Many entrepreneurs and small business professionals are familiar with the term franchising but don’t understand the career opportunity it offers. Simply put, franchising is a way of expanding a business and providing goods and services through a licensing relationship. Franchising means something different from the perspective of a franchisor and franchisee.
There are two types of franchise relationships, business format franchising, and traditional franchising. Under business format franchising, the franchisor gives the franchisee all the business tools needed to succeed, including the entire operating system. Under traditional franchising, the franchisor supplies the products for the franchisee but not the business operating system.
What is a franchise?
A franchise works under a business owned by one or more people to provide products or services according to the rules and branding of the business. Corporations support franchisees and charge a flat fee based on profits or sales. A franchise provides a way to distribute products or services through a franchisor who has an established brand, trademark, and business operating system. The franchisee pays a royalty to the franchisor and in some cases an initial fee for the right to do business. Opening a franchise business is a good idea for new entrepreneurs who are ready to take over the established processes, procedures, strategies, and branding.
1. A Clear Core Concept
Many small business owners operate on instinct, but franchisors prefer franchisees who have a plan in place for all daily operations. A franchisor needs to know their business inside and out to clearly communicate to the franchisee.
The search for a franchise opportunity starts by having a clear concept in mind. What is it you want in a new business? You can be a home-based, retail-based, or office-based franchise owner who works normal business hours or one that has a flexible schedule. Every type of franchise requires a different time commitment and capital investment.
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2. Consider Costs
Opening a franchise business isn’t without its startup costs and fees, as well as long-term costs. You will have to pay an initial franchise fee to the franchisor for the right to do business. The amount depends on the franchise brand and what opportunities you are pursuing. You’ll also need to pay a royalty to the franchisor based on weekly or monthly gross income. There will be operational investments in real estate and retail space as well as inventory and equipment. In some agreements, franchisees may be required to pay into an advertising fund for national or regional ads.
Make sure that when investing in an established brand you receive the proper training on the important aspects of the franchise. You should be taught about branding, how to sell and where to buy the products and services, how to manage product placement and point-of-purchase displays, how to use payment technology and the sales tactics behind the business model.
3. Choosing A Franchise
Opening a franchise business entails a long-term relationship between the franchisor and franchisee. A considerable amount of time and money will be invested in a franchise opportunity, which is why you should choose a franchise brand with care. Always perform your due diligence when vetting a franchisor. They want to attract franchisees and often up-sell opportunities. Avoid falling into a mismatched franchise investment by finding out as much information as you can, including requesting information and documentation.
It’s a good idea to have an open conversation with people who have gone through the franchising process. Ask how long they have run a franchise business, if it met their business expectations, what surprises they encountered, whether or not they achieved their anticipated ROI and their overall experience with the franchise brand.
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4. Apply For Financing
Before you can start to pursue your small business interests, you need to figure out where your working capital will come from. Business loans can be a good financing option if you’re a borrower who qualifies for an attractive interest rate. An alternative lender can offer more financing options than a traditional bank loan that can be customized for your short-term and long-term goals.
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You don’t have to have all of your capital lined up before starting a franchise business. There are several financing options for franchisees including liquid capital, SBA loans, leveraging assets to self-fund such as real estate assets, and partnerships with other funders.
5. The Application Process
Once you have decided on a franchise investment and have qualified for a loan product, it’s time to start the application process. Franchisors often screen franchisees to see how much money they have to work with, what their educational and professional backgrounds are, and why and where they want to open a new franchise.
During the due diligence process, you’ll encounter a Financial Disclosure Document (FDD) that contains detailed information on the bankruptcy filing, litigation, hidden costs, and additional information that may not have come up during negotiations. As a new franchise owner, it’s a good idea to have an attorney review a copy of the FDD to help you understand all aspects of the franchise agreement.
Franchising is a highly regulated industry which is another reason why it’s a good idea to have an attorney ensure you don’t fall into a compliance trap. When reviewing a franchise agreement it’s important to fully understand the obligations and expectations of the franchise system, industry norms, how the franchise system is structured, and how to negotiate modifications.
Opening a franchise business can be a rewarding opportunity for passionate people who are hardworking and have an entrepreneurial spirit. The key to succeeding as a franchise owner is to take things one step at a time, do your research, and not rush into anything.