Franchising is an excellent option for aspiring small business owners who want to play a pivotal role in the daily operations of their business while having the support of a corporation to rely on. However, many aspiring entrepreneurs are not sure exactly how to franchise a business.
This guide will walk you through the basics of franchising, the pros and cons, and the best tips for successfully launching a franchise business.
UNDERSTANDING FRANCHISING: THE BASICS
A franchise is essentially a business agreement between a franchisor and a franchisee in which the franchisee is able to rely on a successful business model to launch their own location of a business.
A franchisor is an individual or corporation who owns the brand, and a franchisee is a small business owner who enters into the business agreement.
While franchise agreements will vary depending on the franchisor, the general purpose of the agreement is to provide the franchisee with the structural support and resources necessary for them to launch a successful location of that business in a new region or neighborhood.
The Concept of Franchising
The concept of franchising has been around for hundreds of years, but the modern iteration of franchising came into its own in the latter half of the 20th century. As suburban sprawl increased the opportunities for small business owners, franchising became a lucrative way to invest in a tried-and-true business brand.
This business model allows for a brand name to begin to spread in different regions of the country while offering entrepreneurs and investors the opportunity to benefit from business ownership.
Some of the most successful franchises in the world include Chick-fil-A, McDonald’s, and Ace Hardware.
Differentiating Franchising vs. Licensing
The main difference between franchising and licensing is the way that brand information is legally shared between two parties. In a franchise agreement, the franchisee acquires the right to rely on a specific business model to offer the same service to a targeted area. In a licensing agreement, an individual or business owner can sell products with a licensed logo or image. Franchising is best for service-based businesses, while licensing is preferred by business owners selling a product.
Types of Franchising
Franchises comprise various types with distinct requirements, capital needs, and degrees of operational involvement, each catering to different business goals and franchisee profiles:
- Business format – This is the most common type, where the franchisor provides a full system for running the business, including branding, processes, and operational support. Fast-food chains and service-oriented franchises (like McDonald’s or Subway) are typical examples.
- Product distribution – In this type, the franchisee is given the right to distribute a product manufactured by the franchisor but is less involved in the business system. Examples include soft drinks and car dealerships, like Coca-Cola and Ford.
- Investment – This type requires a high level of capital investment, and the franchisee usually plays a passive role. Examples include hotels or large restaurant chains where the franchisee may invest in the brand without directly managing daily operations.
- Conversion – In this model, independent businesses are converted into franchise units to operate under a franchise brand. Real estate agencies like Century 21 often use this type, allowing existing businesses to retain some autonomy while benefiting from brand recognition and systems.
- Manufacturing – Here, the franchisee is authorized to produce and sell products using the franchisor’s brand, materials, and specifications. This type is common in industries like food and beverages, where franchisees may produce branded goods locally.
- Job – This is a model where the franchisee typically operates as a solo worker or a small team, offering a specific service or product within a defined territory. Job franchises usually require a relatively low initial investment, as they often don’t need a physical storefront and can be operated from a home office or small vehicle. Examples include cleaning services, lawn care, mobile pet grooming, or repair services. In this model, the franchisor provides the brand, training, and operational guidance, while the franchisee performs the core job duties directly.
TIP #1: KNOW YOUR MARKET
Knowing your customers and understanding the needs of your community are critical components of franchise success. You will want to invest in a franchise that fills a void or addresses a need in your community, rather than add another similar business to an already crowded landscape. For instance, avoid purchasing a fast-food franchise that specializes in hamburgers if there are several other burger joints within a five-square-mile radius.
TIP #2: DEVELOP A BUSINESS PLAN
One of the primary advantages of purchasing a franchise is that you are investing in a business that will offer you structural support in terms of branding, marketing, and business strategy. However, you still need to develop your own business plan that allows you to become profitable as quickly as possible. A quality business plan should include things like an executive summary that highlights your mission and goals, market research that explores the competitive landscape for this kind of business, and a well-defined operational plan that elucidates overall logistics you’ll implement to ensure your franchise’s success.
TIP #3: FIGURE OUT COSTS
It’s important to know that the start-up costs of the most successful and well-known franchises are significant. In essence, you are going to pay more upfront to purchase a franchise from a nationally or even globally recognized brand. However, each franchisor is different, so you will want to get specific information about the franchise fee for the brand you are considering. Knowing what you will need to pay upfront and what types of payments or profit-sharing are required in the long term will allow you to make the best financial decisions for your personal and professional portfolios.
TIP #4: FORM A CORPORATION OR LLC
In order to protect your business assets as well as your personal assets, Incorporate.com recommends that you form a corporation or an LLC once you begin investing in franchises. Not only will your corporation status help you qualify for additional tax breaks that you would not otherwise be eligible for, but it also will ensure that your personal and professional assets are kept separate. This lowers the risk of investing in a franchise and makes it easier for you to grow your franchise portfolio. In fact, many of the top franchisors prefer to deal with franchisees who have formed a corporation or LLC.
TIP #5: SECURE FINANCING
Before you sign your franchise agreement, you will need to secure financing for your transaction. If you are not able to pay cash, you will want to obtain outside financing. Most franchisees obtain financing by applying for a loan through their bank or credit union, applying for a Small Business Administration loan, or borrowing money from family members who have the capital available and are interested in helping you achieve your professional goals.
TIP #6: CREATE A FRANCHISE DISCLOSURE DOCUMENT (FDD)
A Franchise Disclosure Document, or FDD, is a legal document that franchisors are required by law to create and maintain. A franchisor must supply their FDD to the interested franchisee to maintain transparency. An FDD contains information about current franchisees who own a location and data related to the number of franchisees acquired and lost within the past year.
The FDD gives you additional information and context as you make your final decision and provides you with an opportunity to contact other like-minded franchisees to learn more about their experiences.
TIP #7: STANDARDIZE OPERATIONS
Rather than trying to reinvent the wheel once you open your new franchise location, rely on the information and resources provided to you during your training program. Standardize the operations at your franchise in accordance with brand guidelines and best practices. Not only will this help you maintain your relationship with your franchisor and adhere to their brand standards, but it also will ensure that your operations run smoothly and efficiently from the outset. You have a reliable playbook to work with, and there are many advantages to that.
TIP #8: BRANDING, MARKETING, AND ADVERTISING
One of the most significant benefits of purchasing a franchise is that you have access to trademark products, brands, marketing strategies, and advertising campaigns. In many cases, you can rely on brand marketing and advertising to funnel business to your specific location, which can decrease the amount that you spend from your franchise budget on this line item. Branding, marketing, and advertising should remain consistent from one franchise location to the next, which is another reason why you should rely on the materials provided to you by the corporate office.
TIP #9: BUILD A GOOD TEAM AROUND YOU
From the managers that you recruit to the part-time employees that you hire to work at your location, it’s essential that you have a strong and trustworthy team on your side. Everyone should work together to reach the common goals of your location, which may include certain sales goals as well as community outreach objectives.
Ultimately, the team extends from the top down, so the best thing that you can do as a franchisee is set an example and lead with confidence, integrity, honesty, and empathy.
TIP #10: ENSURE COMPLIANCE AND QUALITY CONTROL
Maintaining compliance is critical to your success as a franchise business owner. You will have to work to ensure you follow regulatory guidelines within the industry as well as any compliance standards that have been put in place by the brand itself. In addition, your local government may mandate that you acquire business licenses or permits to operate in the community, and you will need to keep those current to keep the doors open.
TIP #11: CONTINUOUS IMPROVEMENT
Your franchisor will set you up for success with brand guidelines and best business practices, but that doesn’t mean that you can’t work to improve on your own. By prioritizing efforts to give back to your local community and ensuring that your employees enjoy a healthy and happy work environment, you can continuously improve your reputation as a franchisee. Ultimately, you want to be the type of franchisee that people know and recognize in your local community.
Pros and Cons of Franchising a Business
As with any business venture, it’s important to recognize the numerous pros and cons of franchising, as detailed below.
The Upsides: Benefits of Franchising
Franchising offers several benefits for both franchisors and franchisees that make it an appealing business model for aspiring business owners looking for a balance of support, established branding, and reduced risk:
- Faster time to market – Franchises can expand rapidly compared to opening corporate-owned locations. Franchisees invest in and operate new locations, allowing the brand to grow without the franchisor bearing the full financial burden.
- Reduced risk – Franchisees gain a proven business model with established systems, reducing the risk often associated with starting a business from scratch. Franchisors also lower their risk by sharing it with franchisees who assume the cost of opening and running each location.
- Brand awareness and credibility – Franchisees benefit from established brand recognition, which helps attract customers more quickly. Established brands with loyal customer bases provide a strong foundation that gives franchisees a competitive edge.
- Operational support and training – Franchisors provide ongoing training, support, and resources to ensure franchisees can operate the business successfully. This includes marketing, staff training, and operations, which can ease the learning curve and support success.
- Higher success rates – Franchise businesses generally have a higher success rate than independent startups. This is due to the combination of a proven concept, brand awareness, and franchisor support, helping franchisees avoid common pitfalls.
The Downsides: Challenges of Franchising
Franchising, while advantageous in many respects, also comes with its own set of potential challenges and downsides:
- Fees and royalties – Franchisees must pay upfront franchise fees as well as ongoing royalties, often as a percentage of revenue. These costs can add up and reduce profitability, especially for newer franchises that require time to gain traction.
- Limited control and independence – Franchisees must adhere to the franchisor’s established systems, branding, and operating procedures, in turn limiting their ability to make independent decisions. This can be challenging for entrepreneurs who prefer more control over their business operations.
- Potential for conflicts with the franchisor – Disagreements can arise over issues like royalties, support, marketing, or territory rights. If the franchisor changes policies or launches new fees, it can lead to conflicts and dissatisfaction among franchisees.
- Restricted growth opportunities – Franchisors may set territorial boundaries, limiting the franchisee’s ability to expand or open new locations. Additionally, franchise agreements may restrict innovation, meaning franchisees can’t adjust offerings or services to meet local market demands.
- Dependence on the franchisor’s performance – Franchisees’ success is often tied to the brand’s overall reputation. If the franchisor faces financial struggles, legal issues, or brand reputation damage, all franchisees are affected, regardless of their individual location performance.
- Lengthy contracts and renewal uncertainties – Franchise agreements are generally long-term contracts with specific terms for renewal. Franchisees may face uncertainties if terms change at renewal or if the franchisor decides not to renew, posing a risk to the business.
Is Your Business Ready to Become a Franchise?
When an organization is considering franchising, a range of key factors and readiness indicators help determine if it’s the right time to make the leap. Here are some essential considerations when assessing whether a business is ready to become a franchise:
- Proven business model – The business should have a successful, replicable model that has demonstrated consistent profitability over time. A tested concept provides a strong foundation for new franchisees to succeed.
- Unique value proposition – A clear differentiator — such as a unique product, service, or brand identity — is essential. This distinction attracts franchisees and gives the business a competitive edge in the marketplace.
- Scalability – The business should be able to expand with relative ease across multiple locations and markets. Standardized operations, training programs, and supply chains are critical for ensuring each franchisee can replicate the business model.
- Established brand – A recognizable brand with a strong customer following makes franchising easier, as new franchisees benefit from built-in brand awareness and credibility.
- Financial resources and support systems – Franchising requires significant investment in training, support, marketing, and legal documentation. Businesses need the resources to provide initial and ongoing support to franchisees.
- Legal compliance and protection – Franchise businesses must adhere to franchise regulations, which vary by region. Developing a franchise requires comprehensive legal documentation, such as the FDD, along with strong intellectual property protections.
Buying a franchise can be a powerful growth strategy, but it requires thorough preparation, resources, and commitment to support a network of independent business owners. When a business checks most of these boxes, it’s likely on solid footing to consider franchising as the next growth step:
- Consistent demand across locations – If customers are asking for the business to expand to new areas or if the concept has shown consistent success across multiple test locations, it’s a sign that demand is likely sustainable and scalable.
- Detailed operating systems and procedures – The business has established clear, repeatable processes for key operations, from supply chain management to customer service. Documented systems make it easier to train franchisees and ensure consistency.
- Strong profit margins – High profitability and attractive unit-level economics are essential, as franchisees need to see a path to a strong return on investment. A high-profit business with manageable costs is likely to attract franchisees.
- Comprehensive training and support capabilities – The business has the infrastructure to train new franchisees thoroughly and provide ongoing support. This includes having a team dedicated to franchise operations, marketing, and quality control.
- Commitment to long-term growth – Franchising requires a strategic focus on expansion, brand integrity, and relationship management with franchisees. A business committed to growth through franchising is ready to invest in maintaining these aspects over time.
BEGIN A DEGREE PROGRAM THAT WILL LAUNCH YOUR SMALL BUSINESS CAREER
At Johnson & Wales University, we can prepare you for life as a franchisee with our innovative business degree programs. We offer both an online Bachelor of Science in Business Administration — Entrepreneurship as well as an online Bachelor of Science in Hospitality Management, both of which can provide you with the business foundation and practical skills necessary to own your own franchise business.
For more information about completing your degree online, complete the Request Info form, call 855-JWU-1881, or email [email protected].