Advantages of Franchising
When it comes to achieving financial freedom, one of the most well-known ways to build wealth is to own a business. But risks and barriers to entry often keep aspiring owners from starting their own business. Buying a franchise can be a viable way to be your own boss without needing to start from the bottom.
This article will explain the meaning and benefits of franchising and answer the question why you should start a franchise.
What Is Franchising?
A franchise is a business model in which a franchisee distributes products or services using the franchisor’s established brand and business system. While the term “franchise” usually refers to the business, it also refers to the contract between the franchisee (who buys into the business model) and the franchisor (who established the brand).
So how is buying a franchise different from starting your own business? Franchises have an established brand, business model, and marketing strategy that you pay a startup fee and royalties to use while independent business owners are responsible for creating their own products, services, and brand identity.
Here are a few key items you can expect to see in a typical business-format franchise contract:
- Startup Costs: How much is the average initial franchise fee? Franchise startup costs can range from as little as $10,000 to over $5 million and often include property, equipment, renovations, insurance, training, marketing, and supplies. To ensure a successful launch, franchisors will typically require franchisees to have access to the full starting amount up front, whether they have it in cash, through a commercial loan, or from private investors. Visit our directory to see franchises that are currently available and how much capital you would need to get started.
- Fees and Royalties: Franchisors earn their money through royalties; the more successful you are at implementing their business model, the more money they make–and so do you. Royalties and fees for ongoing expenses like software licenses will be recurring expenses, so make sure you have a grasp of them at the time of signing.
- Rights and Terms: The contract grants the franchisee rights to use the franchisor’s brand, signature products and services, and proprietary business information to run and promote their business. Franchisees will also be expected to uphold certain standards, such as employee uniforms that match the brand.
- Site Selection and Territory: When a franchise needs a physical location, the franchisor may be involved in selecting the site to ensure that it gets enough traffic and doesn’t compete with other locations. When the physical site is less important to the business, the contract will establish a territory that the franchisor can operate within.
- Training: The contract will define the scope of franchisor-provided training at the time of startup and afterward to ensure brand standards are upheld.
- Marketing: Franchisors will typically set standards for appropriate marketing methods and give messaging guides so that customers know what to expect no matter which location they visit.
- Insurance and Compliance: The contract will detail the required insurance coverage and record keeping that the franchisee must comply with.
Understanding the terms of your contract with your franchisor is crucial to running a successful franchise, so be sure to discuss any and all questions you have about the process before, during, and after buying in.
What Is the Purpose of Franchising?
The purpose of franchising from the franchisor’s perspective is to open more locations with a specific, proven brand and business model while benefiting from the unique skill sets of different location owners. From the franchisee’s perspective, the purpose of a franchise is to gain the opportunity to own a business without having to invent their own business model and build their own brand.
Franchises also play a vital role in the community where they are located. The importance of franchising in the economy is shown through job creation (800,000 new employees in 2021) and by having an economic output of $670 billion in the US.
Franchises also bring widely-loved products and services into new areas. Think about how exciting it is to visit your favorite ice cream shop while on a road trip!
What Are the Three Types of Franchising?
While business-format franchises (like McDonalds and Starbucks) are the most common, there are actually three types of franchises: business-format, traditional, and social.
These are what you likely picture when you think of franchises. Business-format franchises not only make their products and services available to franchisees, they also share their winning business practices. Starbucks doesn’t just franchise their coffee recipes, they also provide their brand image, hiring and training practices, and promotional strategies.
Traditional franchises often get lumped in with supplier-dealership models. While they have a lot in common, franchises stick with the products manufactured by the franchisor, while a dealership (in a supplier-dealer relationship) can sell multiple brands. Think about a John Deere dealer (franchise) that only sells the famous green tractors versus a car dealership (supply-dealership model) that sells Jeep, Dodge, and Ford models off the same lot. Traditional franchises pass on their products and services, but offer more independence when it comes to the business model.
Social franchises take the principles of business-format franchises and apply them to causes typically led by non-government organizations. Social franchises place the delivery of products and services into the hands of people living in affected communities, so not only are they able to distribute more efficiently, they are also able to build up local businesses in the process. For example, the Child and Family Wellness Shops Network franchises micro-pharmacies and clinics in Kenya.
What Are the Advantages and Disadvantages of Franchising?
When it comes to owning a business, franchisees trade complete control and personal branding for a tried-and-true business model. Franchises come with established brand loyalty while still retaining a great deal of freedom. Here’s a breakdown of some of the benefits that franchisees receive and the challenges they may face (and how to overcome them):
7 Benefits of Franchising
- Low Starting Costs: Becoming a franchisee involves paying starting costs like purchasing property and equipment up front. While the initial price tag may seem intimidating compared to starting your own business, you know what you’ll be paying from the beginning. When starting your own business, you could start with next to nothing, in theory. However, you’ll eventually need to invest more into your business for supplies, staff, or other expenses. Franchising takes the guesswork out of budgeting for your next opportunity, and you can get started with as little as $10,000.
- Corporate Support: When you start your own business, it’s just you at the top. Sure, you get to steer your ship wherever you want, but what happens when a storm approaches? As a franchisee, you benefit from your franchisor’s support before, during, and after opening your location. Support comes in the form of training, marketing materials, and more.
- Brand Awareness: One of the most significant benefits of buying a franchise is operating with the power of an established brand. If you start your own burger restaurant, you have to prove to your customers that you’re worth a visit. But if you open your town’s first Five Guys, customers already know what to expect—a mouthwatering, juicy burger with endless options for toppings. Creating a brand for a small business can cost a minimum of between $5,000 and $15,000 for the name, logo, style, and strategy development—and that’s before you even start spreading the word!
- Lean Growth Opportunity: While owning a franchise still requires a great amount of work, you are not the only owner growing your brand. Your Dunkin’ Donuts in Indianapolis benefits from the hot chocolate with whipped cream that someone enjoyed in Cleveland. When compared to starting your own business from scratch, working within an existing brand can bring you more customers with less work.
- Low Risk: Reduced risk is one of the especially important advantages of franchising in the restaurant industry and other low-margin sectors. When putting a significant investment into your next opportunity, going with a model that is proven to be successful can often yield better results than an entirely new enterprise.
- Opportunity from Multiple Revenue Sources: Scaling a new business can be extremely difficult. What worked in your first location may not translate to the next. Then there’s conducting market research, finding the right property, buying equipment, hiring a new team, and getting customers to actually show up. While buying a franchise in a new location includes many of the same steps, there is an existing formula to use so you’re not taking shots in the dark. Then, once you open your doors, customers already know what to expect.
- Providing a Wanted Product or Service: We’ve already mentioned a few times how important brand awareness is. You know people love Big Macs and a bucket of KFC, so you can be confident in attracting customers. But put the money aside for just a moment. What would you like to see in your city? Are you lacking an affordable fitness center like Planet Fitness? A reliable mechanic like Grease Monkey? Or a plumber that’s there when you call like those at Mr. Rooter Plumbing? Becoming a franchisee allows you to bring a valuable product or service to your community—and build wealth while doing it.
Franchising comes with some striking advantages, but what about the challenges?
Challenges of Franchising (And How To Overcome Them)
Owning your own business is never without challenges, and that’s even true for franchising. Here are a couple of the most common ones with ways to overcome them:
- Upfront Starting Costs: While franchise starting costs are usually lower than for an independent business in the same industry, franchising does require you to have the money upfront—unlike starting a business where you can spread out the costs over time. The good news is that if coming up with the money presents a challenge, you do have options like financing through the franchisor, taking out a commercial loan, or connecting with private investors.
- Lack of Personal Brand: One of the motivations for entrepreneurs is the pride they feel from starting and growing their own brand. While franchising doesn’t usually offer you the chance to put your name on the billboard or choose which animal goes in the logo, you still have a great deal of control over how you manage your business. Your impact on your business and community comes through in how you treat your employees, customers, and community organizations.
Franchising has its own unique challenges, but it also comes with a built-in support system and the example of other successful locations.
Find Your Financial Freedom with Franchise.com
While the advantages of franchising are clear, where to find the right franchise for you isn’t always as obvious. That’s where Franchise.com comes in. With our franchise directory, you can find the right opportunity for you by filtering by state, city, starting cost, and categories like top 25 franchises, low cost franchises, work from home, and new franchises.
We’ve been helping aspiring business owners find their path to financial freedom since 1995—without the hassle of starting their own business. Contact us to see how we can connect you with your next opportunity.