A Partnership Defined: How a Franchise Works

Mar 28, 2022 | Articles, Blog, Blogs, General

Interest in franchising opportunities has skyrocketed over the past couple of years, and for good reason. If you’ve ever found yourself wondering about launching your own startup, now is an advantageous time to dig into that possibility. As with any potential business venture, it helps to know the ropes. The first thing one must always consider is that success is not automatic. Franchising is an investment and comes with its fair share of risk, just like any other investment. But by their nature, franchises are meant to be operated by following a proven business model. And they all come with a modicum of built-in support – both from the franchisor and other franchisees in the system.

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As a franchise owner, you’ll be in business for yourself, but never by yourself. Here are a few things you should know before making the jump – especially as it pertains to how a franchise operation works…

Know the Costs 

Knowing the specific costs (your personal financial tolerance) and what services are provided by the franchisor are among the first steps one should take when considering becoming a franchisee. The person operating a franchise on a day-to-day basis is the “franchisee.” As a franchisee, you’ll pay a fee to the brand, known as the “franchisor.” However, this fee does not include the initial costs to start up, like initial inventory, any equipment you may need, and your “grand opening.” You’ll also have continuing royalty payments, based on a certain percentage of your gross income. 

Know the Benefits

In return, you’ll access the format which has proven lucrative for the franchisor, and the right to use their trademarks and likenesses for the length of term (typically 10 years). In addition, the franchisor provides support in varying forms. Depending on the particular concept, this may include help with a website, finding a location (site selection), training for the franchisee and staff, management strategies, and much more.

Role of the Franchisor

Franchisors typically have a tried-and-true (proven) business model, by which they ensure consistency in the delivery of a particular product and/or service. The franchisor typically has the right to approve or refuse location sites. This isn’t a negative, as the franchisor will usually study the area and demographics extensively to determine your precise operating territory. This is done solely in the interest of bolstering success. A franchisor will also typically hold design and appearance standards to ensure uniformity across locations. The franchisor is there to guide you, so long as you abide by the standards set forth in your franchise agreement. 

Role of the Franchisee

A new franchisee is purchasing the right to do business as a representative owner within the franchisor’s system. All roles and responsibilities are set forth and explicitly stated in the franchise agreement. The franchisee’s role is to operate the day-to-day business according to the brand’s guidelines and operations manual. Franchisees receive training and ongoing support from the franchisor and other franchisees in the system. 

Weigh All Your Options

When looking into possible franchise ownership concepts and weighing your options, you’ll want to determine if a particular franchisor is a match for your lifestyle and income needs. It’s not required that a franchisor disclose potential earnings or sales, though if the franchisor chooses to share this information, they must disclose it in Item 19 of the Franchise Disclosure Document (FDD).

Pulling the Trigger

Be careful not to get stuck in limbo. Gathering all the information you need about the various franchise opportunities and then sifting through it all can be overwhelming. Don’t allow yourself to get so overwhelmed that you throw in the towel. It’s highly advisable to seek the assistance of an attorney and tax professional to review your franchise ownership plans. If everything lines up for you, and you have the support of your family, friends, and professional counsel, you have a simple decision to make.

Yea, or nay.

If you’ve yet to capitalize on your dream of business ownership and want to kick-start your entrepreneurial journey, FranNet can help you get started today by setting up a no-cost, no-obligation appointment with a qualified FranNet representative who both lives and works in your area. Together, we can find a franchise ownership opportunity that matches up perfectly with your lifestyle and income-oriented goals.