A franchise is a type of business model in which an owner of a business allows others to operate using their business name, products or processes, in exchange for a fee. The individual who wants to operate a business using an established company's name is known as a franchisee, while the franchisor is the person who provides the guidelines and standards. The franchisee pays a franchise fee to the franchisor in exchange for the right to use the franchisor’s assets. Alongside the initial franchise fee, the franchisee also pays ongoing royalty fees to the franchisor.
You might be interested in opening a franchise if you want to launch a business that already has brand recognition and a strong business model – something that consumers are already familiar with, rather than starting a business from scratch. However, opening a franchise is not a guaranteed good investment. Before taking the leap, you should weigh the pros and cons of opening a franchise.
This guide will take you through the benefits and drawbacks of operating a franchise.
What Businesses are Available for Franchise?
When you think of examples of a franchise business, thoughts immediately turn to fast food giants across the United States. McDonalds, Burger King, KFC, Taco Bell, Subway, Dunkin’ Donuts, and Krispy Kreme are all examples of substantial and wildly successful franchise businesses.
However, franchises are not strictly limited to the fast-food industry. 7-Eleven is the largest non-fast-food franchisor in the US, closely followed by the hotel chain Marriott International, Ace Hardware, and the UPS store. It is estimated that there are over 700,000 franchises in the US alone, meaning that if there is an industry that you are looking to enter, there is likely to be a franchise for it.
Franchise Advantages and Disadvantages
Now we know what a franchise is and what types of businesses are available for them, we need to run through the drawbacks and benefits.
|Typically a lower risk than building a brand new business
|High startup costs
|More immediate brand recognition
|Enjoy the benefits of economies of scale
|No guarantee of success
- Typically, the franchisor will already have a business plan in place alongside established systems which can be a real struggle for start-ups to implement. The franchisor will have a tried-and-tested product to which the market is receptive, as well as training programs to ensure that franchisees can hit the ground running.
- Building a new brand is hard; it takes a lot of time, effort, and money. Even if you put in all these things, brand recognition can take years and years – that is, if it even succeeds at all. However, franchisors will already have brand recognition, meaning you can invest your time in other areas of the business.
- The term "economies of scale" refers to a business's rising purchasing power the more expansive it is. For instance, large, long-running franchises like McDonald's will have far more purchasing power than a brand new business. Therefore, this means that a franchisee will be able to acquire goods at a lower cost than a start-up and benefit from marketing campaigns run at franchisor level.
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- Setting up a franchise will require high up-front costs. Franchisees have to pay an initial franchise fee upfront. Furthermore, franchisees will have to pay royalty fees on an ongoing basis – usually, a percentage of revenue generated. For more well-known franchises, upfront costs can be substantial, with franchises such as KFC or McDonalds requiring an investment of $1,000,000+.
- Franchisees have to operate within strict parameters put in place by the franchisor. As such, there are limited opportunities for franchisees to show a degree of entrepreneurial spirit, and operations have to be in line with the franchisor’s guidelines.
- While franchising a business and operating a franchise does put you in a solid position to start a business, it doesn’t ensure success. Other factors are important and will impact a franchisee’s success, such as location, competition levels, and commercial terms negotiated with a franchisor.
A franchise can be a great way to start a business, but ensure that you thoroughly research the market, business model, and financial requirements to ensure that the returns from running a franchise align with your expectations. If you decide that a franchise is for you, you can get funding to open one from various sources like SBA loans, alternative lenders and business loans. You will also have to ensure that the franchise's cost will not be prohibitive for you to operate.