Running a business usually involves planning and setting up a solid structure. While starting your own independent business is one choice, working with an established company and using their business system can sometimes be a better option. If you work in business development and are thinking about partnering with other brands, it’s important to understand what a franchise is and the advantages it can offer.
In this article, we explain what a franchise is, the types and benefits, how to buy one and become a franchisee, and we also answer common questions about franchises.
What is a franchise?
Knowing the answer to “What is a franchise?” can help you recommend the right business structure in your workplace. A franchise is a business owned by an individual or group that operates under an established brand. This business uses the brand’s name and follows its proven methods.
For example, if you work at a restaurant owned by three partners, they might choose to buy a franchise. This would mean making a deal with an established restaurant brand to use its tested business model.
Franchises are widely used in many industries, and many well-known store chains operate as franchises. Two common terms in this setup are:
- Franchisor – Creates the brand and business system. They give investors permission to open a location using the brand’s name and resources.
- Franchisee – Buys the rights to use the franchisor’s name and business system. The franchisee usually pays a share of their earnings, called royalties, to the franchisor.
Types of franchises
There are two main types of franchising:
- Business format franchises
In this setup, the franchisor provides products, services, and a complete system to run the business. For example, a restaurant may supply ingredients, training, equipment, and marketing help to its franchisees. This format is popular because it helps increase the chances of success for the new business. - Product distribution franchises
This type is more like a supplier-dealer relationship. The franchisee sells the franchisor’s products but does not follow the brand’s full business system. For example, a global bottling company may give product distribution rights to businesses wanting to enter the beverage industry. This type is also used in industries like automotive, manufacturing, and oil and gas.
Benefits of purchasing a franchise
1. Reduced business risks
Franchisors are often companies with years of experience, which can lower the risks of running the business. If the public already knows the brand and products, there’s less risk that marketing won’t work. It can also make it easier to get loans or grants, as franchisors usually provide support.
2. Customer loyalty
Buying a franchise lets you connect with the franchisor’s existing customers. For example, if a company is based in one city and you open a franchise in another, you can still benefit from their loyal customer base. Many brands use franchising to grow and attract more customers.
3. Access to group purchasing power
Franchise systems often have long-term supplier relationships. This can mean discounts for franchisees similar to those the franchisor gets. Buying items in bulk across different locations can also lower costs.
4. Higher chances of profitability
Starting a franchise often costs less than starting your own independent business. With the franchisor’s brand reputation and support, you may earn profits faster. Businesses that join a franchise system can also increase revenue through training, guidance, and brand recognition.
How to purchase a franchise
1. List the business’s strengths
The first step is identifying what makes a business competitive. A SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) can help guide your search for the right franchise.
2. Match strengths to opportunities
Once you know the strengths, look for matching franchises. For example, if the business is great at marketing, look for a marketing franchise. If you’re in the food industry and provide excellent customer service, a fast-food franchise could be a good fit.
3. Set a budget
You will need to pay an initial franchise fee. Other costs may include renting or building a location, licensing, and contributing to advertising. Having a budget helps you choose a franchise that fits your financial situation and compare it to expected earnings.
4. Research the franchisor and market trends
Check the franchisor’s website and visit existing franchises to learn how they operate. Read franchise handbooks from libraries or online sources. Attend franchise expos and consult franchise brokers, coaches, or consultants. Review the Franchise Disclosure Document (FDD) carefully and research the market to see if the franchise is sustainable.
5. Meet with the franchisor
Schedule a meeting to understand the brand and business terms. Discuss the agreement’s details, such as renewal conditions, royalty changes, and termination clauses.
6. Negotiate the terms
Prepare for the meeting and negotiate terms if needed. A lawyer can help review the FDD and ensure the agreement is fair. You might discuss work requirements, operating hours, or other conditions to make them more workable.
7. Plan financing
Depending on the agreement, you may need to fund a new location. Look into loans, grants, or other funding sources. Whatever option you choose, understand all requirements and plan to keep expenses under control.
