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 spread 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 and 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.
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.
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.