Why Should You Start a Franchise?
You should start a franchise if you want to run your own business without also figuring out every step on your route to success. Starting a franchise means buying into an established brand and running their business as your business. Depending on the franchise you choose, you will receive support, guidance, materials, inventory, and more in exchange for your investment.
Some owners think of starting a franchise as securing themselves a turnkey career as their own boss. If you want the day-to-day experience of running and growing a business without facing overwhelming uncertainty alone, starting a franchise might be the best move for you.
But what does it mean to start a franchise? What agreements will you be locked into, and how much control will you have over the business? How much of your profits will be paid as royalties to the existing brand? We’re here to explain all the important things you need to know before starting a franchise and lay out the advantages and disadvantages of franchising so you can make this important decision for yourself.
What is a Franchise and How Does It Work?
A franchise is a partnership between an investor who wants to start a business (franchisee) and an established brand that wants to sell their business concept (franchisor). The franchisee pays an initial up-front fee to launch their new business, almost always with the support of the franchisor. The parties also sign a franchise agreement.
These legal contracts look very different depending on the partnership. Some franchisors allow their franchisees room to make business decisions. Other franchisors spell out every aspect of the setup and operation of the business in the franchise agreement, including but not limited to the following:
- Future Fees and Royalties: The franchise agreement should detail the up-front costs required and what they cover, such as software licensing fees or initial inventory costs. If the franchisor requires future royalties out of the franchise’s revenue, the percentage to be paid and how often it will be paid should also be clear and understood by both parties.
- Franchise Rights and Terms: These are elements of the contract which give the franchisee the right to the intellectual and tangible properties they need to start the business. This means everything from the sign out front to the processes and products customers love. The terms also spell out what actions by either party can lead to the termination of the agreement, and how long the rights to the franchise are granted. These details vary significantly based on the industry in question, the time it will take the franchise to achieve the desired return on investment, the type of franchise agreement, and many other factors.
- Site Selection and Assigned Territory: Some franchise fees include the up-front cost for a brick-and-mortar location, especially in retail or food service businesses. The franchisor usually reserves the right to approve the location and branding, even when the franchisee oversees finding the space. Service-focused industries that don’t require a physical business location may assign a territory and grant the franchisee exclusive rights in the area instead.
- Training and Support: The franchisor has a vested interest in the success of the franchisee, and therefore provides initial training. This onboarding could take as little as a few hours or as long as six months or more, depending on the business you franchise. Continuing education throughout the lifetime of the partnership can also be included. Whatever the process and expectations, it will be described in the franchise agreement.
- Marketing and Technology: Some franchises come with specific requirements for logos, marketing messages, and using marketing channels like social media and email. The same goes for software: the franchisor may require the use of certain platforms and prescribe certain data management or security policies. Many franchisors charge an initial fee for these line items, and there may be ongoing fees as well, especially in the case of national franchises.
- Insurance and Compliance:The franchise agreement also spells out the insurance requirements for your new business, as well as the records you are required to keep. This clause often protects the rights of the franchisor to monitor record-keeping and ensure the business is being run correctly.
- Non-Competes, Legal Rights, and Jurisdiction: Last, the agreement usually puts limits on your ability to start a similar-but-competing business while you are under the franchise contract. It will also spell out what happens in the event the contract is broken, including whether mediation is required. The franchisor might also require that claims be filed in the courts of a specific state.
According to Federal Trade Commission (FTC) regulations, the franchise agreement must include 23 key items, many falling into the above categories. It is also part of FTC regulations that you be provided this document at least 14 days before it is required to be signed and the fees paid.
Clearly, there is a lot to consider when deciding to start a franchise! But negotiating a single contract with a partner is still a much simpler process than starting a business from the ground up.
You might think that the franchisor will not negotiate and have a standard set of terms they want to stick to. But most are more concerned with developing high-quality relationships and partnerships with the new franchise owner. Of course, this starts with understanding each franchisee’s unique goals, background, strengths, and needs. This calls back to mind one of the main reasons why you should start a franchise—it’s the chance to join a team while becoming your own boss at the same time.
Importance of Franchising
Another great reason to start a franchise is the role of these businesses in the larger economy. Here are some statistics about the importance of franchising for our communities:
- U.S. franchises output $670 billion into the domestic U.S. economy each year. Around one-third of this is from quick-service restaurants. Worldwide, McDonald’s alone generates over $93 billion in sales each year. (Statista)
- Other leading economic sectors for franchises are business services, full-service restaurants, real estate, and commercial and residential services. (Statista)
- 20,000 franchise locations closed in 2020, resulting in around 960,000 lost jobs, especially in the retail, food service, and hospitality sectors. (International Franchise Association)
- As part of economic recovery, it was projected 26,000 new franchises would open in 2021, exceeding pre-pandemic levels by over 6,000 locations and 800,000 employees. (International Franchise Association)
- Women are the sole owners of 10% of U.S. franchises and jointly own around 30%. (Encyclopedia for Business)
- There are around 3,000 different franchise opportunities on the market in the U.S., available across at least 30 different market sectors. (Encyclopedia for Business)
- One of the first successful U.S. franchises was the bottling and resale of Coca-Cola. (Encyclopedia for Business)
Yes, franchises play an important role in the economy, which is motivating and inspiring to many owners. But there are also personal reasons why to start a franchise. As we mentioned, you might want to be your own boss, or bring something exciting and new to your city. Let’s talk more about the practical reasons why you should start a franchise.
7 Benefits of Franchising
There are 7 main benefits of franchising. Some are benefits for the franchisee, others are benefits for the parent company, and there are shared benefits between the two.
1. Low Start-up Costs
A franchise is a turnkey solution to start a successful business without needing tens or even hundreds of thousands of dollars in the bank. Yes, it is possible to start your own business with $0 from home, but that means sole responsibility for elements of ownership like strategies to attract clients, defining company policies, and filing paperwork. And during your first year in business, you will spend an average of $30,000-$40,000 on expenses like marketing and product or service development. On the other hand, franchise fees cover many of these expenses upfront, meaning less spending overall and a faster route to revenue.
2. Corporate Support
One of the biggest advantages of franchising is the corporate support we mentioned earlier. Many franchisors will train you, not just in business and leadership, but the skills and tools of a new trade. Many of our franchise opportunities come with training included in industries as diverse as home services, finance, technology, and education. Of course, more traditional offerings like franchise restaurants and low-cost mobile franchises also often come with training as well as established company policies, staffing and hiring support, marketing materials, and more.
3. Brand Awareness
Purchasing a franchise means buying into a brand which consumers may already be aware of. This is especially true in the case of national franchises, which come with a reputation to protect. That means you are responsible for growing awareness and customer loyalty in your region, using the strategies and materials that have worked for other locations just like yours.
4. Lean Growth Opportunity
Franchising allows a successful business to grow without significant investment by the original founders or owners. Even in very supportive franchise agreements where a franchisor helps with marketing or providing leads, franchisees are also motivated to grow their own business. This means the franchisor’s brand, reputation, and reach also grows.
5. Diverse Revenue Sources
Franchisors benefit when multiple locations are driving revenue. Suppose one location is going through a lull or has an interruption in business. In that case, others in the portfolio can make up for the temporary weakness and be similarly supported in the future. Highly-successful franchisees who own more than one location can also achieve this benefit!
6. Low-Risk Model
For the franchisor, the decision to offer other people the opportunity to buy franchises in their business is a very low-risk way to grow. The franchisee makes the investment to launch the new location, while the franchisor can convey the brand standards and best practices that are required to follow.
7. Opportunity for Distribution
The last benefit of franchising is simply the opportunity for more interesting, unique, and essential businesses to succeed in more diverse places. This benefit applies to the franchisee, franchisor, and their communities. The choice to franchise brings businesses into new markets and puts the concept in the hands of new owners to repeat the steps of success.
If you’re still curious about more pros and cons of owning a franchise, we’ve compiled some FAQs about franchising to cover next.
Frequently Asked Questions About Franchising
What are the Requirements to Start a Franchise?
Each franchisor has slightly different requirements, but there are some common factors that are important when applying to start any franchise.
- U.S. Citizenship or Permanent Residency: If you want to start a franchise in the U.S., you are required to be a permanent resident or citizen. This gives the franchisor basic security that you will be in the country to run the business and uphold your end of the contract. It also ensures the legal terms of the contract fully apply to you and are enforceable.
- Good Credit Score and Available Financing: You will need to pay a franchise fee and other costs up front. Franchise startup financing is a great option for many new owners because it allows you to pay as the business grows, instead of fronting one lump sum of cash. But, if you have the cash on hand, that is likely to make you an even more attractive partner to a franchisor!
- Industry or Retail Experience: Industry experience is a plus for many franchises, and sometimes can even be a requirement. Especially for nationally-known brands in industries like full-service dining and retail, the brand image is very important. These companies may be hesitant to work with a first-time restaurant or store owner. Other franchisors are eager to get new talent into their industries and provide intensive training to beginners and experts alike.
As you explore franchise options and start seeing ones that appeal to you, it will be easier to know if there are additional requirements specific to that franchise, like certifications or other documentation that must be included with your application.
Can Owning a Franchise Make You Rich?
The short answer is: yes! The long answer is also yes…if you invest in the right franchise, with the right mindset and skills.
Starting with mindset, you have to know yourself and why you are making the choice to start a franchise. Are you choosing this option because it uses your existing expertise? Or to pursue a new interest? What is your vision for the business and how it will change your life? The answers to these questions will help you determine if you will be able to get rich owning a franchise. It takes a lot of hard work!
Visiting existing locations of the franchises you are considering is a great way to feel out if the opportunity is right for you. If there are lots of current owners trying to exit the franchise, that is a sign the business might not deliver the expected or desired revenue. In cases where the franchise is a strong investment, charting a course to own multiple units is essential to growing wealth as an owner. Lastly, one key to getting rich owning a franchise is to take care of your employees, so they are happy to be at work, in turn leading to repeat customers. This is true whether you own one or many units in the business!
What Important Questions Should You Ask Before Becoming a Franchisee in a Company?
Here are some questions it’s important to ask the franchisor before buying a franchise.
- Will you help me find a good location?
- If needed, do you offer financial assistance to owners?
- Are there any hidden fees?
- Can you describe a typical day in the life of one of your franchisees?
- What training or resources will be provided?
- Have you ever had a conflict with a franchisee?
- What was it and how was it resolved?
- Will other franchisees be able to open their own location near mine?
- What happens if the location does not deliver the expected revenue?
- What are the royalties and how often are they collected?
- When will my rights to the franchise expire?
- What is the renewal process like?
Remember, these are just the beginning of what you might need to know. Many of these details will be included in the franchise agreement, but that doesn’t mean they can’t be discussed. Even if you think the terms of the agreement are great, talking through these questions starts the relationship off on the right foot with mutual understanding and respect. Ultimately, you should ask any question you can’t get off your mind.
What Are the Best Franchises to Own?
The “best franchise” is different from person-to-person. One individual might love opening a franchise travel agency. Others weigh the pros and cons of owning a franchise restaurant and decide they’re up for the challenge. This is why the first step in deciding if you should start a franchise is some of the soul-searching we described earlier.
With that said, there are also some franchises that are objectively more profitable than others. Forbes annually ranks the best franchises to buy. Here are a few of the lower-cost franchise highlights from their list!
Mathnasium Learning Centers: Mathnasium is the world’s #1 math tutoring center. Franchisees receive exclusive, protected territory, regional and national support, and ongoing training. They even offer a 25% off discount to veterans who want to open a Mathnasium! Forbes ranked this franchise among the top low-investment franchises.
MaidPro: MaidPro’s home cleaning enterprise puts the work-life balance of its franchisees front-and-center. They allow owners lots of flexibility and control while also providing marketing support, training, and a national sales center that screens incoming potential customers for you. Plus, they offer a 20% discount to veterans and first responders! This is another high-value, low-investment franchise.
BrightStar Care: BrightStar Care has proven its resilience as a home healthcare provider during the pandemic. Franchises provide skilled and unskilled care to clients, helping with everything from medical needs to cooking and cleaning. If you want to start a franchise that truly makes a difference for others, look no further—especially because Forbes ranked this franchise #1 among low-investment options!
Nothing Bundt Cakes: Nothing Bundt Cakes was ranked #1 among the mid-range investment franchises by Forbes. This bakery is dedicated to true hospitality, humor, and sincerity across their over 400 U.S. locations. Franchisees are granted a protected territory as part of their investment!
Sports Clips: Sports Clips was the #2 mid-range franchise named by Forbes. This barber shop caters primarily to men and boys with low-cost yet high-quality haircuts. The sports-themed environment keeps customers coming back! Part of the process of opening a Sports Clips includes attending training at their corporate headquarters in Texas.
Find Your Best Franchise on Franchise.com
Whether you’re interested in launching a franchise everyone knows and loves, or want to bring the next big thing to your area, Franchise.com is your resource to explore different franchises. We started our franchise directory in 1995 and continue to be one of the most trusted resources online today. Franchisors trust us to share their opportunities because they know we are realistic and candid about starting franchises.
You can realize amazing potential for both earnings and work-life balance by opening a franchise. We invite you to explore our franchise directory and build a list of all the options that appeal to you. Then, you can compare the offerings, do your research, and choose the franchise that will sustain your future. Reach out to us if you have any questions!