What is a Franchise?
By definition, a franchise is a method of distributing products or services that involves a franchisee and a franchisor. The franchisor establishes the brand’s trademark and a business system, while the franchisee pays a royalty fee for the right to do business under the brand name and working system.
The franchise model involves the franchisor providing the franchisee with an entire business system to work with, including site selection and development support, operating manuals, training, brand standards, quality control, a marketing strategy and business advisory support.
Franchise Facts and Stats
The International Franchise Association’s (IFA) annual Economic Outlook Report suggested that franchise businesses contributed $670 billion to the economy in 2020 and represent 3% of GDP. Despite the COVID-19 pandemic, franchising is projected to open more than 26,000 locations and add 800,000 new jobs in 2021.
The Franchise Business Model
The franchise business model is by no means new. It actually has roots that can be traced back to ancient China and the Middle Ages. Back in the time of the Middle Ages, a landowner would give the rights to a peasant or serf to do business in their domain. These rights and rules contributed to European Common Law. The more common form of the franchise business model is believed to have begun with Benjamin Franklin in 1731, when he entered the first franchise agreement with Thomas Whitmarsh to provide printing services in Charlestown, South Carolina.
Fast forward to today, and franchising generates trillions of dollars of economic activity and employs millions of workers. The franchise business model has created opportunities to generate wealth and change lives for the better.
Types of Franchises
While fast food comes to mind when most people think of franchise opportunities, there are franchises in virtually every industry imaginable. For example, the top 10 franchise industries include:
- Advertising and marketing
- Building and Storage
- Child care
- Computer and Internet
There is something for everyone in franchising. On top of being profitable, franchises can also do good. For example, there are many eco-friendly franchises that offer sustainable solutions for environmentally-conscious customers. For dog lovers, there are an array of franchises at most any investment level. And you don’t have to work year-round to own a franchise. Seasonal franchises can be successful and they come with unique perks. There are many franchises in a category by themselves that you probably never heard of. There are brands that cater to children and others that focus on wellness. The possibilities are truly endless.
Buying a Franchise and Franchise Consultants
Investing in a franchise opportunity can be a huge life-changing step. To help make the right choice, you can call on the services of a franchise consultant to help guide you through the process. By definition, a franchise consultant serves as a trusted advisor and expert to aspiring business owners. They are a critical part of any potential franchisee’s decision to invest.
Before making an investment in a franchise, consider the following:
- How much can you invest? How much can you afford to lose?
- Are your skills an asset to the business?
- What are your goals for the franchise?
If franchising sounds like an industry for you, there is nothing stopping you from taking the leap into it.
The pros and cons of buying a franchise
Starting a business from scratch can be a long and challenging process. That’s why so many people invest in franchise opportunities. By investing in a franchise, you can mitigate the risk that comes with starting a business from scratch. However, franchising isn’t for everyone.
Before investing in a franchise, consider the pros and cons.
When you invest in a franchise, you invest in a business with a proven concept that has seen success. As a franchisee, you can see the numbers and get insights from other franchise owners who run the same exact business.
Brand recognition is a major benefit of buying a franchise. For example, when people are traveling, they will gravitate towards the familiar. People know what they are getting from McDonald’s for breakfast versus an unknown coffee shop.
When you invest in a franchise, you can start a career in an entirely different industry without having to go back to school. For example, suppose you are interested in getting into the fitness, beauty, or adult care industries. In that case, you don’t have to go back to school because the franchisor will provide you will all the information and training you need to run the business. If you are tired of the industry you’re in and don’t have the time to go back to school, franchising is an excellent option.
Training and Support
As a franchisee, you receive the support and training needed to run the business. In addition to ongoing training and education, the franchisor can also help you in a lease negotiation. Some franchisors even offer call centers and administrative support.
There is no guarantee of success in any business. But franchising increases your chances of success by becoming a part of a proven working franchise system. With a proven method in place, the franchisee can better predict how the business will likely run on an annual basis.
Under the Federal Trade Commission’s (FTC) rules, the franchisor must charge a franchise fee for the business to be considered a franchise. This fee averages about $35,000, more or less. Although this sounds steep, the fee gives the franchisee use of the franchisor’s system and the right to use the franchisor’s name.
Another fee that a franchisee is responsible for is the royalty fee, which is calculated based on the franchise’s revenue. This fee typically ranges from between 4%-12% or even more. The idea behind this fee is that the franchisee and franchisor can share in the business’s success. While some franchises charge a fixed price, covering ongoing support and other resources, many franchisors charge an additional advertising fee.
Less Creative Control
When you buy into a franchise, you have to follow the proven system. After all, why else would you invest in a franchise? This means that you cannot be creative with the look and feel of the logo, or add menu items, for example.
Depending on the brand, scaling a franchise business could be challenging and dependent on what’s available. The franchisee and franchisor agree on an assigned territory to operate the business in a franchise agreement. This territory can be calculated by the population, county, or square mile.
As the saying goes: one bad apple can spoil the barrel. This rings true for franchising. Since all units in a franchise are connected in a system, lousy press from one unit can impact the entire franchise system.
Great articles on franchising:
- Timing is everything when buying a franchise
- 5 Questions to ask yourself before buying a franchise
- Managing fear when buying a franchise
- Things to consider before entering a business partnership
- 5 side hustle ideas you can do from home
- Working after retirement: Invest in a franchise
- Franchise Opportunities for Veterans
- Franchise Opportunities that offer Veteran Discounts
- Why work with a franchise consultant?
- 25 Questions to ask a franchisor when evaluating a franchise opportunity
- Navigating the franchise validation process