Everything You Need to Know About Franchises
What is a Franchise?
Most people have heard the word ‘franchise’ before, but not everybody can explain what a franchise is. A simple explanation is that a franchise is a contract between a company (franchisor) and the owner (franchisee). The franchisee runs their own business but takes advantage of the resources and branding of the franchisor. In exchange, the franchisee has to follow the rules and guidelines set by the franchisor.
A franchise can follow any type of business model. Examples of franchises include tax preparation, business brokers hair salons, clothing shops, and car dealerships.
Franchising a mutually beneficial relationship for both franchisor and franchisee. Companies get to increase their footprint without worrying about managing many locations. Business owners get access to an established brand and proven business model.
What are the Advantages of a Franchise?
Owning a franchise can offer several advantages, especially to new business owners.
Most franchises are turnkey operations and include everything you need to get started. All you need to do, as a franchise owner, is to open the door and provide excellent customer service. Most franchises provide a business plan that includes everything you need to get started. You’ll get guidance on where to buy supplies and equipment and how to hire staff.
Savings on supplies
Most franchises have established links with supply companies. The combined buying power of hundreds of stores means lower prices for franchisees. The lower your costs, the higher your profit margin, and the more profitable your business will be.
Access to branding
Many franchises are common household names with international brand-name recognition. By buying into a franchise, you get access to this brand-name recognition. Franchises often have an established customer base that is loyal to the brand. This brand loyalty offers an excellent head start when you open up your first location.
As a franchise, you’ll also get the benefit of marketing strategies done by the parent company. While you may need to pay into a marketing fund, the rewards are well worth the initial investment.
Established business model
One of the most appealing factors about franchises is that they come with a proven business model. It’s an excellent way for novice entrepreneurs to learn from the best without having to make costly mistakes. Instead, you get all the instruction and support from the parent company to run your business smoothly.
Most franchisors have a vested interest in seeing your business succeed. They will provide initial training to get you up to speed with managing a business, and will also help out if you run into any problems.
What are the Disadvantages of a Franchise?
Unfortunately, running a franchise does come with some downsides. How much these downsides impact your business will depend on the type of business owner you are. Independent owners may find some of the disadvantages challenging to handle. Understanding the drawbacks will help you decide whether a franchise is the right choice for you.
Franchisors have a strict set of rules and guidelines on how their franchises should operate. These rules and guidelines apply to every level of running the franchise. Most franchises have guidance on location, opening hours, signage, the layout of the shop, and even product pricing.
One reason for this high level of control is to maintain a consistent look and feel. Since franchises rely so much on brand-name recognition, customers need to get a consistent experience. That’s why franchise shops are the same around the world.
Unfortunately, this level of control also comes with some drawbacks. The biggest is that individual franchise owners aren’t able to adapt to changing market conditions. Franchise owners can’t change pricing or buy from different, cheaper suppliers. The one-size-fits-all mentality may soon start to chafe.
High initial costs
Buying into a large, well-known franchise can be incredibly expensive. While the initial franchise fee may be small, most franchises have to assume all the costs of the business. These costs include purchasing equipment, renting a location, and hiring staff. They can quickly add up and can be the same as starting your own independent business.
An excellent way to reduce these initial costs is to work with a smaller franchisor. These companies tend to have more reasonable up-front fees and will have lower set-up costs. Smaller franchisors are also more supportive since they have fewer locations to manage.
Franchisors will also collect a percentage of your earnings each month. The exact amount will depend on your franchise agreement. You will also have to pay into an advertising or marketing fund, and these ongoing costs can quickly add up to a large part of your monthly income.
Types of Franchise
There are several different types of franchises, apart from the one we’ve discussed so far. Most follow the same basic principle but vary in investment level, operations, and the franchisor’s strategy.
Business format franchise
The business format franchise is the most commonly known type of franchise. In this agreement, the franchisee gets the rights to the franchisor’s trademark. They also get access to the business operating model. This model often comes with a detailed plan of how to run and manage the business.
A product franchise is an agreement between a supplier (franchisor) and a dealer (franchisee). The franchisee agrees to distribute the franchisor’s products. In return, they get the rights to use the parent company’s trademark.
Most product franchises don’t come with a detailed business plan. Instead, the franchisee can run the business as they see fit, as long as they only sell their franchisor’s products. Car dealerships are the most prominent example of a product franchise.
A job franchise is a low-investment opportunity where the franchisee runs their franchise alone. These franchises tend to be service-oriented. Examples include plumbers, lawn care services, or corporate event planning. The franchisee doesn’t have to buy a lot of equipment or stick to a set business model.
Almost any business has some type of franchise opportunity. It’s a good idea to choose a franchise in a niche that you know. If you’re an accountant, you may not enjoy running a restaurant. Franchise organizations are a great place to start looking for your first opportunity.
Loyalty Brands is a franchise organization working in the United States. It has several franchises under its umbrella, including ATAX and First Choice Business Brokers. These franchises focus on giving customers vital financial and business services. These services include tax preparation, business advice, and business brokerage.
The main benefit of working with a franchise organization is that you get consistent support. For instance, Loyalty Brands offers franchisees the opportunity to be part of the Loyalty Network. This network spans the majority of the United States, with events in Las Vegas and Virginia Beach. These events allow franchisors and franchisees to mingle and form relationships. You can take advantage of these relationships to grow your business even further.
Applying for a Franchise
The first step of buying a franchise is to do your research and find a niche that you love. Hundreds of business models form franchises and you’re not limited to just retail or restaurant opportunities.
Once you’ve found a franchise that interests you, you’ll have to follow the relatively simple application process. Most franchises will have online forms to fill in to start the process. These forms can get very detailed, so set aside some time and complete them as thoroughly as possible.
One of the significant parts of these forms is your financial information. Franchisors need to know what your current situation is, and whether or not you can afford a franchise. Remember that franchise costs, especially initial costs, can be high. Few businesses start making money from day one, so you need to be sure you’re in a situation where you can live off your savings for a few months.
Once you’ve submitted your form, you should hear back from the franchisor within a week, and often much sooner. The interview process will feel similar to a job interview since the franchisor wants to make sure you’re a good fit for the business.
When you pass the initial screening test, the franchisor will send you a franchise disclosure document (FDD). This document outlines the details of a franchise. You’ll have at least two weeks to review this document before deciding to sign the final franchise agreement. You can view this time as your opportunity to interview the franchisor and make sure they’re a good fit for you.
Most franchisors will hold ‘Discovery Days,’ where they meet with prospective franchisees. These days give you the chance to meet with major players in the franchise. Take this opportunity to start developing relationships with corporate leadership and other franchisees.
If at the end of the process, you decide that the franchise is the right way to go, you can commit by signing the franchise agreement.
What is a Franchise Agreement?
The franchise agreement is the formal, legally-binding document. It outlines the relationship between the franchisee and franchisor. While individual franchise agreements differ, they all have some aspects in common:
- Overview: this section briefly summarizes the parties involved in the agreement. It also outlines the ownership of IP and the obligations of both the franchisor and franchisee
- Duration of the agreement: franchise agreements tend to be long-term relationships, often lasting 10 to 20 years. This section also covers the franchisee’s rights to enter into new agreements
- Initial and continuing fees: apart from the initial franchising fee, franchisees also have to pay monthly royalty fees. The agreement also covers all additional fees, such as marketing funds that the franchisee has to pay
- Territory: this section clarifies all aspects related to territory. These aspects include details about alternative distribution sites and internet sales. The section also covers whether you get exclusive or protected access to a territory
- Use of intellectual property: one of the main benefits of signing a franchise agreement is the use of the parent company IP. This section outlines how the franchisee can use the IP. It also outlines the franchisor’s ability to change the IP as they see fit
- Record keeping and the right to audit: all franchisors have the right to access and audit any records that franchisees need to maintain. This section also outlines the software franchisees have to use as part of their daily operation
- Site selection: in most cases, the franchisee handles finding, securing, and developing the location. The franchisor must approve the site and development in keeping with brand standards.
These are just some of the key areas covered by the franchise agreement. A good agreement will also cover more niche questions that you may not have thought would matter. These aspects include transfer rights, resale rights, termination, successor rights, and many others.
If you plan to sign up for a franchising opportunity, get in touch with an attorney to ensure that you understand every aspect of the agreement. Doing so will prevent you from discovering nasty surprises later on when you can least afford to.
Franchises are a great way for new business owners to get started. Most good franchisors offer comprehensive business plans to get their franchisees started. In most instances, you can expect ongoing support as well. Since franchises have an established business model, there’s less chance of making costly mistakes. Instead, you can take your time and learn how to run a business.
The main drawback of franchises is that they take away your independence. Some people go into business to get away from people telling them what to do. Such people will often resent the restrictions that come with running a franchise.
Before you commit to a franchise, do your research. Understand the advantages and disadvantages, as well as the costs involved. Franchises are great for new and established business owners and can be the right choice for you too.