How Does a Franchise Work? Your Introduction to the Franchise Business Model
When you’re thinking about starting your first business, your research might bring up a lot of different options, one of those being franchising. But how exactly does a franchise work?
In short, buying a franchise will take out a lot of the foundational work that’s required when starting a business from scratch. It’s a way of getting a jump start on your operations.
Let’s take a closer look at the franchise business model.
The Basics of How a Franchise Works
In franchising, there are two main parties involved: the franchisee and the franchisor. The person buying into the franchise is the franchisee, and the owner of the brand itself is the franchisor.
Once you have identified your brand, done the research, and made a decision to invest, you will enter a partnership with the franchisor. The terms of that partnership will be laid out in detail in your franchise agreement.
Once you have signed all of the necessary paperwork, you (the franchisee) will pay an initial franchise fee and a predetermined royalty fee periodically as long as you operate that franchise. You’re paying for the rights to use the brand, all of its systems and processes, and for ongoing support in areas like technology and marketing.
In exchange for using all of those resources, the franchisor receives your franchise fee and royalty payments and grows its footprint (and brand recognition). It’s a mutually beneficial relationship—you get all the perks of an established business and the franchisor gets to expand its footprint and grow its brand recognition.
Different Types of Franchising Opportunities
In many cases, and especially if this will be your first time operating a business, franchisees will only want to operate a single franchise location. That’s called single-unit franchise ownership.
Once you get more settled into the day-to-day responsibilities of being a franchisee, you may end up wanting to add more locations to your portfolio. Opening additional franchises would move you into the multi-unit franchise ownership category.
If you’re really looking to step up to the big leagues, you can opt for what’s called master or regional franchise ownership. At this point, you would be acting almost like a corporate member of the franchisor. You would take control of an entire territory and sell franchises to other franchisees to operate within that territory. You would receive franchise fees from those franchises and carry out all of the training and support offered by the brand in the franchise agreement.
This is where the lines start to get a little more blurry for the novice business owner. It might start to seem more like its own separate corporation, but that’s one of the higher-level benefits of franchising. The flexibility it offers is hard to match.
The Perks of Franchising
There are a lot more benefits to franchising than just flexibility with your business type.
First, you’ll be buying into what’s essentially a turnkey system. Every process, system, and workflow has already been thoroughly developed by the franchisor. After all, the company had to demonstrate its profitability and potential for scalability before beginning to franchise.
As previously mentioned, you’ll also have ongoing support from the franchisor. All of your training will be taken care of. If any of those processes or systems change, the franchisor will help you train your team to put that new, presumably more effective system into place. That’s not to mention the power of larger-scale marketing and inventory purchasing power you’ll have access to with your franchise network.
If you go with a startup business instead of a franchise, you’ll face some big challenges early on in getting customers, simply because they’ve never heard of you. With a franchise, you’ll already have big-time brand recognition working in your favor, helping you reach breakeven and profitability more quickly.
Brand recognition can also help you when it comes to recruiting new employees. Being a known commodity could push more candidates through your doors instead of a similar business next door with a lesser-known brand name. Many franchisors also offer guidance for recruiting and hiring efforts.
Taking the Next Step
Knowing exactly how the franchise model works puts you in a position to decide if you want to try out franchising or go with a startup of your own.
While the upfront cost of a franchise may seem a bit intimidating, many prospective business owners go the franchise route because of the added convenience and peace of mind it provides. You can actually end up spending less money with a franchise because you can avoid the often wasteful trial and error spending that comes with a start-up business.
We look forward to helping you sort through all of the franchise opportunities available and narrowing it down to the one that fits you best