Franchising has proven to be a resilient industry that continues to grow even amidst economic uncertainty. The International Franchise Association (IFA) forecasted that franchise establishments will increase by 1.9% and total franchise output will increase by 4.1% in 2024.
Franchising is an attractive business opportunity for entrepreneurs because it offers a proven concept and already established processes. There are various types of franchising models, but a “business format franchise” is the most common.
What is a Business Format Franchise?
This is the type of franchise you would normally think of when talking about franchising. The goal of this format is to replicate a proven business model, so the franchisor will provide everything from detailed business operating procedures to ongoing training and support. The franchisee purchases the rights to the brand while adopting the franchise’s business model including a standardized system for operations, services provided, local and national marketing strategies, and more.
Examples of this type of franchise include:
- Fast-food restaurants
- Coffee shops
- Retail businesses
- Fitness centers
- Service businesses
3 Unique Advantages to a Business Format Franchise Model
#1 – Complete Operational Blueprint
While this type of franchise doesn’t give franchisees the option to deviate from the business model and operating procedures, having a blueprint to follow is also a great advantage. Franchisees will receive detailed guidelines on every aspect of the business. This includes day-to-day procedures, employee training, supply chain management, customer service, and even the store’s layout. This step-by-step playbook benefits franchisees in several ways including:
- Opportunity to start with a proven system
- Less guesswork = minimized stress
- Reduced risk compared to starting a business from scratch
#2 – Brand Consistency and Recognition
Because franchisees are strictly required to adhere to brand standards with this type of franchise, it ensures that the customer experience is identical across all franchise locations. Of course, a poor franchise brand can lead to negative customer experiences at all locations, so it’s important to choose a franchise with a well-trusted brand. Joining a business format franchise with a strong brand provides franchisees with a competitive edge that comes from strong brand recognition and customer loyalty.
#3 – Extensive Franchisor Support
In order to ensure operations are consistent at every franchise location, the franchisor will provide support that extends beyond the initial training. This includes continuous assistance in areas such as marketing, operations, employee training, technology upgrades, and more. This level of support is unique to the business format model because the franchisor’s goal is for every franchise location to perform consistently well. As a result, franchisees won’t have to navigate challenges on their own, and they’ll have the resources they need to adapt to changing market conditions, new technologies, and customer preferences.
5 Steps to Owning a Business Format Franchise
#1 – Research Franchising Opportunities
There are thousands of franchise opportunities out there, and it will take some research to find a good fit. Start with the following steps:
- Identify Your Industry of Interest – You should look into industries that align with your passion or professional experience.
- Compare Franchise Opportunities – Various factors to consider when doing this include initial costs, franchise fees, the franchisor’s reputations, and the brand’s growth potential.
- Understand Market Demand – Market research is essential because not all franchises will perform the same in every region. You should evaluate the demand for the franchise’s products or services in your desired location.
#2 – Review the Franchise Disclosure Document (FDD)
The Franchise Disclosure Document (FDD) is a document provided to prospective franchisees that provides an in-depth look at the franchisor’s business practices and financial performance. It is helpful for making a well-informed decision about which franchise to join. Key sections of the FDD to review include:
- Fees and Initial Investment – Detailed breakdown of all costs, including initial franchise fees, royalty fees, marketing contributions, and other expenses.
- Franchisee Obligations – The responsibilities you’ll have, including operational requirements, reporting obligations, and purchasing rules.
- Franchisor’s Financial Health – The financial condition of the franchisor, which is crucial for understanding the stability and growth potential of the franchise.
- Litigation History – Information on any legal actions involving the franchisor, which could be potential red flags.
- Franchisee Performance – Data on the success or failure of other franchisees, including revenue ranges, profitability, and closure rates.
#3 – Calculate the Initial Investment & Explore Financing Options
Naturally, securing adequate financing is an essential step to buying a franchise. First, you’ll need to determine how much it will cost to get the franchise up and running. Financial considerations include:
- Franchise Fees – The initial franchise fees are for the right to use their brand, training, and support.
- Real Estate & Build-Out Costs – In some cases, you’ll need to lease or purchase a location and cover renovation costs to meet the franchisor’s standards.
- Equipment & Inventory – You’ll need the upfront capital to purchase equipment, technology, and inventory to start operating.
- Working Capital – You’ll need sufficient capital to cover initial operating expenses such as payroll, rent, and utilities before the business becomes profitable.
#4 – Conduct Due Diligence
Buying a franchise is not something you do on a whim. It’s a significant investment of time and money so it’s important to be certain of your decision. A few steps you can take include:
- Speak with Current Franchisees – Getting in contact with existing franchisees is a great way to gauge a franchise’s potential. You can ask specific questions about their experience, profitability, challenges, and franchisor support.
- Visit Franchise Locations – This will give you the chance to see how they operate, how customers respond to the brand, and whether or not the franchise enforces adherence to the business format. If you’re seriously considering a franchise, you should make plans to attend Discovery Day.
- Consult with Professionals – Hire a franchise attorney and accountant to review the FDD, franchise agreement, and financials. They’ll provide valuable insights that will help you decide if the franchise opportunity aligns with your goals.
#5 – Sign the Franchise Agreement
The franchise agreement is a legally binding contract between the franchisor and franchisee outlining the rights and obligations of both parties. Depending on the franchise, negotiating the agreement may or may not be an option. Either way, you should do the following:
- Understand the Terms – This includes your responsibilities as a franchisee, the franchisor’s level of control, and the duration of the franchise term.
- Confirm Franchise Territory – Ensure the agreement specifies an exclusive territory that protects your market from other franchisees.
- Examine Renewal & Exit Clauses – Understand what happens at the end of the franchise terms and if you have renewal options. Review any exit clauses, such as the franchisor’s right to repurchase the franchise or restrictions on selling the business.
Is a Business Format Franchise Right for You?
Are you thinking about buying a franchise? As the most common type of franchise model, a business format franchise is a good option to consider. FranNet is here to help you find the right opportunity. One of our expert franchise consultants will work with you to determine your interests and financial abilities in order to find the perfect match. Our services won’t cost you a dime. Schedule your free consultation today to get started!