Did you know? Starting a business of your own does not have to involve building a personal brand. This makes things far less hectic, giving you time to focus on what matters. The answer is in the business model known as franchising and we open up all of its secrets in this article. 

What is a Franchised Business?

In business, franchise refers to licensing an entire brand and its operations in exchange for a fee. The fee collected in this arrangement is a franchise fee, while the license comes from a business known as the franchisor and is obtained by a business known as the franchisee. 

The idea behind franchising is to give entrepreneurs the sense of owning and running a business while saving them from having to grow a personal brand. So they get to start a business but purchase a license to operate it under the branding of a similar and already successful business.

The most popular type of franchised businesses are restaurants. Renowned names like McDonald’s, KFC, and Taco Bell all make the list. In addition, other businesses like The UPS Store - focused on packing, shipping, and printing, and Century 21 - focused on real estate sales, are gaining countless new outlets and storefronts through franchising.  

Evolution of Franchising

There are many accounts of the first business franchises in history. According to this publication, Albert Singer who began the Singer Sewing Machine Company in 1851 was recognized for this achievement. Separately, in the year 2000, the IFA congratulated Martha Matilda Harper as being the pioneer Business Format Franchisor. 

It appears that neither of these two entrepreneurs was the first to begin a franchising business. Instead, the report goes that it was inventor and entrepreneur, Benjamin Franklin, who created the very first franchise system. 

“On September 13, 1731, in the city of Philadelphia, Franklin entered into a contract with Thomas Whitmarsh for a "Copartnership for the carrying on of the Business of Printing in Charlestown in South Carolina."

The agreement put the printing business in the hands of Thomas Whitmarsh and directed him to only purchase printing materials from the franchisor, Franklin. This would lead to great success and even inspire many other early-day franchises.

‍Key Components of Franchising

When thinking of franchising, there are three things to consider. These include franchise rules, fees and payments, and roles of participants. We’ll explain these components in more detail. 

Roles of Participants

The first key component of franchising is the roles of each participating business. As expected, the franchisor’s role is to dictate how the franchisee operates and whether it has rights to all or some of its brand assets.

On the flip side, the franchisee has the role of working the business in alignment with the franchisor’s terms. It is important to note that every franchise agreement could come with unique roles for one or more parties. This has to be well understood and properly documented. 

Franchise Agreements or Rules 

‍

The franchise agreement contains detailed information about both parties, especially on the franchisor’s background and ethics. In addition, the document outlines past and present franchises, spells out restrictions, and explains product sourcing or sales procedures.

Like the roles, participating businesses must follow through on franchise agreements and document this as much as possible. 

Multiple digital and physical copies of agreements should be made available to both parties. Moreover, copies should be translated into different languages to aid the accessibility of the document. 

Franchise Fees and Payments 

A franchisee will make payment to the brand they are operating under. Both parties are responsible for agreeing on the amount and frequency of franchise fees, and how many payment defaults will warrant termination of the agreement. Fees collected usually include an initial franchise fee followed by monthly royalty, marketing, or advertising fees. 

Tips for Evaluating Franchising Opportunities 

Look for an Opportunity that Matches your Interests, Skill Set, and Work Experience:  

Franchisors often have a list of conditions, that the franchisee must fulfil before purchase of the franchise. A typical example is having previous experience with running a business. Besides passing set requirements, franchisees must exercise due diligence in understanding the work culture and expectations of the franchisor. 

Evaluate the Needs of Your Community 

Is there a strong demand for the franchisor’s business products or services within your community? If the answer is no, you may want to consider a different franchise business altogether. A robust research will help ascertain your response to this question, and offer a forecast of your potential success. 

Consider the Franchise Fees, Royalty Fees, and Related Startup Expenses 

Exploring the cost of an investment upfront saves entrepreneurs from financial setbacks. It is advisable to apply this technique to franchised businesses. Franchisees should have a thorough look at the franchise profitability, including the financial commitment required of them, the time it would take to reach profitability, and all the financial risks involved. 

Identify the Business Model and Support System

A franchise is more or less a partnership where a new business (partner or franchisee) pays to assume the identity of an existing business (franchisor) - and mimic its operation. 

Since a franchisee has to reflect their pseudo-parent brand, it is necessary for the business to receive as much direction and support as possible. Owners of franchisees, therefore, need to assess the amount of guidance available to them.

Resources, training, and clear, consistent communication must come easily and meet the needs of the second business. 

Request a Franchise Disclosure Document (FDD) 

A Franchise Disclosure Document (FDD) is an informative document that explains all or major aspects of the franchise agreement. The Federal Trade Commission requires franchisors to issue this to the franchisee at least 14 days before a contract is signed or a fee is paid. Make sure to accurately weigh the benefits and risks spelled out within an FDD. 

Consult with a Business, Financial, and Legal Professional  

Three sets of professionals guide you through franchising - a business coach, a financial manager, and an attorney. The coach offers strategies and helps identify profitable opportunities, the manager helps direct financial resources, and the legal attorney helps assess and interpret the legalities of the agreement. Pay close attention to the advice of these professionals, share any concerns, and always leave some room for your personal decisions. 

Advantages and Risks/Challenges of a Franchised Business

Advantages of a Franchised Business 

Easy Access to Support:

Think of it this way. Franchisors receive a fee from a business; in exchange, they give them license to operate under the brand name and use its assets. Failure or underperformance from the new business directly affects the existing brand. To avoid such, the former will freely offer support to the latter. This could come in any form, including access to capital, operational secrets, or industry, competitors, and customer analysis data. Super cool, right? 

Proven Business Model:

Franchised businesses depend on already existing business models. Ideally, these models must have proven to be highly successful before the franchisor opens a licensing opportunity. Don’t worry, it takes little research to figure out how successful a particular business franchise is, and besides, a Franchise Disclosure Document (FDD) should reveal any detail you may have missed. Once again, remember to look everything under a microscope to avoid any unpleasant surprises. 

Quick Profits:

Setting up a franchised business might imply significant costs - sometimes up to thousands of dollars at a time. Nevertheless, owners of franchisees usually experience fast turnaround times and rapidly increasing profits. This is often a result of the franchisor’s existing brand awareness, their earned public trust, and their impeccable customer base. It is in your best interest to preserve these assets that have been served to you on a platter of gold. 

Disadvantages and Challenges of a Franchised Business

Lack of Autonomy:

A franchised business lacks autonomy since it is subject to the decisions and dictates of its pseudo-parent company. This could be frustrating for business owners, brewing conflicts and, in certain cases, creating other forms of challenges. 

Issues with the Business Recruitment Process:

A franchisee might want control over who it employs and how it conducts hiring. There could be several reasons for this. First, it believes that it understands how to choose employees better than the parent company does. Second, it desires a particular characteristic in employees to drive the business forward. The franchisor will likely reject the idea of independent hiring processes, forcing a disagreement between both parties. 

The Most Successful Franchise Businesses

Taco Bell

According to Entrepreneur, Taco Bell clinched the top spot in the 2024 Franchise 500 ranking. The company serves Mexican-inspired foods in more than 8,000 franchises across the U.S. and has earned the attention of customers thanks to its impeccable menu and flavors. If you’re thinking of starting a Taco Bell franchise, a total of $25.000 to $45,000 should be just enough to pay the initial fee.  

McDonald’s

McDonald’s has been described as the epitome of franchise success. The fast-food restaurant has more than 34,000 units spread across 100 countries and has repeatedly made the top five of the Franchise 500 list. Becoming a McDonald’s franchisee today requires that you pay an initial fee of $45,000 and have about $500,000 minimum in liquid assets.

The UPS Store

The UPS Store is one company with a wide variety of services including shipping, packing, and printing. The brand comes in fourth place on the 2024 Franchise 500 ranking by Entrepreneur. With the UPS Store numbering more than 5,000 franchise units worldwide, it is easy to see why the business has grown in its popularity and gained an impressive user base.Potential franchisees will have to pay between $247,306- $476,993 for traditional locations, $218,148 - $419,226 for rural locations, and $101,818 - $310,779+ for store-in-store locations. 

Century 21

Unlike many franchise businesses, Century 21 focuses on the sales of residential real estate. The company is so successful that it is regarded as the world’s largest residential real estate organization. It has more than 14,000 outlets, operates in 86 countries, and serves a remarkable number of customers yearly. Century 21 franchisees have a bill of $25,000 for initial franchisee fees. 

‍Kumon 

Kumon, a supplemental education service, made 10th position on the 2024 Franchise 500 ranking referenced above. The company is rapidly expanding, with footprints in well over 55 countries and a solid reputation for getting after-school individuals to participate in maths and reading programs. The initial franchisee fee to set up a Kumon business is $2,000. 

Conclusion

From the Franchising website’s piece on “The Evolution of Franchising”, three things are said to govern this unique business model. One is the desire to expand and control, the other is the limitation of human and financial resources, and the third is the need to overcome distance.

If all these match your current business motivations, you might be in the right place to offer a license and see who buys into running their business under your brand architecture. Take the bold step today - who knows? You may just be the Taco Bell of the future. Remember to jump on our blog here to read more interesting business pieces. 

‍Also Read:How To Grow Your Business Through Philanthropy