The media is awash with news about how new businesses have a high rate of failure. Why do new businesses fail so often? There are several reasons, but it usually boils down to lack of experience and not offering a product or service that is desired. The idea of franchising can help mitigate both of these business killers. A franchise can provide both proven operating methods, as well as proven products and services.
A franchise is a right to use someone else’s successful business model. The idea behind franchising is someone else has already found a business model that works, and they will sell that model to you. The benefits include use of a recognized brand, training on how to operate the franchised business, and access to standardized inputs to produce standardized products or services. The ability to produce something standardized is important for offering a recognizable and successful product.
Some popular franchise restaurants in our area include McDonalds, Taco Johns, Buffalo Wild Wings, Perkins, Little Caesars, Subway, and Pizza Ranch. Restaurants aren’t the only franchised businesses. Franchised businesses can include hotels, like Hilton or Ramada. Fitness centers can be franchised, like Anytime Fitness or Snap Fitness. Cleaning companies can be franchised like ServiceMaster Clean. Even shipping services like UPS Stores are franchised. Any business can be franchised.
Franchises are usually independently owned and operated. This means while the franchising company sells the business model, they do not share in the risk of running the business concept they are selling. To outline what franchisor (the seller of the franchised model) will do, and what the franchisee (the purchaser of the franchised model) is expected to do; the two parties will enter into a franchise agreement. This agreement stipulates what each party must provide to each other in exchange for the franchise.
The seller of the franchise usually receives an upfront franchise fee for the purchase. This is usually a fee for simply entering into a franchise agreement, and does not provide anything else to the purchaser. The franchisee is solely responsible for purchasing all the necessary assets to start the businesses in addition to paying the franchise fee. Once the business is operating, it will then typically pay a royalty fee to the franchising company. The royalty fee is commonly a fixed percentage of gross revenue.
In return for paying franchise and royalty fees, the franchisor maintains the brand. They help give the franchisee access (but not financial support) to all the assets they need to operate their franchised business. The franchisor may advertise nationally, which is not a cost any one franchisee could support on their own. The franchisor will also conduct quality assurance reports (QAR) to make certain people adhere to franchise standards, and force franchisees to continually undertake product improvement plans (PIP). All of these activities reinforce the brand recognition of the franchise, adding continued value and desirability to both consumers and future franchise owners.
Acquiring a franchise may be expensive, but the alternative is to take a bigger risk with an unknown business with an unproven product. But, a franchise does not guarantee success, and will still require hard work and discipline from the business operator. The franchise is intended to give someone with the resources to operate a business an advantage by letting them buy into a brand and proven method. In this respect, the franchise helps mitigate some of the risks that lead to business failure, but it is still the entrepreneur’s skills and experience that are required to operate the franchise successfully.