand and open another location.
An area developer franchise model allows entrepreneurs to develop a package of locations in a domestic area. Panera Bread uses this model. The franchisee agrees to open an agreed number of businesses within a specific amount of time. The area developer is regulated by stipulations of the parent company. A typical contract mandates a franchisee to develop an area within five years.
When a franchise model expands abroad—spreading into international territories, a master franchise model expands the company. The master franchisor handles training and support of newly established overseas.
Product Distribution Franchising
A product franchise model revolves around manufacturers controlling the retail stores that distribute their products. This form of contract—licensing—allows store owners to use a trade name or trademark. Store owners pay a fee to the manufacturer for the rights to use the trademark for signage and advertising. This system is also known as traditional franchising. This business format is popular in the automotive, gasoline, and bottling manufacturers.
Why is Franchising So Popular?
The franchise system is prominent because the business format has been previously proven in the marketplace. The model is the best way to start a business for a person looking for a career change. Systems of operation are refined, and franchisors provide support—giving franchise owners an edge over independent business competitors.
A company brand tells the ‘story’ behind the business. Brand loyalty can be a huge advantage. Customers more than likely have already experienced and interacted with the brand and will know what to expect. Customers’ brand loyalty stems from this experience. One of the most famous brands is McDonald’s. The iconic golden arches, red & yellow color-scheme and mascots all serve as part of the franchise’s brand. An identifiable brand helps customers trust a small business’s practices because of the standards and implications of the brand.
Franchisor support is also integral to opening a business. Not only are all the operational systems in place, but a reputable franchisor should provide assistance. Franchisors provide support with finding a location, training yourself & your management team, research & development of products & services, establishing a relationship with vendors, and marketing & advertisement.
Hiring a staff to develop and execute marketing campaigns is expensive. Social media marketing, search engine optimization (SEO), and other inbound marketing tactics need to be performed by individuals with expertise. Within franchising relationships, the company’s headquarters will handle marketing. A franchise system allows for the franchisor to handle overarching operational tasks while the franchisee focuses on their local community.