Franchising is an innovative method of doing business to create and expand wealth, gaining momentum over the years at an accelerated rate. A franchise business model involves two parties: a franchisor and a franchisee. A franchisor is an entity that wants to expand its business by giving contractual rights to individuals to sell its offerings under its brand name. On the other hand, franchisees are those individuals who buy the rights of a business in exchange for an agreed fee and royalty.
Owning Franchise establishments work very well as independent small business options.
According to the data given by the Small Business Association (SBA), almost 50% of small businesses fail within the first five years. A startup has many risks and challenges that can be hard for an individual to overcome.
Owning a Franchise business provides an individual with the entrepreneurial opportunity that has the backing of a large organization and professional know-how to succeed.
For a company that wants to expand, a franchise is an asset-light model that allows faster growth in multiple territories. It is a wealth creator for individuals looking to own a business. Franchising has been an increasingly popular business method for the last two decades. The franchise model of expansion has been followed by thousands of brands in hundreds of industries. More than 80% of the restaurants around the world are franchise-based.
It has been estimated that there are some 753,700 franchise establishments in the USA in some 2,500 different businesses, outputting 670 billion U.S. dollars and employing 7.5 million people. The largest segment of this franchise industry is quick-service restaurants, which comprise over 241 billion dollars of the industry’s total output, followed by business services with 121 billion dollars output.
Pros And Cons of Owning A Franchise
Franchise owners must adequately evaluate the Advantages and disadvantages of buying franchises before owning a franchise.
- Better Ability Of A Brand To Expand: Franchising provides an excellent opportunity for a company to expand. As an investment to start a unit is brought in by a franchisee combined with a passion for making the business successful. A brand is saved on heavy assets and operations supervision every day, giving them a better and quicker scope of expansion. Franchising also provides a brand with the scope of penetration into the secondary and tertiary markets.
- Benefits of A Brand To A Franchise: A brand brings a set of consumers’ expectations. Partnering with a brand in the franchise model of operation offers a franchisee to take forward the same offerings of the brand in the same operating procedure to customers sold on the product. Franchisees reap many benefits of recognized, well-known brand names. Everything from marketing to customer loyalty is pre-established.
- Reduced Risk For The Franchisees: It has been seen that the risk of a business is reduced considerably in a franchise model of business. Here, the franchises replicate the franchisor’s successful business model.
- Training And Support: The parent company provides its franchisees with the required training to start the unit. The training could be given as and when required by the business. The franchisor also supports the professionals engaged with the organization to its franchise units like marketing and advertising support, accounting, etc. Support makes starting and running a new business much smoother and more cost-effective for the franchisees.
- Financial Support: Getting loans on a franchise business is much easier than a startup. The franchisors also usually have tie-ups with banks to provide financial assistance to their franchises for starting a unit. They also offer unique financing options for military veterans and minorities.
These are why more and more people have started looking for franchise ownership in the USA. But, owning a franchise is not as easy as it sounds; there are many things that one might have to consider before doing so. Here in this article, we will tell you how to own a franchise.
Why Are Franchises Popular In Today’s Age:
Franchising started in the middle ages when the landlords sold the rights to collect taxes and operate markets on their land to individuals on their behalf. However, this was more of franchising of political activity. The modern-day franchising started in the mid-nineteenth century in Germany, with breweries setting up contracts with tavern owners to sell their beer to travellers. In the United States, the first franchising happened in 1851 when Isaac Singer sold independent salespeople the rights to sell his sewing machines to the end consumers.
In recent times, franchise businesses are growing faster and creating more jobs than the rest of the economy.
Small businesses are the job creators in a country. These small businesses, in this case, franchisees, are helping the economy by contributing to job growth, which leads to boosting the economy and driving economic growth. And that’s why State Government and Federal Government offer stimuli to the business owners to get started.
Many franchise opportunities offer financial incentives to veterans, women, minorities, and young college graduates interested in establishing their businesses. The reasons for the popularity of franchises today to entrepreneurs are:
A) Brand Recognition: A franchise owner gets the instant benefit of an established brand that a new business owner cannot have. This gives the franchisees a significant competitive advantage over startups in the market.
B) Better Strategies: A franchisee system starts after perfecting its working model. The strategies used by the franchisor have passed the initial teething phase and are proven for better success in the markets.
C) Calculated Risk: A franchisee enters the business contract knowing what to expect. Mostly they will get all the information regarding the investments, costs, and expected revenues from the franchisor and other sources before starting the business. This provides a more secure and calculated proposition to a franchise owner of their earnings.
D) Documents And Compliances: The documents and compliances can be very tricky to handle for a new business. Franchisors have a system that takes care of the formalities required for starting and running a unit.
E) Marketing Assistance: A new unit struggles most in the marketing of its business. That is because of the cost that can be huge for more extensive marketing campaigns or because of lack of experience and professionals. The parent company provides marketing support to its franchisees—an individual location benefits from expensive marketing campaigns that can be a part of a brand. Being a part of a big organization helps reduce the cost of marketing for an individual unit.
F) Support Of Franchisor And Other Franchises: A franchise network is like a big family that can depend on each other. The franchisor at one end provides all the support to the franchisee to grow, like IT support, accounting, etc. A franchisee also has the assistance of other franchisees in the network, which is a massive advantage of working in a franchise setup.
However, the franchise business also has its share of risks involved, and before entering the immense ocean that the franchising world is, you should know whether buying a franchise is right for you.
How To Own a Franchise
Owning a franchise business takes time, commitment, and hard work, but all that will be worth it when you have an entity to call your own at the end of the process. Mentioned below are the steps that have to be taken to own a franchise:
#1 Research And Research:
While franchising is an excellent opportunity to own a business, it still has risks. About one-fifth or one-sixth of a franchise business fails within the first five years of its operation. The good thing is that you can research franchise opportunities from various readily available sources before you commit yourself to one. The evaluation process of a franchise opportunity has to be from both ends. One will guide potential franchise owners towards the required franchise, and a franchisor also can demand financial and qualification requirements from its franchisees.
When choosing a franchise opportunity, you have to find the answers to the following questions to help you move forward in your selection process. Some Such Questions include:
What is the success rate of the franchise?
Some franchise brands will have a more successful rate than others. Make sure you choose a brand that has a lower failure rate.
What are the financial requirements of the franchise?
Franchisees are a lot of investment for an individual. The investment requirements also vary broadly from brand to brand. As you find out about a brand, make sure you find out its investment requirements first and foremost.
What is your credit limit?
If you have to take loan assistance for your franchise investment, you need to know the exact credit limit that you can secure.
What is the location of your business?
The success of a business depends highly on the footfall of an area which is only possible after finding the right franchise location. Make sure the brand you are investing in goes well with the location of your unit.
Do you have a passion for the business?
Make sure you pick the work that has your passion. Hard work and difficulties that are a part of any business will matter less if you are interested in your work.
It has become much easier to research a franchise opportunity from the internet and other sources in recent times. But you cannot trust all that you read or hear about a franchise’s performance as most of the information available will have the intent of selling a particular business to you. To make a more informed choice take the help of Fransmart – the leading franchise consultants of the U.S.
#2 Set up an LLC:
Forming an LLC will be a better way to move forward in owning a franchise. Most companies require franchisees to incorporate into an entity. LLCs are much easier to manage, and as they are different from corporations, it is easier to structure taxes as per your requirement. To form an LLC, you will need to contact a business lawyer who will guide you to consider your specific business field.
#3 Shortlist And Apply to the Franchisor:
After registering an LLC, you will have to send applications to the franchisor(s), considering their selection criteria. A brand has fixed financial and qualification requirements from its partners that are the preliminaries of their selection process. Mostly you will find the needs of a franchisor on its website.
If you meet the set criteria of a franchisor, they do a background check and will ask for proof of assets. Knowing potential franchise Net worth is essential for the franchisor. Then they request to meet its applicants on a “discovery day” where you can ask them questions relating to the business. Cross-questioning process for both parties, so makes sure you go well prepared.
If the Discovery day process goes well for both parties, the franchisor will give you the Franchise Disclosure Document (FDD) to review and sign, the legal right to start a business.
#4 Securing Funding:
As soon as you commit to a franchisor, you will need to secure a loan for your business to start. Many franchisors have tie-ups with financial institutions that provide loans to their franchisees at a lower interest rate than otherwise available in the market.
You can also approach the Small Business Association for funding for your business. As soon as you secure the funds for the company, you are ready to sign the contract and start the business. Before signing the agreement, there are some things you should know.
Expand to the Franchise:
Starting a franchise is another set of work altogether. You may begin by finding a location, hiring trained staff, buying the equipment, etc.
The good thing here is that it can also help you have a grand opening of your Owned franchise store.
A franchising business is a very empowering investment, and if you have followed the steps mentioned above well, you will have a great chance at success from it.
Franchising is increasingly becoming popular in many sectors of businesses. It provides an ingenious opportunity for expansion to the franchisor and an entrepreneurial setup for the franchisee. A franchise business method amalgams a big brand with small business owners for mutual growth.
However, this business can be as tricky as any other. For better success in your franchise venture, make sure you do a lot of research about the brand and its workings. But you cannot trust all you read as a lot of information is touted by the companies.
We at Fransmart help you buy your franchise by giving you the correct information you look for to start a business. Our team will guide you from finding the right franchise to getting the finances and opening your franchise business. Contact us to know more.