Introduction to Franchising
Don’t be fooled into thinking you have to start a business from scratch to be a business owner, or that you’re not an entrepreneur unless you go it alone. That’s nonsense. Being a franchise owner is one of the greatest ways to achieve business ownership and satisfy your entrepreneurial spirit.
What is a Franchise?
The first and most important subject we address in this guide is what a franchise actually is. What makes it different from your typical startup or independent business?
A franchise is an arrangement where the owner of the brand and business model gives you the right to use said brand and business model (with all attending trademarks, products, systems, etc.) in exchange for money. In the franchise system, the owner is the franchisor and you are the franchisee.
This is how a franchise comes to be: an entrepreneur starts an independent small business, and over time refines it into a successful and stable business model. Let’s call this entrepreneur Alex. Alex realizes the efficacy of what she has built, and wants to expand it. She could do this by opening more branches herself, or she could sell her business model (and all attending perks) to another entrepreneur.
Sam wants to be his own boss, but doesn’t necessarily want to deal with the trial and error of starting his own business from scratch. He wants to use somebody’s business model that has already been proven, with a brand that has widespread recognition. Sam can purchase Alex’s brand and business model. Sam then opens a franchise location and runs his business according to the model Alex developed. He gets to use a market-tested brand, marketing materials, business model, techniques and products. In this situation, a franchise agreement is a win-win for both Alex and Sam. Alex gets to build her brand and wealth by expanding through a franchisee, and Sam gets to become his own boss with a proven business model (and without the risk and unknown that can come with a startup).
For the use of her brand, Sam pays Alex some form of a one-time franchise fee, and typically an annual percentage of revenue as a royalty. This payment structure differs with each franchise — we’ll cover the costs of franchise ownership in depth in Chapter 5.
The Difference Between Franchising, Chains & Licensing
How does franchising differ from a chain or licensed business? The concepts are similar, but each has specific qualifiers that hold it apart.
A chain is a group of identical businesses that use the same logo, products, marketing, etc. (just like a franchise) where each individual location is owned by the parent. This means that a location can have a store manager who runs day-to-day operations, but that person does not own the business. With a franchise, as we know, each location is owned by the individual.
Restaurants are the most common form of this, but not the only option. Costco and Walmart are chains: multiple locations, each owned by Costco or Walmart’s central business structure.
A licensed store has slightly more subtle differences. It is very similar to a franchise in that the brand owner (licensor) gives permission to the individual (licensee — are you sensing a theme here?) for the brand to be used and products to be sold, but the structure and fees associated differ widely. Typically, the licensor has little to no operational control of the licensee, and the licensee receives significantly less training from the brand. Additionally, there is typically no one-time fee upfront, like with a franchise. Instead, an ongoing licensing fee is typically assessed.
An excellent example of licensed stores are Starbucks that appear inside of other stores, like a Target or Safeway, often in the form of a big kiosk rather than a self-contained space. These mini-Starbucks still carry all of the same coffees, snacks, and merchandise, but they are not held to the same standards as traditional Starbucks locations. Nor are the Target Starbucks baristas employees of Starbucks: they’re employed by Target.
The Pros and Cons of Franchise Ownership
Naturally, all business opportunities have their pros and cons. This list will help you make an informed decision on whether or not franchising is the right options for you.
Of course, it’s important to do your due diligence on any franchise you’re looking into. For you, some of these cons may be benefits, and vice versa.
Pros
Proven business model. Alex has already gone through months or years of trial and error to refine her business model. Often, being a franchisee removes much of the risk inherent with a startup, because the franchisor has already made mistakes. You get to reap the knowledge from those mistakes without having to make them yourselves. (Of course, any type of business carries risk, franchises included. Franchises are not a magical, success-insured investment.)
Market-tested products or services. The product or service has already received feedback from the market — it’s already passed through the first few rounds of trial by fire. And again, you get to reap the rewards of those mistakes without having to pay for them yourself.
Brand recognition. One of the most difficult aspects of running a small business is bringing customers in the door. With a franchise, the brand is often already nationally recognizable. One obvious example is Subway. Or a more recent example is Menchies. Your franchisor has already worked to build the brand you’ll be using so you don’t have to.
Territory security. When you purchase a franchise location, you also receive a specific geographic territory. This means your franchisor won’t sell another franchise location too close to yours — they don’t want their franchisees competing with one another for market share, and neither do you. You can even purchase multiple territories at once, if you want to expand your number of locations.
Marketing support. Along with brand recognition, the franchisor will often provide marketing slogans, images, content and support with building your strategies and budget. Some franchisors even have national or international marketing campaigns that they run on behalf of their locations.
Training program. Training programs are typical built into a franchise system to give you a solid understanding of the business model and strategies for running a location.
Operational assistance. Many franchisors have a team dedicated to ongoing support for you and your location. They’ll answer your questions and assist with the many details that come with their franchise brand.
Built-in support system. Last but not least, being a franchisee means you have a built-in support system of other franchisees. The brand will have online forums and annual conventions where franchisees can come together, answer questions, trade tips and tricks, etc.
Cons
Rules and regulations. There are specific rules around how, when and where to operate your franchise location. These rules apply to every franchise owner, and are in place to ensure the brand remains true and uniform. They restrict the franchisor’s freedom to do whatever he or she wishes.
Fees and royalties. Purchasing your location can be expensive — even more so than buying an independent business or building your own. Franchisees also typically owe a percentage of revenue back to the franchisor in the form of a royalty.
High start-up costs. Outside of the franchise fee, the cost of actually getting your doors open can be very high. Typically, a franchisee is required to procure equipment and materials through the franchisor. This can occasionally be more expensive than if the franchisee had the freedom to choose a different supplier.
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