With a franchise, you can reap the benefits of business ownership without starting from scratch. You can get tools and guidance from a broader business that has a vested interest in seeing you succeed.
So, should you look into investing in a franchise of your own? This post will discuss what franchising means, the different types, and why you should or shouldn't get into one. But if you're in a pinch, use these jump links to get where you need to be.
What is a franchise?
A franchise is an authorization for an individual or group to sell a company's products and services under its name. Unless given a formal franchise agreement, the individual wouldn't be allowed to sell any commercialized product from the company.
A franchise involves a mutually beneficial relationship where the franchisor (company) offers an array of support to the franchisee in exchange for recurring royalty fees. Through this relationship, the franchisee (individual) can expand the parent company's reach and get more of the commercial product to more customers.
The Basics of Franchising
The franchising business model is often referred to as a "hybrid" business model and can be divided into two primary forms.
Product Distribution Franchising
Product distribution franchising, also known as traditional franchising, is an arrangement where the franchisor grants the franchisee the right to buy its products and use its trade name. This typically connects a single manufacturer with a network of distributors.
For example, suppose you own a car dealership and want to sell Jeep vehicles. In that case, you need a product distribution agreement with Jeep to sell its cars and the ability to use the Jeep trademark in advertising or promotions.
Business Format Franchising
Business format franchising is an arrangement where the franchisor gives the franchisee the necessary training, advertising, and other assistance to get them started. This franchise model offers the franchisor most of its revenue from royalties and fees.
For example, if you want to open a McDonald's, you would enter a business format agreement. Once you've put down an initial fee and signed a contract known as a franchise agreement, McDonald's will then help you get off the ground by training you for weeks, helping you determine where to build your location, giving you the supply chain contacts you need, and guiding you once your franchise opens.
So whether you choose to get into a product distribution or business formatted franchise agreement, both models have the same pros and cons to consider.
The Pros and Cons of a Franchise
Pros of Franchising
1. Brand Recognition
One of the many gripes people have when they begin a business is a need for brand awareness. Oversaturation in the market can be a significant roadblock for upcoming entrepreneurs — and it can take a lot of effort to set yourself apart from the competition. A franchise agreement lends credibility and trustworthiness to a franchisee and attracts loyal customers of the brand in question.
2. A Helping Hand
A franchisor typically provides financial planning services, supply chain management and analysis, and extensive training for franchisees. Without those resources,many entrepreneurs might struggle to find and establish trust with consumers.
3. Long-Term Return
A franchisor's products or services are generally market-tested and have staying power. That can make investing in them a smarter play for entrepreneurs concerned about their business's longevity.
Cons of Franchising
1. High Cost to Start and Fees
The initial investment is often a barrier of entry for this business model.And even if you can afford the initial commitment, you'll still have to pay ongoing royalty costs to the parent company when the business is up and running. These royalty fees usually range from 4% to 12% of revenue, although some companies charge a flat monthly fee.
2. Lack of Control
While a large company will give you the right to do business with its name, it will ultimately dictate what you can and cannot do with it. This can include from actions like mandating the type of product you're allowed to sell or dictating pricing.A franchisor might even uproot you and place you in a different territory if there's a business need.
3. Possibility of Being Over-Promised
Big businesses can boast about how successful they are and how advantageous it would be to apply to open a franchise with them — but for many of these brands, misinformation is a huge problem. Parent companies, especially newer ones, can boast about how lucrative and highly rated they are, but doing so might lead individuals to invest in a company with little to no actual franchise value.
Choose the Business Model that's Right for You
Ultimately, entrepreneurs can explore many different business models, depending on their goals and interests. Franchise business models are generally more secure but less potentially lucrative than independent endeavors. If that tradeoff works for you, you might want to consider franchising.