How Do Franchises Work?

how franchises work

When you ask the question “How do Franchises Work?” there are numerous ways to answer.  Franchising is complex and most rely on guidance from experienced consultants like Franchise Me Consulting to guide them through the franchise process.  Read more to learn how franchises work and how Franchise Me Consulting can help.

Franchising is one of the hottest business opportunities in today’s business landscape.  Franchise opportunities exist in almost every industry imaginable and continues to evolve and expand with the ever changing economic climate. 

Franchising is a solid business framework and thousands have reaped great rewards from this investment. 

The decision to proceed with a franchising endeavor should not be taken lightly as this involves careful research, time and effort. Understanding the fundamentals of the franchising business model is the first and most important step in determining whether this is the right move for you.

Read more to learn how franchises work and how you can work with Franchise Me Consulting to acquire the franchise of your dreams.

How will Franchise Me Consulting, Inc. help me to find the best franchise for me?

What Is A Franchise?

A franchise is an established business agreement between a franchisor and an individual or corporation (franchisee). The franchisor sells a license to a franchisee in exchange for the rights to use the franchisor’s trade name and established business process, procedures, and business model to sell their products or services.

Role Of A Franchisor

A franchisor will provide leadership and guidance to help the franchisee be successful. They are the gatekeepers of this business agreement and responsible for providing the necessary tools for the franchisee to prosper. These tools include providing the proper training when it comes to running the daily business operations, field consulting, consumer marketing assistance, lead generation, and sharing their overall experiences and knowledge when it comes to running the business.

Role Of A Franchisee

A franchisee must be comfortable with adhering to, and following, the established business model and procedures as set forth by the franchisor. In addition, the franchisee is expected to pay the initial franchise fee associated with the investment as well as pay ongoing royalty fees as outlined in the franchise agreement. A franchisee is also expected to make a concerted effort to learn the franchisor’s business model and how to effectively run the business.

What Franchisees Can Expect From Their Franchisor

Leadership – A franchise would be doomed from the start without a franchisor who shows rock solid leadership skills. A franchisee is highly dependent on receiving the proper guidance and encouragement from a franchisor. This will provide confidence and reassurance that the franchisee is in good hands, and the franchisee’s investment was a sound financial decision.

Training – A franchisee can expect extensive training in regards to daily business operations, brand marketing, and customer service principles that will be crucial in promoting and growing a customer base.

Ongoing Support – Many franchises would struggle to stay afloat without the ongoing support that franchisor’s provide. This can include ongoing training, field support, system maintenance, and consumer marketing support.

Monetary Components Of Franchising

Funding – In order to invest in a franchise, the franchisee will need capital to proceed with this investment. The initial franchise fee typically includes equipment costs, practical training, supplies, employee recruitment, and rights to operate under the franchisor’s trademark. The initial fee will vary depending on the size and complexity of the business.

Ongoing Expenses – Just like every business, there are ongoing expenses that must be paid in order to keep the business alive and well This includes a monthly royalty fee to be paid to the franchisor, which normally ranges between 5% and 10% of the gross sales. It is important for a franchisee to factor in the royalty expense as this will ultimately impact overall profitability..

Reserve Cash Flow – As with any new business venture, profits will not magically appear after the first few days of operation. Time is needed for the business to get off the ground and before revenue growth can be realized. During this period, it is important to have a reserve cash flow at your disposal to help fill this monetary gap and cover any business expenses that may need to be paid before profits can start to generate.

Franchise Agreement

This document is the legal binding agreement between the franchisor and franchisee, which provides details on the expectations for both parties as it pertains to operating every facet of the business. In summary, most franchise agreements cover some form of the following.

  • Duration and term of the franchise agreement
  • Details on the initial fee and what is covered by the fee
  • Expected royalty and ongoing fees
  • Operational expectations
  • Training and ongoing support
  • Advertising / Marketing
  • Renewal rights / termination / cancellation policies

There is no standard form or template for this agreement as the terms and methods of operating a franchise are highly dependent on the type of business venture. It is always best to have a franchise attorney, and your franchise broker, review the document on your behalf to ensure all the intricate details of this agreement are understood.

Franchise Regulations

The US Federal Trade Commission (FTC) regulates franchises at the federal level, however franchises are also regulated at the state level. The FTC does require franchisor’s to disclose information to franchisees prior to signing any agreements. 

Individual state’s regulations can vary a great deal, which makes it exceptionally critical to understand the laws and regulations for the local jurisdiction in which the franchise will be operating under. 

Having a clear understanding of the franchise rules and regulations will give any prospective franchisee the information needed to weigh the risks and rewards and make an informed decision.

Franchise Advantages

There are significant advantages to investing in a franchise business. Here are some advantages to consider.

Instant Brand Recognition – A franchisee immediately inherits a well known business with an established customer base, and brand recognition.

Ongoing Business Support – A franchisee will receive ongoing business support from the franchisor as it pertains to marketing, ongoing training, equipment and supplies, as well as field support.

Lower Failure Rate – On average, franchises have a lower failure rate than starting a business from scratch. This is due to having an established brand awareness, loyal customer base, and a proven business model.

Profits – In general, franchises have a higher chance of profitability than an independent start up business.

Built In Customer Base – Investing in a franchise can help avoid one of the biggest struggles of any new business, which is attracting customers. Customers are immediately aware of the franchising brand and trust the product or service being purchased.

Ongoing Support – Many people underestimate the importance of having ongoing support when running a business. This includes ongoing training, field support, operating system maintenance, and financial management assistance. These are all critical components to increase the likelihood of having a solid and profitable business.

Franchise Risks

Along with the many benefits of owning a franchise, there can be  some risks associated with this business venture.

Capital Risks – The initial fee can be substantial when investing in a franchise business, but moving forward with this investment will not always guarantee success. If the franchising endeavor does not go as planned and profits are not realized, the franchisee’s initial monetary investment is not refundable.

Knowledge Risks – Without completely understanding the franchise agreement, the franchisee runs the risk of agreeing to unexpected terms, which may have a negative impact on overall profitability and growth of the business.

Not All Franchises Are Created Equally

The network of franchises that exist in today’s world are much more extensive than most people realize.. 

Franchises exist in just about every facet of today’s economy including retail, food, healthcare, real estate, education, fitness and hospitality. With so many franchising opportunities along with the complex set of rules and regulations for each state, it is clear that all franchises are not created equally.

Research becomes critical when evaluating a potential franchising opportunity and determining all potential risks and rewards associated with this investment. 

Consulting with a franchise broker, like Franchise Me Consulting, will ensure a franchisee receives up-to-date information and valuable support. We can answer the ‘how do franchises work?’ question and help you make an informed decision as you work toward your dream of owning a franchise.

Call Franchise Me Consulting today – take control of your future.

About Us

Franchise Me Consulting, Inc. understands that business success starts with developing relationships, and I take that commitment seriously. Matching you with the perfect franchise is the goal, but to me, true success comes when you say, “thanks, this is the best decision I ever made!”

So, whether you call me Coach, Recruiter, Partner, or just Mentor… Let Franchise Me Consulting, Inc. help you find the perfect match. I promise to earn your trust!

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