Do you have a passion for starting a business but don't want to put in the hours required to get it off the ground? You should consider franchising. Starting any business has its fair share of ups and downs.
A franchise model enables you to start a business in a much more relaxed environment- you don’t have to do the heavy lifting. It’s a strategic way to start a business simply by building on the legacy of an established brand. If you are looking to break free from the 9-5 grind, then franchising is the way to go.
According to statistics, 11.4 percent of all businesses are franchises and it’s a source of employment for over 9.6 million workers. Investing in a franchise business is an excellent move for any entrepreneur who does not want to start from scratch. However, it can be a complicated process to make a go at a franchise business. There is more to it than just finding the right brand.
In this comprehensive guide, you’ll find out more about the basics of franchise business, its advantages, and what you need to get started. So, let's dive in.
Understanding the Basics of Franchising
A franchise is a business model that allows you to get on your path to entrepreneurship without doing the leg work. You get an already established brand, products, services, and system. Furthermore, your franchisor will also guide you on issues to do with marketing, sales, and how to operate the business.
Under this model, you get a license to operate the business in any location of your choice. As a franchisee, you’ll pay the royalties, associated fees and follow the guidelines set by the franchise.
A franchisor is the owner of the brand, and a franchisee is the business owner who goes into an agreement. Entrepreneurs benefit from business ownership as the owner gets their brand spread across different regions. McDonald's is a perfect example of a successful franchise.
With a franchise arrangement, you get the opportunity to sell the products or services of an already established business. In return, you pay the franchisor a fee which could be ongoing royalties, a one-time initial fee, or both.
Advantages of a Franchise
So, why opt for a franchise instead of starting your business from scratch? Here are some reasons why starting a franchise business may be an attractive option.
Ready-Made Business
A franchise business allows you to leverage the franchisor’s recognition. You’ll, therefore, find it easy to attract customers. It’ll give you an edge over your competitors and reduce the need for additional marketing.
A Recognized Brand Name
Since you are working with a brand name that’s already recognized by customers, it’ll be easy to gain customer trust. Having customer's trust is invaluable when you are starting a new business.
Loyal Customer Base
You’ll start your business with an existing customer base who are already loyal to the brand. Your target audience already knows what to expect and will not take longer to decide to buy your product. As a result, you begin to generate profits within a short time.
Reduced Time and Effort
The business is already established, you won't have to market it. Most of the aspects have already been taken care of. As such, it will take less time to get it up and running.
Built-In Training and Support
As long as you are part of a franchise, you’ll enjoy ongoing training and support. The franchisor takes it upon themselves to ensure every franchisee understands the business model and how they operate their stores.
Under their guidance, you'll be able to build business acumen. You get support in operations management, site selection, marketing campaigns, startup assistance, and even quality control. It is an excellent way to get started especially if you are new to that industry.
With the proper training, you can handle any market shifts or challenges you may face in your business.
Ready-Made Marketing System
The franchisor does the marketing which means your marketing costs will be lower. You only have to follow the system in place and enjoy the profits.
Starting Your Franchise Business
There are steps you must follow to start a successful franchise business. It is a process that takes time, and you have to plan yourself well in advance. Here are the steps to follow:
Research the Franchises
First things first, you need to know the franchise business you want to start. There are plenty of franchise opportunities at your disposal. You'll find franchise businesses based on the cost and industry. To help you choose the best opportunity, consider the following points:
- Required liquid capital
- Industry fees
- The average monthly or yearly revenue
- Marketing fees
- Royalty fees
Evaluate the Cost
Now that you know that you have chosen the franchise industry, let’s look at the financial aspects of opening your franchise business. The initial entry costs and ongoing costs vary from one franchise business to the next. You need to identify the type of franchise that’s within your budget. The costs depend on the location, rent, and size of your business.
There are associated costs that come with the franchise business model. These are three main costs you should know about when it comes to franchise business.
- Initial fees: There is an initial fee you have to pay upfront before you can operate the franchise business. The initial fee can be anywhere from $10,000 to $100,000 depending on the franchise business.
- Royalty fees: You'll also have to pay royalties once the business is up and running. The percentage varies from one business to the other. The average is between 5 and 50 percent.
- Marketing fees: Franchises spend a considerable amount on marketing. The fees ensure your product becomes well-known in the local market. It ranges from 1 and 4 percent of your revenue.
There are also the overhead costs you must address just like you would in any business. Such expenses are licenses, wages, inventory, and equipment.
Opening a franchise business can be costly so it is essential to have your finances in order. If you don’t have enough saved up, you can secure financing to help you meet the capital required.
Draft a Business Plan
You have your finances in place and just can’t wait to get started with your franchise business. But not so fast. Make sure you draft a business plan. Even though a franchise business offers you support in branding, business strategy, and marketing, you'll still need a business plan.
In your plan, highlight your mission, vision, operational plan, and even the competitive landscape. With this system in place, you can anticipate any opportunities or challenges you may encounter. Moreover, a business plan will come in handy when you want to secure financing from lenders. So, keep it as detailed as possible.
Review Franchise License
Under the Federal Franchise Rule, a franchise is created by any written or oral agreement that:
- Creates a continuing commercial relationship.
- Grants a trademark license (although this is not required under certain circumstances).
- Controls how a business is operated.
- Requires the payment of a fee.
Licensing is crucial for any business.
The good news is that with a franchise you will be operating with licensing that already has some public recognition. When you buy a franchise, part of the contract is receiving a license that allows you to use the brand of that company. Make sure you go through it and understand every aspect before you sign. Know what is expected of you as a franchisee and ensure you are comfortable with it. You are required to follow the brand standards and the franchisor’s rules or else you can be terminated for breach of contract.
To know what trademarks and potential proprietary information you will be using, look no further than the Franchise Disclosure Document (FDD) from your franchisor. The document outlines the details you need to know about the business. You are required to receive the FDD no less than 14 days before you sign any binding agreement with the franchisor.
Note that in addition to the trademark license(s) of the franchise, you may need additional licenses, permits and certificates relating to the operation of your franchised business. Fortunately, your franchisor can be a great resource in finding out how to obtain them if you don’t already.
To avoid any unnecessary delays in opening your franchise, research all needed licenses and certifications needed, if any, early in your research process.
Find a Reputable Franchise Partner
Choosing a reputable partner is crucial for the success of any franchise business. You first need to look into the industries you are interested in and have growth potential. Once that is settled, it’s time to check the franchisor's reputation and the support you’ll get from them.
Do your research on the franchisor until you find the right one to partner with. Look into the different franchise options. Working with a reputable brand will minimize risk and boost your chances of being successful. Here are some attributes to look for in a franchise.
- Proven success
- Established brand
- No competition
- Strong marketing strategy
- Goals aligning with your objective
- Recession-resistant market
- No legal issues like conviction or pending litigation
Think About Your Market
You need to analyze the location you want to set up the franchise. Are there competing products in that area? What does the community think about that product? Know what will work in that area. If there is a brand that is saturated in the market, then you should steer clear of it.
Understanding the needs in your community where you want to set up a business is critical to succeeding in a franchise business. Your franchise should address the pain points or needs of your community. It can be tempting to go into a franchise that is already crowded but you should avoid that temptation at all costs. For instance, if you notice there are numerous hamburger joints in your area, it may not be worthwhile to purchase a franchise that specializes in hamburgers.
Choose Your Space
A location can make or break any business. Follow the guidelines set forth by the franchisor on the location in terms of size and even setup. When looking for an ideal space for your franchise business, consider the following factors:
- Demographics
- Competition
- Demand
- Visibility
- Zoning and regulations
- Accessibility
- Cost and the terms
Hire Employees
Now that you have everything set up, you need to look for employees. You’ll need a capable team by your side to run a profitable business. Hire trustworthy employees who can work as a team to meet the location’s common goals.
As the leader of your team, ensure you are leading with empathy, integrity, and honesty. By doing so, your employees will also follow suit. Also, make sure you follow the franchisor's guidelines in hiring, retaining, training, and managing staff. There are often job descriptions and even titles so all you have to do is post the opening and look for ideal employees.
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Even though a franchise business needs a lot of work you can rest easy knowing that the franchisor has already done most of it. All you have to do is concentrate on the vital aspects of the business.