What is Franchising? Detailed Guide

Franchising is a unique business model. Franchising combines the best qualities and aspects of both Sole proprietorship and Corporate America. […]

Franchising is a unique business model. Franchising combines the best qualities and aspects of both Sole proprietorship and Corporate America. When you choose to be a franchisee, you get to work with an established brand name – giving you instant credibility.

It is not an industry by itself but a unique way of conducting business that can apply in all sectors. Currently, approximately 3,400 established franchise businesses conduct their business in 29 sectors across more than 225 subsectors. Ultimately, it means that about One business out of Seven is a franchise in the USA.

There are two forms of franchise businesses. In a trade or name franchising, the franchiser has the right to the trademark or name, meaning that they have a right or license to use the trademark name. The forms of franchising business discussed in this guide involve a more complicated relationship whereby the franchiser offers the franchisees a variety of services plus support, meaning that the franchisees should sign an agreement to do business following a specific set of rules laid by the franchisor.

As per the International Franchise Associations, franchising is a way of distributing services or products. In this method, two people are involved;

i. The franchiser gives out his trademark or the trade name plus the business system.

ii. The person who pays the loyalties plus the initial fee to get the right to do business using the franchisor’s name.

Franchising requires a team effort, which means that most franchisees should operate a profitable business over time for it to be successful. The success of the brand will depend on the ongoing partnership between the franchisee and the franchisor. In simple terms, franchising is whereby you work for yourself but not by yourself.

For most franchising businesses, their main aim is to help individuals control their goals or dreams, which enables them to secure their future. In the initial stages of the franchising business, it was a system whereby independent-minded business owners got an opportunity to purchase a job. For example, you could have a sandwich shop or offer a home repair service where you were supposed to report every day as a worker.

Later, the franchise model has emerged as a profitable business model for wealthy personnel or investors who prefer to buy many units at once or people who buy the rights to develop geographical areas by establishing a specific number of units within a specific

time. These area developers or area representatives have become a pillar in the franchising business. Some of them also hire new franchisees where they also support them within the territory. They also account for about 53% of the franchised units in the USA.

Multi-brand franchisees have also emerged, and they usually operate multiple brands under one organization. Doing so enables them to create efficiencies and boost economies of scale, and after they establish themselves in the market, they can increase sales and profits. The two reasons why established franchisees look for additional brands is due to;

i. They have already worked hard to build the brand within the territory.

ii. They require a new complementary business to sort out the challenges and achievements of the business.

Franchisors also combine different brands into one whereby they offer discounts to the franchises who choose the second or third brand. Today, you will find that many franchisors have several different brands, and they also provide incentives to franchisees.

Co-branding is another model whereby a franchisee runs two companies from the same place. The primary benefit of co-branding is that it helps minimize leasing costs or real estate since it generates more income per square foot. A high number of franchisors with multiple brands also provides incentives to the co-brands.

One of the reasons prospective franchisers prefer to buy a franchise brand is because it gives them peace of mind. They want to be assured that;

i. The franchise business model presented by the franchisor is realistic and accurate.

ii. They also do a lot of research where they talk with the current franchisees or read FDD (Franchise Disclosure Document) carefully with the help of a professional franchise attorney, which enables them to understand the business better.

iii. They also need to compare the brand’s competitors, which helps determine whether they would get better returns.

Most aspiring business owners who are new to the franchise business or corporate background may see it as ridiculous. They don’t understand why they should pay thousands of dollars before starting and then pay 8-10% every month for 10 to 15 years.

Those who do detailed research can make more profits through the franchise model than by running their very own brand. They also realize the potential of long-term returns from their investments despite paying an up-front fee plus a percentage every month of their gross income for advertising marketing or royalties. Franchise fees vary according to the business idea, while the required royalties are 5-8 percent. The advertising and marketing fund requires an extra 1-3 percent.

Legitimately, franchisees are not the owners of the franchise they purchase. Instead, they are awarded a license which gives them the permission to run and manage the franchise business. However, they are the owners of the company’s assets, but they need to stick to the franchise agreement to know their specific rights according to the federal and state laws. Franchisees can also form an organization that is allowed to participate in corporate decision-making. Having this ability, they can oppose or agree to decisions that can affect their business operations or their brand in general.