There is a lot of thought that goes into opening a business. You need to consider things like financing, the economy, and whether your idea will draw customers. If you are in the market for opening a new business, you might have considered franchising. There are many benefits of owning a franchise.
What is a franchise?
A franchise is a license to operate a location or locations of a pre-existing brand. The person hoping to open the new location, or franchise, is called the franchisee. The franchisor owns the brand and gives the franchisee the rights to open and operate the business under the same name.
Franchising has been around since the 1800s in one form or other, but it became an officially recognized business model in 1946. Now, almost 10 million people are employed by franchises in the United States.
There are thousands of different brands that have franchises. And, about 40% of retail sales come from franchises. Popular franchises include fast food, hotel, and gym industries.
Are franchises considered small businesses?
Franchisees are individual owners and operators of each location,s but they are a part of the brand system operated by the franchisor. To get the license to operate under the brand, a franchisee pays an initial fee and ongoing royalty fees. The franchisee then has access to information like proprietary knowledge, processes, and trademarks.
Put simply, franchises are considered small businesses in many cases. The Small Business Administration (SBA) has a registry of franchises that fit the small business description.
How does a franchise work?
There are two major types of franchising forms: product/trade name franchising and business format franchising.
Product/trade name franchising
Product/trade name franchising, or traditional franchising, is when the franchisor licenses a company’s name and trademark to a franchisee so they can open and operate a franchise. The franchisee receives the goods from the franchisor to sell, like at a car dealership. A car dealer can sell certain brands of cars but operates independently.
In a product/trade name franchising system, the franchisee can localize the name of their franchise while still selling brand-name products. For example, under this type of franchise, a franchisee located in Cleveland, Ohio named Jack Smith could name his location Smith Kia of Cleveland if he sold Kia cars.
Business format franchising
Business format franchising is when the franchisee receives regular services and supplies from the franchisor in addition to the rights to the franchise. For example, a franchisee might receive burgers at a fast food restaurant, but they do not receive the finished product. The franchisee uses the supplies to create a product and sell it under the franchise name.
A franchisee might receive training, franchise accounting systems, and marketing materials. Business format franchising strives for consistency across franchise locations. There’s less independence because each location is required to look, serve, and act like the other franchises. And, all locations must have the same name.
Perks of owning a franchise
There are many reasons you might consider opening a franchise. To find out if franchising is right for you, take a look at these benefits of owning a franchise.
1. Brand name
Franchises are popular in the United States because consumers come back to what they know and love. If a consumer has had a great experience at one franchise location, they might want to go to yours.
Brand names are a powerful commodity. Many people don’t want to spend money trying something new if they have the option to buy from somewhere they know, love, and trust. As an independent small business owner, building brand awareness can take a lot of time and money.
With a franchise, a customer can expect the same product or service no matter where they go. For example, if you own a Subway, a customer knows they can expect close to the same sandwich they’ve had at another location.
Having a recognizable brand name can also make job recruiting easier by attracting candidates. With a franchise, there might be a streamlined hiring system that you don’t have to set up. And, you might get employees who transferred from a different franchise location, so they are already equipped to work in the business.
Keep in mind: The brand name is powerful. Do your research before committing to a certain franchise brand. See if the mission and values of a franchise line up with your own because customers could equate the overarching franchisor with your individual franchise.
There are consultants who help you find a franchise brand that is right for you. You can talk with them about your passion and value system to help decide on a franchise.
2. Tried and true system
When you open a franchise, you know you’re benefiting from the business method that skyrocketed the company. You are able to open a franchise location because of the success of the model, which can be very comforting for a new business owner.
The franchisor might know what operating systems work for their businesses. You don’t need to put in the work experimenting with growing a brand new business.
Keep in mind: If you want the freedom to develop, test, and try a business model, franchising might not be the option for you. You need to follow the tried and true system to run the franchise. Products, services, and store hours are aspects the franchisor decides.
Online accounting and payroll software is part of the system you’ll need at your franchise. Patriot’s small business accounting software and payroll software are trusted systems by franchisors.
3. Low cost of goods
Owning and operating a franchise can significantly lower the cost of goods sold (COGS). Since a franchisor could have multiple locations, or even hundreds of franchises across the country, they can get inventory at a discount for buying in bulk.
For example, a supplier who knows they will be selling five million burgers as opposed to one thousand is more likely to give the franchisor a discount. As a result of lower cost of goods, customers might pay less for certain products.
That said, you still need to keep an eye on the cost of goods sold. Part of owning a franchise is making sure your business is turning a profit.
Dr. Ben Litalien, Founder of Franchise Well, said, “In the current dynamic marketplace, franchisors and franchisees would do well to evaluate all supplier relationships and operating costs to ensure they are getting the best value.”
4. Support team
When you own a franchise, you are not alone. You have other franchise owners who might be experiencing the same challenges as you. And, you have a support team in the franchisor itself. If you need help with marketing, technology, or sales, someone is there to guide you.
Franchisors may also support franchisees with training, so you know that you (and your employees) will be able to run operations correctly.
Keep in mind: A system could have hundreds and thousands of locations, so the level of support a franchisor can offer depends on the specific system.
5. Financing
When starting a business, you need money to put your idea into action. The same is true for starting a franchise. If you want to open a franchise, you need to pay an initial fee and startup costs, which could range from $100,000 to a couple million dollars.
To help out with the costs of starting a franchise, many franchisors have financing programs. Talk to the franchisor you are considering to see what they can do to help.
And, banks offer financing for franchises. In many cases, banks have more confidence giving loans to someone starting a trusted franchise brand than a new business.
The Small Business Administration (SBA) provides the bank a repayment guarantee to make it easier to secure a loan from the bank. If you meet SBA loan requirements, and are an SBA franchise registry approved brand, this could be an option for you.
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