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How Does A Franchise Work

A franchising business model expands operations by giving individuals (franchisees) contractual rights to sell their offerings in a defined territory. The individuals or franchises use the company’s brand name and working model and, in return, pay the company(franchisor) an agreed amount in the form of franchise fees and royalties.

Franchises have gained immense popularity in the last two decades because they provide a proven system for businesses to establish themselves quickly in a competitive marketplace.

When Fransmart meets with potential franchisees, one of the first questions we ask the prospective franchisees is why they want to start their own business. A Franchisee can leverage a proven operational system, access to crucial support and tools (marketing, training, I.T. systems, financial support, etc.)

Why buy a Franchise?

As per the Small Business Association (SBA), nearly 50 percent of new businesses close down before the first five years. Compared to this, franchising business works excellent for people who want to work for themselves but not by themselves.

The risk of a new business reduces considerably in a franchise model of working as a proven successful concept is replicated by the franchises in new territories.

Over the years, the franchise market has been growing exponentially. According to the IMF report, the GDP contribution of the franchise industry in the U.S. grew by 4.6% in the year 2020, which is more than the U.S. GDP growth rate of 4.1% for the same year. The industry has generated a whopping $494.96 billion, which is 3% of the country’s GDP in the year 2020.

However, everything is not as gleaming as it looks. A franchise business has its advantages and disadvantages; therefore, before buying into a franchise, one needs to understand clearly the many factors that govern that particular business. The success of the franchise business can depend on many factors like the franchisor’s contract, the market suitability, and the franchise’s strength in running the business. Before jumping into the franchising world’s large ocean, an investor must access all these factors.

For more clarity on the franchise opportunity, ask these questions from your franchisor and conclude whether buying a respective franchise is a good investment for you.

What Is A Franchise?

Franchising is an ingenious method of doing business to create and expand wealth that has been gaining momentum over the years at an accelerated rate. The most recognized franchise brands in the U.S. are McDonald’s and Domino. These brands have been the model of the franchise system of working across many countries. Still, they are neither the pioneers of the system nor the leaders in generating wealth in this category of business.

It is even more straightforward when you understand what a franchise business means. A franchise is an organization strategy adopted for expansion. It is a legal and contractual agreement that a company gets into with individual(s) to sell its products and services using its brand name and business system. These independent individuals, in return, expand the business of the owner company in new territories, commercially benefiting both parties.

Advantages of Franchise Model

The franchise model of working has many benefits that contribute to its success in different industries. Some of the advantages of the franchise model include

To The Franchisor:

  1. Fast Growth: Franchise business model gives a much more rapid growth to a brand than any other business expansion process. By partnering with different franchisees, the company can easily take the brand and its product to new markets and territories.
  2. Low Capital Requirement for Growth: When the franchisor partners with individual franchisees commercially to develop separate business units, the development charges of individual units are either borne by the franchisees or at best shared by the company.
  3. Building Brand: With the expansion of the business in different territories, a stronger brand is built for the franchisor.
  4. Better Buying Powers: Since the franchisor represents multiple units, they can negotiate with suppliers for heavy discounts, an advantage that an independent unit cannot demand.
  5. Partnering With Entrepreneurs: Franchise businesses give individual entrepreneurs the power of owning their business while reaping the benefits of brand popularity. While each entrepreneur or new franchisee manages their business dedicatedly, the company is also profiting from their combined efforts on sales and profit.

To The Franchisee:

  1. Better Chance at Success: Franchise businesses have an additional 20% more success rate than individual units. They have the benefits of professional and large organizations working with them.
  2. Training: The franchisor provides professional training essential for running the business to its franchises. The franchisees benefit from the experience and the expertise of the parent company that would have been difficult to acquire otherwise.
  3. Easy Access to Funding: While an independent business owner can also get a loan, it is more difficult when compared to franchises. The franchise company usually has tie-ups and sponsorships with banks and credit card companies. Through these partnerships and the help of franchisors, franchisees can get easy financing.
  4. Independent Ownership: Franchisee is the owner of its business unit enjoying the benefits of owning a branch of a large organization.

Even though the franchise business is a very lucrative idea, it is not free of risks. To help you understand if buying a franchise is suitable for you, you should read this guide.

How Does A Franchise Work

A franchise is an asset-light model for the brand that wants to expand. It is an investment opportunity for an individual or group of individuals who can partner with a brand that meets their entrepreneurial requirements. The working of a Franchise is governed by the contractual relationship between the franchisor and the franchise:

As soon as a franchisor and a franchisee agree to partner with one another, they carry out the formalities and preliminaries of opening a franchise unit. Broadly, the following are essential steps on how the franchise works:

Franchise Disclosure Document (FDD):

Are you aware of the franchise agreement? No, then read this.

The FDD is the agreement that defines the franchise business. It holds all the essentials that govern the franchisor-franchisee relationship. The FDD will also lay the financial requirements of the franchisor from the franchisee and have all imperative information about the policies like bankruptcy, territories, potential earning, etc. You should be aware of these essential points before signing the dotted lines.

Funding:

Some franchisees may require funds for their franchise setup. A franchisor may or may not assist them in getting this needed fund. If you fall under minorities or military veterans, you have these franchise opportunities providing the best financial aid.

Location Selection:

The franchisor and franchisee then have to select the location of the unit’s operation. As per the company expansion strategy, franchise opportunities are available to buy only one store or more than one unit. The franchise buyer should evaluate their net worth and then decide whether purchasing a multi-unit or single unit is feasible for them.

Also, finding a good franchise location is vital to ensure the smooth running of the business. The chosen territory should have less competition and have good potential demand for goods and services. We have shared some tips here on how you can find the right franchise location for yourself.

Training and Operating Manual:

The franchisor has to provide job training to the franchisee and its staff. They also provide the franchisee with operating manuals that hold instructions regarding doing business and set a standard of expectation for the business. For a brand to be successful, training is of utmost importance.

Marketing and Advertising:

Franchisor provides marketing and advertising services to its franchisees. It could be in the form of more prominent marketing campaigns like SEO, T.V. ads, or local advertising in the area of the franchise unit. The franchisor charges an advertising fee for this purpose from its franchisee.

Support:

The franchisee may require support from the parent company in its running. The franchisor has to provide this support in different degrees to all its franchise units. A franchisee may also seek help from other franchise units for similar issues they have access to in a franchise business.

**For a franchisee, before signing the franchising agreement and validating their status as a franchise, we recommend to one time again ask yourself these questions regarding the franchising process to be 100% sure about it.

How Should A Franchise Owner work?

Whether you’re an experienced entrepreneur or just getting your feet wet in the business world for the first time, franchising presents many opportunities. You have a proven system, ongoing support, and you can enjoy a steady stream of revenue through franchises. However, if you’re new to franchising, you may be wondering how to get started and what steps to take.

The franchise owner should follow these steps for smooth operation and

  • Research: There are multiple franchise opportunities to build a business with. However, as an investor, you need to remember that not all franchises will suit your temperament, financials, and general investment criteria.
  • Evaluate and Choose the Right opportunity: Once you are through with your research, you need to evaluate the options present and choose the ones that would benefit you most. We have deeply researched more than 100 franchises opportunity and pointed out the main reason why you should not buy particular franchises.
  • Submit an Application: One of the first and most important steps in buying a franchise is to narrow down your options by shortlisting the top franchises you want. Then, you need to apply to those franchisors.
  • Being eligible as per Franchise Requirements: A franchisor sets qualifications, experience, net worth, liquid capital requirements as to eligibility criteria for its franchisees, as a franchise directly impacts the image and business of a brand. As a franchisee purchaser, you need to fulfill the franchisor’s requirements.
  • Study the FDD: The next step is carefully reading the Franchise Disclosure Document that the company provides to the interested individuals. Understand it before moving ahead with the contract. This document defines the relationship between the franchisor and the franchisee; also analyzes FDD item 19 as it discloses its expected returns.
  • Disclosure Period: The franchisor should give you the franchise disclosure document (FDD) at or before you pay any money to purchase your franchise. You then have 14 days from the date the FDD is delivered to review the franchise opportunity and decide whether you want to pursue it.
  • Meet Existing Franchises: The best way to understand how much franchise owners earn is to visit their existing franchises and get reviews and testimonials. The current franchisees could give you the best information about the working, profitability, and support that a company provides. This is a review from a proud franchise owner who got a significant breakthrough after 28 years of service in the financial industry.
  • Meet The Franchisor: After visiting those three or four franchised locations, the next step is to visit the franchisor’s headquarters. During your visit there, you will meet the company officials and learn about their philosophies and business practices. You will also be able to find out if there are any current or potential franchisees in your area that you can get in contact with.
  • Sign The Contract: After completing the FDD, you will have to pay franchise fees. You will then have to complete the Franchise Licensing Agreement, submit your financial statements, and sign a guarantee. If your application is approved, the franchisor will sign the franchise agreement with you. You can now proudly say that you are a franchise owner now.

Conclusion

Franchising is an excellent opportunity to create wealth. There will be at present thousands of franchise opportunities in hundreds of industries. According to a U.S. government report, the franchise industry employs about 21 million people and generates an economic activity of $2.3 trillion.

Franchising is a unique way of structuring a business relationship. When you buy a franchise, you’re essentially purchasing into a blueprint — a blueprint for a business. And it’s essential to get it right the first time because you’ll use that blueprint as your guide as you develop your franchise.

Franchises that Can help you earn millions

Fransmart has made a list of some of the best combinations of financially rewarding and award-winning franchises with low risks involved with our team’s expertise and knowledge. Please check to see if any of these could be the business for you!

Frequently Asked Questions (FAQs)

Q. How do franchise owners get paid?

A franchise owner makes money through profits received from sales and service transactions. It is generally the remaining amount of money received from revenue after deducting the overhead costs. Overhead costs include equipment costs and fees, staffing salaries, inventory and supplies, benefits, and finally, other expenses of a physical location — like electricity, internet, etc. 

Q. Is owning a franchise a good idea?

Yes, owning a franchise is a good idea. The best part about a franchise business is that you can foresee risks by scrutinizing the brand and its other outlets. You also get to operate under a brand name that people already trust, giving you an upper hand. You also get franchisor support throughout your journey. 

Q. What percentage does a franchisor get?

Your franchisor usually collects franchise royalties monthly. Like marketing fees, these fees are also based on your revenue percentage. But there’s one significant difference; the percentages are higher. Franchise royalties can range from 4% to 50% of your revenue.

Q. How does a franchise agreement work?

To get the ownership of a franchise as the franchisee, you need to sign a franchise agreement. A franchise agreement covers both sides. When buying a franchise, the franchisee makes a substantial financial investment. A Franchise signed agreement covers key points like disclosure, trademark & intellectual property, support & training, advertising, long-term duration, territory, fees & expenses, site selection, termination, non-competes, etc., giving franchisee rights to help safeguard its investment in the business. 

Q. Is a franchise business profitable?

Yes, a franchise business is very much profitable. If you buy an emerging franchise that has good scope in the future could be very much lucrative. You get the benefit of large advertising platforms at a reasonable price that you would not have been able to manage as a small business.

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