{Updated November, 2023}
Starting a franchise can reap many of the same benefits of starting a business from scratch, but it also offers several unique advantages. Not only do franchisees secure the use of a trusted and recognized brand, but they are also able to adopt established operations and systems that have been proven to work. If you’re going to pursue business ownership, buying a franchise can increase your probability of success.
While there are good reasons to pursue franchise ownership, you should first understand how franchises work. Keep in mind that each franchise is different. Business models, systems, and profitability will vary, so it’s important to find the franchise that best fits your goals and abilities.
How Does The Franchise Business Model Work?
In short, franchises expand their businesses by allowing franchisees to use their name, brand, system and product in exchange for a franchise fee. The franchisee owns and operates the local business and pays a percentage back to the franchisor by way of royalties. Franchisors will often provide training and support in areas such as marketing, finding a location, daily operations, and more.
Franchisor/Franchisee Relationship
While the specifics of each franchise agreement will vary, the end goal is the same. That is, two parties working together to grow and run a successful franchise business. The franchisor and franchisee both have individual responsibilities in achieving that goal.
In general, the franchisor’s role is to support its franchisees, which includes national marketing for the brand, developing new products and services, managing franchise territories, ongoing training, regular evaluations of franchisees, business advice, business development opportunities, vendor recommendations, and more.
The franchisee’s role is to run a successful business while accurately representing the franchise’s brand. This includes paying the required fees and royalties, acquiring a location for the franchise, hiring and training employees, and running the business according to the franchisor’s standards, and more.
Different Fees Required to Buy a Franchise
As mentioned already, a franchisee pays fees in order to use the franchise’s brand and systems. These include:
- Initial franchise fee – This fee gives the franchisee the license to use the franchise’s proprietary business systems. According to the International Franchise Professionals Group, “The initial franchise fee is the upfront, one-time payment the franchisee pays the franchisor when a franchise agreement is signed.” Each franchise is different, but the fee could cover: initial training, building out a location, initial marketing, employee training, and more.
- Ongoing royalties – Royalty fees go towards the maintenance and expansion of the franchise as a whole. Depending on the franchise, these fees are either a percentage of sales or a flat fee.
- Advertising fee – While this is not a guaranteed fee, franchisors will often charge their franchisees an advertising fee. Franchisors will use this money to pay for national and regional advertising campaigns
Prospective franchisees should also consider additional costs including rent, initial inventory, equipment, property improvements, furnishings, marketing, insurance, and more.
Different Types of Franchises
There are various types of franchises prospective business owners can evaluate. In fact, there are 4,000+ franchise brands that broadly fall into the following five categories:
- Job Franchise – This is typically home-based, has one owner with minimal staff, and requires a low-investment. Examples include: plumbing, cleaning services, and real estate.
- Product (Distribution) Franchise – This represents a supplier-dealer relationship. Basically, a franchisee acquires a license to distribute the franchisor’s product within their own business. Such products typically include: car parts, vending machines, appliances, and more.
- Business Format Franchise – This is the most common type of franchise where the franchisee purchases the rights to a brand while the franchisor provides the operating procedures along with training and support. Examples include: fast-food restaurants, retail, personal care, and fitness.
- Investment Franchise – In some cases, a franchisee will hire a team to run the business rather than being involved in the day-to-day operations. Examples include: hotels, large restaurants, and grocery chains.
- Conversion Franchise – Similar to a standard franchise relationship, this is when an independent business owner joins their business with a franchisor in the same industry. Industries that lend itself to this type of franchise include: real estate, professional services, and home services.
A Few Things to Consider Before Buying a Franchise
Even though there are many upsides to buying a franchise, there are several considerations to take into account before investing.
- Cost – This is one of the biggest factors as start-up fees for franchises can be higher than with other kinds of businesses.
- Commitment – You should understand that even though you will be running your own business, you are not free to run it any way you choose. You will need to abide by the franchisor’s rules in order to keep a consistent brand image across all territories.
- Research – You should do your due diligence and thoroughly investigate the franchise you want to buy. This includes reviewing the Franchise Disclosure Document (FDD) for information on franchisor and franchisee obligations, litigation and bankruptcy, estimated initial investment and fees, earning and/or sales claims, and more. Make sure you carefully review your franchise contract while seeking advice from industry experts, such as a lawyer and accountant.
Ready to Pursue Franchise Ownership?
Wondering if franchising is right for you? Take our Franchise Assessment to learn more about your entrepreneurial strengths and weaknesses. You should also reach out to an expert franchise consultant. At FranNet, we have helped thousands of entrepreneurs get started in the franchise industry, and we can help you too. At no cost to you, we will help you understand your options and guide you throughout the entire process. Schedule your free consultation to get started!
For further reading: A Consumer’s Guide to Buying a Franchise (Federal Trade Commission)