Franchising is a business model that provides entrepreneurs and aspiring business owners with an established brand, proven business model, and ongoing support system. It gives them the license that grants them access to a franchisor’s proprietary business knowledge, processes, and trademarks. Hence, enabling them to sell products or services under the franchisor’s name. In this article, we will discuss the franchising sales process, its advantages and disadvantages, as well as the kind of opportunity it offers. Also, you will learn how to evaluate the opportunities and examples of companies that offer franchises.
What Is Franchising?
Franchising is a business model in which the owner of a business system (the franchisor) grants an individual or group of individuals (the franchisee) the right to operate a business selling a product or providing a service using the franchisor’s business system and brand. The franchisee has permission to use the franchisor’s trademarks, branding, and operating procedures and is subject to a partnership agreement with the franchisor for a specified period. Additionally, franchising gives the franchisor opportunity to expand its business into new areas, leveraging the franchisees’ capital and local market knowledge.
How Does Franchising Work?
If you are considering franchising sales, consider the following steps:
- Business model: Create a successful and replicable business model that franchisees can easily follow before franchising your business. This includes having a unique offering in the marketplace, established credibility, strong management, and a basic operating structure that is easy to replicate.
- Prepare legal documentation: Franchise compliance involves creating legal documents like the Franchise Disclosure Document (FDD) and franchise agreement, ensuring a legal relationship between franchisor and franchisee..
- Determine franchise fees and royalties: Franchise sales involve initial fees and ongoing royalty fees for franchisees, with initial fees upfront and royalty fees generating revenue for the franchisor.
- Find and select franchisees: Establishing a franchising system involves attracting and selecting franchisees based on qualifications, suitability, and brand alignment, ensuring a successful business model. Franchise sale involves attracting qualified franchisees based on suitability, brand alignment, and ensuring a successful business model through various channels.
- Training and support: It also involves providing training and support to franchisees, including initial understanding, ongoing success, marketing, supply chain management, and other resources.
- Maintain brand consistency and control: Franchisees offer cost-effective growth for expanding brand identity but require consistent brand standards and business model adherence to maintain control and customer experience across franchise locations.
- Prepare your franchise for sale: Contact your franchisor and inform them about your decision to sell. They may be able to assist you with the resale process or provide valuable guidance. Obtain a valuation for your brand to determine its worth.
Evaluating a Franchising Opportunity
To evaluate a franchise opportunity, consider several key factors. First, assess your investment level, franchisor management, franchise territory, franchise fees, franchisor litigation, franchisor training programs, growth and terminations, financial statements, required suppliers and rebates, intellectual property, and trademarks. Also, assess your liquid capital, assets-to-liabilities, and net worth to avoid undercapitalization.
Before taking a franchise opportunity, ensure the franchisor has a cross-section of business skills and experience and that the franchise is defined consistently and allows for franchisee growth. Try to Identify any legal disputes between the franchisor and franchisees and compare the amount and source of litigation.
Another thing to consider when evaluating a franchise opportunity is the franchisor’s training programs, ensuring comprehensiveness and onsite training for new franchisees. Also, assess the franchisor’s financial statements, ensuring they have a growing stream of revenues from franchisee royalties. Lastly, assess the franchisor’s intellectual property, including any confidential information or trade secrets, and ensure proper control over the brand name.
Types of Franchising Opportunity
The types of franchising opportunities include the following:
- Job franchise: An individual or group buys a franchise to secure employment, operating independently without industry experience or expertise. Examples of job franchises include cleaning services, home care services, and tutoring services.
- Product franchise: A product franchise involves the franchisee selling the franchisor’s products as a distributor/dealer, providing and reselling products. This type of franchise is common in industries like automotive, retail, and vending machines. Examples of product franchises include car dealerships and vending machine businesses.
- Business format franchise: A business format franchise involves the franchisee selling products or services, following a complete business system, and receiving support, training, marketing materials, and ongoing assistance. Examples of business format franchises include fast-food chains, hotels, and fitness centers.
- Investment franchise: Investment franchises involve a significant capital investment from the franchisee, typically in large-scale projects like hotels or restaurants, with the expectation of return and capital gain upon exit.
- Conversion franchise: This converts an independent business into a franchise unit, utilizing the franchisor’s trademarks, marketing, advertising, training, and support systems. Industries commonly use conversion franchising include real estate brokers, professional service companies, and home services.
Franchising Advantages and Disadvantages
Franchising sale offers several advantages and disadvantages for both the franchisor and the franchisee.
Advantages
The advantages includes:
Business Assistance
One of the main benefits of franchising sale for the franchisee is the business assistance they receive from the franchisor. This assistance can include a turnkey business operation, access to the brand, equipment, supplies, and an advertising plan. The franchisor provides valuable knowledge and wisdom that can guide the franchisee through owning and operating a business. This support can be essential for running a successful business and makes it easier than starting from scratch.
Buying Power
Franchising offers the advantage of increased buying power. Franchisees can benefit from the size of the franchise network and purchase goods at a deep discount by buying in bulk. The franchisor can negotiate deals that benefit all franchisees, resulting in lower costs for goods and overall operation costs for the franchise.
Increased Brand Awareness
Franchising sales can lead to increased brand awareness. The more locations a brand has, the more people become aware of it. This increased brand awareness can be highly beneficial for both the franchisor and the franchisees, as it can attract more customers and contribute to the success and profitability of the brand.
Reduced Risk for the Franchisor
One of the biggest advantages of franchising sale for the franchisor is the ability to expand without taking on additional risk. The franchisee takes on the debt and liability of opening a unit under the franchise name, allowing the franchisor to benefit from additional locations without increasing its risk. Additionally, it is often incorporated as a separate entity, further protecting the franchisor’s original business.
Capital Requirements
Franchising allows the franchisor to expand with lower capital requirements. The franchisees provide the capital to open each franchised outlet, reducing the financial burden on the franchisor. This can be advantageous for business owners looking to grow or scale their brand without investing more of their capital.
Growth and Unit Expansion
Franchising enables businesses to grow and expand more rapidly than traditional methods. By selling franchise opportunities to franchisees, businesses can scale their operations without investing more of their capital or taking on additional partners. This allows for quicker market saturation and the ability to compete with larger businesses.
Economies of Scale
The franchisor can provide franchisees with economies of scale. Franchisees may have a competitive advantage and increase sales if they have access to a high-quality supply chain, better technology, better goods and services, dependable marketing systems, and innovation driven by the franchisor’s team.
Staffing Leverage
Because franchisees take on many duties that the corporate home office would typically handle, franchisors can operate with a leaner organization. This allows franchisors to reduce overall staffing and leverage the efforts of franchisees to support the growth and operations of the franchise network.
Improved Valuations
Successful franchisors often have higher valuations compared to other businesses. The combination of faster growth, increased profitability, and organizational leverage can result in higher valuations when it comes time to sell the business. This can be advantageous for franchisors who have established a scalable growth model.
Disadvantages of Franchising
Here are some of the disadvantages of franchising:
Lack of Financial Privacy
One disadvantage of franchising is the lack of financial privacy. Franchise agreements often stipulate that the franchisor can oversee the entire financial ecosystem of the franchise. This lack of privacy can be a disadvantage for franchisees who value financial independence. However, it may be less of an issue for those who welcome financial guidance.
Higher Costs
Franchising can involve higher costs than starting an independent business. In addition to the initial costs of buying the franchise, franchisees must pay continuing management service fees and may have to agree to buy products from the franchisor. These ongoing costs can impact profitability and may be higher than expected.
Lack of Control
Franchisees have less control over their operations compared to independent business owners. The franchise agreement usually includes restrictions on how the business can be run, such as limiting changes to suit the local market. Franchisees may need help to introduce changes to respond to the market or make the business grow. This lack of control can be seen as a disadvantage for franchisees and franchisors.
In franchising, franchisees must share a portion of their profits with the franchisor. While the franchisor typically receives a small percentage of the revenues, franchisees still have to share their profits. This can result in decreased profits for franchisees compared to an independent business.
Difficulty in Selling the Franchise
Franchisees may find it difficult to sell their franchise if they decide to exit the business. They can only sell it to someone approved by the franchisor, which limits their options. This lack of flexibility in selling the franchise can be seen as a disadvantage for franchisees who may want to exit the business for various reasons.
Both franchisors and franchisees may need more flexibility and authority in franchising. Franchisors delegate responsibility to franchisees and have an indirect and partial hold on the running of the business. On the other hand, Franchisees must conform to the set guidelines and may feel restricted in making changes or decisions. This lack of flexibility and authority can be seen as a disadvantage for both parties involved in franchising.
System-Wide Reputation Risks
If other franchisees perform poorly or the franchisor encounters unforeseen problems, it can negatively impact the reputation of the entire franchise system. Franchisees may need help to maintain their reputation if the brand suffers. This risk of reputational damage can be a disadvantage for franchisees.
High Entry and Ongoing Costs
Franchising can be more expensive to start than starting an independent business. Franchisees may need to pay upfront franchise fees, royalties, and ongoing payments to the franchisor. These costs vary widely depending on the franchise and can be a significant financial burden for franchisees.
Lack of Support From Uninterested Franchisors
Some franchisors may have little interest in the success of their franchisees and may prioritize collecting fees over providing support and marketing assistance. Franchisees may need more support to run their business, which can be a disadvantage.
Strict Product Rules and Limited Flexibility
Franchisees need more flexibility to use their initiative due to the restraints imposed by the franchisor. They can only sell the products or services approved by the franchisor and may be tied to a national brand with strict instructions on operating. This lack of flexibility can be seen as a disadvantage for franchisees wanting more autonomy in their business decisions.
Franchising Examples
Several companies sell franchises. Here are some examples:
- McDonald’s: McDonald’s is a well-known international quick-service restaurant company. Over 75% of its worldwide restaurants are independently owned.
- Popeyes: Popeyes is a popular fast-food brand that consistently ranks in Entrepreneur’s Franchise 500 Rankings. It has a global presence, strong advertising strategies, and well-developed core philosophies.
- Sonic Drive-In: Sonic Drive-In is a drive-in chain known for its operational excellence and customer service. The franchise owners of Sonic Drive-In have seen an average gross sales of $1,341,000.
- Subway: Subway is a popular franchise specializing in submarine sandwiches and salads.
- 7-Eleven: 7-Eleven is a convenience store franchise that offers a wide range of products and services.
- Dunkin’: Dunkin’ is a franchise that sells coffee, donuts, and other baked goods.
- Anytime Fitness: Anytime Fitness is a franchise that operates 24-hour fitness centers.
- Supercuts: Supercuts is a hair salon franchise that provides affordable haircuts and styling services.
- UPS Store: The UPS Store is a franchise that offers shipping, printing, and mailbox services.
- H&R Block: H&R Block is a franchise that provides tax preparation and financial services.
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