Ultimate Guide to Business Franchising

Here’s a comprehensive guide to help you become a successful franchise owner, or franchisee. We’ll cover what a franchise is, how it differs from a chain or independent business, how to buy a franchise, financing options, and why hiring a franchise attorney is a wise choice.

What is a Franchise?

A franchise is a business model where an individual (the franchisee) operates a business under the branding and guidelines of a parent company (the franchisor). In return, the franchisee pays fees and royalties to the franchisor. The franchisor provides support with marketing, inventory, and sometimes training.

According to the International Franchise Association, a franchise involves a franchisor who sets up a brand’s trademark and business system, and a franchisee who pays fees to operate under the franchisor’s name and system.

Types of Franchises

There are several types of franchises, each with different characteristics:

1. Job Franchises: These typically require a lower investment and can sometimes be run from home. Examples include cleaning services, lawn care, and children’s services.
2. Product Franchises: Franchisees distribute products provided by the franchisor but do not get the full business system. Examples include automotive and soda companies.
3. Business-Format Franchises: This is the most common type. The franchisor provides a complete business system, including marketing and operations. Examples include fast food and business services.
4. Investment Franchises: These require a significant investment and often involve hiring a management team. Examples include hotels and large restaurants.
5. Conversion Franchises: These involve converting existing businesses into franchise locations. This allows for rapid growth and access to the franchisor’s systems.

Franchise vs. Chain Store

While franchises and chain stores might seem similar, they have key differences:

• Ownership: Franchise locations are owned by individual franchisees, while chain stores are owned by the parent company.
• Financing: Franchises can grow faster because they leverage the investments of multiple franchisees. Chain stores, however, fund expansion from the parent company’s resources.
• Cost of Operation: Operating a franchise is often less expensive than a chain store because franchisees handle some of the operational costs.
• Profitability: Franchisees share profits with the franchisor, which can reduce their earnings compared to chain stores, where the parent company retains full control over profits.

Steps to Buying a Franchise

If you’re interested in buying a franchise, follow these steps:

1. Evaluate Your Reasons: Ensure you have a clear understanding of why you want to own a franchise. Business ownership, regardless of the type, involves significant challenges.
2. Research Franchises: Look into different franchises to find one that fits your goals and budget. Consider factors like the franchise’s track record, market growth, social responsibility, local competition, and the potential for repeat business and upselling.
3. Apply for a Franchise: Start the application process, which often includes a review of your finances, background, and business plans.
4. Attend a Discovery Day: This meeting, which can be virtual or in-person, allows you to learn more about the franchise and ask questions before making a decision.
5. Seek Financing: Most franchisees need financing. Options include bank loans, SBA-backed loans, leveraging personal assets, or forming partnerships.
6. Review Franchise Documents: Carefully read and understand the franchise agreement, possibly with the help of an attorney.
7. Find a Location: Choose and secure a commercial space for your franchise.
8. Receive Training and Support: Get training on various aspects of the franchise, including branding, products, sales tactics, and payment technology.

Costs of Owning a Franchise

Owning a franchise requires an initial investment and ongoing fees:

• Initial Franchise Fee: This fee can range from $10,000 to over $100,000, depending on the franchise.
• Ongoing Fees: These include marketing fees and royalties, often based on your monthly revenue. For example, a franchise with $25,000 in monthly revenue might charge a 2% marketing fee, equating to $500 each month. Royalties typically range from 4% to over 12% of revenue.

Potential Earnings

Your earnings as a franchise owner will depend on several factors, including loan payments, business reinvestment, and taxes. On average, franchise owners earn about $93,000 per year, which includes a base salary and additional pay.

Financing Options

If you need funding to start your franchise, consider these options:

• Liquid Capital: This includes cash on hand, assets, or funds from family or investors.
• Traditional and SBA Loans: These loans can help cover startup costs.
• Asset Leverage: Use real estate or retirement funds to finance your franchise.
• Partnerships: Partner with others for additional funding, though they will need to sign the franchise agreement.

Popular Franchises

Some well-known franchises include:

• Wings Etc.
• Mathnasium
• Home Instead
• School of Rock
• CMIT Solutions

Hiring a Franchise Attorney

A franchise attorney can help you navigate the legal aspects of buying a franchise. They offer valuable insights into franchise agreements, industry norms, and compliance issues. This ensures you fully understand your obligations and make informed decisions.

Conclusion

Franchise ownership can be rewarding, but it requires careful planning and research. Understanding the franchise model, evaluating your options, and seeking professional advice will help you start on the right foot. By following these steps, you can increase your chances of success and make your journey as a franchise owner as smooth as possible.