Franchise Business Basics

Elizabeth Macauley

The amount of time, effort and money it takes to start a business can be overwhelming. That’s why many budding entrepreneurs consider opening a franchise instead of creating a company from scratch.

Small business owners with a franchise can easily deliver products or services by following a franchise’s specific:

  • Brand
  • Name
  • Operation style
  • Trademark
  • Processes

While this makes it easier to establish a successful business early on, you’ll still need to pay initial fees when you open a franchise. These usually include annual licensing fees.

Franchise Business Basics

Franchises come packaged for success. But before you jump into opening one, it’s important to understand how they work. Some basics of owning a franchise include:

  • Contract agreements — The foundation of your franchise is the contract you have with the franchisor. This franchise agreement will state renewal rights and cancellation policies. It’ll also include the franchise fees you’ll owe after you open.
  • Contracts are temporary — Your contract will be like a lease or rental of a business and will usually only last from five to 30 years. If you violate or end this contract early, you’ll likely face consequences.
  • Business advisory fees — When you work with a franchise, you’ll also need to pay your franchisor for training, equipment and business advisory services when you first open.
  • Ongoing fees — As a franchisee, you won’t keep all your sales income. Some of what you make will go to your franchisor in the form of royalty payments, which are based on the percentage of your revenue. You’ll also need to pay marketing fees.
  • State and federal laws will apply — In the U.S., states regulate franchises. There are also regulations established by the Federal Trade Commission (FTC) that will impact your business.

What You Need to Know About Buying a Franchise

Opening a franchise is a big commitment. Here are some things to consider before jumping in:

  • Costs — Certain types of franchises can be more expensive than others. You’ll need to account for the cost of the opening inventory and required working capital, as well as ongoing fees and payments.
  • Franchisee experience — It’s important to know what you’re getting into. By talking to other franchise owners, you can get an idea of the daily demands of a franchise business. How many hours are they working? Has their income matched expectations? What has been their experience in hiring qualified staff? Have they had any issues with the franchisor? Ask about the challenges they face and how they handle them.
  • Your goals — Before you purchase a franchise, you’ll want to have an idea of how long you’re planning to keep it and if you’ll want to open more franchises in the future. Evaluate your long-term financial and personal goals. What will you need to accomplish with the franchise to meet those goals?
  • What you’re good at — You’ll want to work in a field that you’re interested in so that you continue to stay invested in your business and feel fulfilled. You should also be comfortable following the franchise’s rules, processes and systems. If you’d prefer to follow your own course of action, you may want to consider running an independent business instead of a franchise.
  • Level of franchisor support — Research the brand you’ll be working with. Is this an organization you’re prepared to partner with for several years? How committed are they to your success? What ongoing training and resources will be available to you? You’ll want to understand how you’ll be supported beyond the startup phase.
  • Franchisor history and references — Before you work with a franchisor for years, you’ll want to understand their history. Not only is it important to see how long they’ve been operating but also how they’ve evolved and made money throughout their time in business.

Pros and Cons of Owning a Franchise

Before buying a franchise, it’s a good idea to outline the pros and cons to help you make an informed decision.

Pros of Buying a Franchise

Some benefits of owning a franchise include:

  • Skipping the startup stage
  • Instant name recognition
  • Training
  • Knowing the demographics and locations that work best for the franchise
  • Easy access to financing because banks and lenders are more likely to loan money to a franchise
  • Access to increased purchase power because you’re part of a larger brand

Cons of Buying a Franchise

Some drawbacks to owning a franchise include:

  • Less flexibility. You’ll have to abide by rules set by your franchisor. For instance, there are usually restrictions on operating hours and which suppliers you can use. Your contract will determine what you can and cannot do.
  • Profit-sharing. You’ll pay a fee to your franchisor for continually using their trademarks and patented processes.
  • Contracts that can expire. Typically, franchisors renew branches that are making money. However, they can decide to close yours down by not renewing your contract.
  • Royalty fees. In addition to the initial investment, you’ll also need to make ongoing payments to your franchise to use their branding.
  • Reputation issues. While you can benefit from a franchise’s reputation, there can also be a downside if other branches are slipping in quality. For instance, if a franchise near you is providing bad service, people may automatically associate that with your business.

Things to Consider Before Starting a Franchise

Starting a business is an exciting way to pursue your interests and passions. Some types of franchises you can open include:

  • Travel agencies
  • Coffee vans
  • Plumbing services
  • Commercial and domestic cleaning
  • Real estate companies
  • UPS stores
  • Gyms

It’s important to look for a franchise that aligns with your strengths, weaknesses, skills and goals. One way to determine if a franchise is right for you is to ask yourself questions like:

  • Do I want to work part-time or full-time?
  • Is this franchise in an industry that I already have background knowledge on?
  • Will this be my primary source of income?
  • Would I want to expand and own more franchises in the future?

Before you open a franchise, you’ll also likely need to:

  • Investigate market conditions — Look for growing industries — and different franchise opportunities within them — before you settle on your business. To help evaluate this, look for markets with a diverse customer base that’s increasing.
  • Write a business planThis is important for determining the long-term success of your franchise. You’ll also want to include how to get financing in this plan.
  • Research locations — Certain businesses will do better in different regions based on the demographics in those areas. It’s important to buy or rent real estate for your franchise in the right spot. One way to determine the best location for your franchise is to look at the locations of your competitors.
  • Get permits or licenses — Check with local and state officials in your area to confirm which licenses and permits you’ll need. Depending on your industry, you may need extra permits like a liquor license.
  • Hire a franchising consultant — These professionals can help you navigate the franchising journey. They’ll be able to answer questions about starting up a franchise business and provide guidance on growing your operation.

As you consider opening your own company, be sure to look at your options and really understand how franchises work. This type of business has a lot to offer, from instant brand recognition to easy access for financing from banks. Just be sure to do your research and weigh the pros and cons to see what’s right for you.

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One Response to "Franchise Business Basics"
    • Donovan Billiot | December 29, 2020 at 5:05 am

      I’m very interested in learning about franchise businesses and possibly running or owning my on business one day.

      1
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