What Is a Franchise?
If you’re thinking about dipping your toes into the world of business, you might be curious about your options. Operating a franchise is an attractive business method to many, but often people describe retail stores with multiple locations as a franchise and don’t understand how they function.
This article answers the “what is a franchise?” while exploring the differences between this type of business and other ventures. It covers everything you need to know about franchise meaning in business, buying and operating one, along with tips on picking the right franchise.
Quick Takeaways
- A franchise is when you pay a company for the right to do business under its brand name. The franchisor is the company that holds the brand’s trademark and trade name, while the franchisee operates the location.
- There are pros and cons to owning a franchise versus traditional business ownership, including access to marketing help and faster startup times, but also fewer freedoms and higher costs.
- Franchise agreements are typically complex and include three payment categories for the franchisor: purchase of ownership rights, training/equipment/inventory fees, and ongoing royalty payments.
- Franchises give companies an excellent way to increase distribution without having to invest more money into building additional locations. To determine what franchises you should investigate, match your top skills to franchise opportunities, or find out what you’re good at.
What Does Franchise Mean?
So, what’s a franchise? In essence, when you franchise a business, you’re paying a company for the right to do business under its brand name. The franchisor is the company that holds the brand’s trademark and trade name. As the one operating the location, you’d be the franchisee.
Pros and Cons of Franchise Investment
Like anything in life, there are several pros and cons to owning a franchise versus traditional business ownership. Here’s the good, the bad, and the ugly about being a franchisee.
Pro: Brand Recognition and Marketing Help
When you buy a franchise business, you’re paying for the brand of products and services that people already recognize. For instance, if you are a franchisee of McDonald’s, you get immediate access to well-established infrastructure.
You gain from McDonald’s reputation, products, equipment, and uniforms. People will already know and trust the brand, which translates to more sales across the board.
That makes marketing a little easier, too. You will likely have to do local marketing and advertising, but the franchiser will likely have active nationwide campaigns. Some companies might even provide a marketing plan and resources to help you create an effective campaign.
These are major pros if marketing isn’t your strong suit. It’s a good idea to research the company and see the extent of offered marketing. They might cover market analysis, strategy, sales forecast, and budgeting to help your new business succeed.
Con: Fewer Freedoms
One major con of running a franchise is the many rules and regulations you’ll have to follow since you’re buying a ready-made brand. The company sets these rules, regulations, and business operations to protect its brand name and retain its value.
But these directives can be stifling if you want to experiment with products and systems. One of the draws to entrepreneurship is being your own boss, and it might not feel that way if you’re running a franchise under someone else’s standards.
As a franchisee, you’ll most likely be required to sign a contract outlining what you will and will not be able to do when running your business. Breaking these rules could lead to lawsuits and forced closure.
The contract will also make it harder for you to sell or transfer ownership of a franchise you don’t want to run anymore. You will need to weigh how worthwhile such restrictions are before deciding to become a franchisee.
Pro: Faster Startup and Access to Financing
Starting a business is no easy task, with business plans, research, and financing being the major hurdles to cross before you can even think about creating a product or service.
When you become a franchisor, much of that work is done for you. Many franchises provide training and financial plans or list the recommended vendors so you won’t have to take care of that research yourself.
Purchasing a franchise might also make getting financing easier and faster. The Small Business Administration offers a special loan allotment for franchises. If the company you’re trying to franchise with is in the directory, you might be able to secure a loan in less time.
Con: You’ll End Up Paying More
Although a franchise comes with a formula, success isn’t automatically guaranteed. Franchisees could see large start-up costs and continuing royalty costs.
Franchise fees tend to be high, and don’t include the cost of real estate, franchisor licenses, inventory, supplies, and training. On top of that, you’ll have to pay continuous fees to keep using their name.
Franchise Agreement Basics and Regulations
Franchising agreements can be complex. Typically, a franchise agreement includes three payment categories for the franchisor:
- First, the franchisor has to purchase ownership rights for the trademarks owned by the franchising entity at a predetermined cost.
- Second, the franchisor has to pay a fee to provide training, equipment, and inventory.
- Finally, the franchiser will require ongoing royalty payments or percentages of the sale of the business.
Franchise agreements are essentially a temporary form of business leasing. The franchisees will not legally “own” the brand, only the specific branch they’re franchising.
Who Owns the Business?
When considering the question of “what is a franchise?” one issue that comes up is the matter of who owns the business.
Although the franchisee operates the business itself, the franchisor remains the actual owner of the name, branding, and intellectual property of the company.
The franchisee pays a franchise fee to the franchisor for the company’s goods and the continued right to do business under their name. This approach is known as business format franchising.
Why Do Some Companies Franchise Their Businesses?
Franchising relationships give companies an excellent way to increase distribution without having to invest more money into building additional locations.
Instead, they outsource the creation of additional branches to local entrepreneurs. That reduces the financial risk involved for all parties while establishing a growing market presence.
Determining What Franchises You Should Investigate
Once you’ve decided on operating a franchise, it can be hard to choose which specific one you want to run. That is partly due to the fact there are over 790,000 franchise establishments in the US alone.
How can you know which will be the best option for you? Here are two methods to pick the perfect franchise.
Match Your Top Skills to Franchise Opportunities
Running a business takes several skills, including:
- Leadership and management
- Planning and time management
- Delegating
- Networking and negotiation
- Marketing and promotion
- Financial management
It’s a good idea to determine your strengths and weaknesses before figuring out what kind of franchise you could run. For instance, if you aren’t that comfortable with financial management, you might prefer options with a well-defined financial business system.
Another consideration is whether you want to franchise a smaller local business or a large global chain. A smaller business may offer fewer resources, but it’ll also be cheaper and less of an investment compared to larger restaurant chains. Once you have a general idea of what sort of business opportunity you want, you’re ready to start looking.
The International Franchise Association has a directory tool to help prospective franchisees. You’ll be able to indicate your passions, preferences for a particular territory, and budget. They’ll search their existing database to find franchise investment opportunities that are the best fit for you.
Find Out What You’re Good At
Running your own business is hard, but it will be easier if you love what you’re doing. Be honest with yourself about your skillset and passions. If you’ve never enjoyed cooking, opening a fast-food franchise might not be the best use of your money and time.
Although success is never guaranteed, it will at least be more attainable if you’re running a business you have some experience with. With so many different franchises available, you should be able to find something you’re passionate about.
Frequently Asked Questions
Still wondering if running a franchise system is the best option for you? Check out these frequently asked questions for more information.
What is an example of a franchise?
Franchise operations are everywhere. You probably drive by a few every day during your commute. Some of the most notable examples of franchises include McDonald’s, 7-Eleven, Kentucky Fried Chicken, and AAMCO Transmissions.
Which franchise makes the most money?
According to the 2022 Franchise 500 Ranking, the five highest-grossing franchises are:
However, franchising with these brands doesn’t automatically equate to success. Many factors will influence whether you thrive, including location and density within city limits. Always do thorough research to maximize your franchise’s profit potential.
What are the disadvantages of franchising?
One major disadvantage of franchising is that you won’t make as much profit as you would if you operated the business yourself.
You’ll need to periodically pay royalty fees to the franchisor, usually around 10 percent of your gross income. In addition, you might be required to buy specially branded items from the franchisor, like software and computer systems.
There are also strict rules that come with owning a franchise. Since you’re using the franchisor’s brand name, you’ll need to adhere to their business model. You’ll have little freedom to experiment with products and marketing.
Final Thoughts
So, what is a franchise? The franchise definition is straightforward: you pay a company to operate under its brand name. Owning a business doesn’t have to be hard. If you have the skills and dedication, you can invest a chunk of money into a nationally-recognized franchise business and turn a profit.
Do your research and choose a company that closely matches your current talents and lifestyle. Doing so will help you create a business that will provide you with financial freedom for years to come.
