A franchise is a business opportunity where a licensor grants permission to a licensee to share their business concept. The resulting business, a franchise, helps the licensor expand while retaining control over products, delivery method, marketing, and concept. In return, the licensee receives an established product with permission from the franchise owner to sell it.
Types of Franchises
There are two types of franchises: business format and product distribution franchises. You can find either kind of franchise for nearly every imaginable type of product.
- Business format franchises: Provide the licensing the franchise with an entire system for marketing, distribution, and sales of the product along with the product itself. Business format franchises offer a turnkey solution to those buying into the franchise, with products already marketed, tested, and packaged; brand manuals; site selection assistance; and guidance on how to run the business from start to finish along the methods developed by the franchise owner. Business format franchises emphasize the entire methodology of selling along the lines established by the originator of the franchise.
- Product distribution franchises: Offer a proven product without the comprehensive system of a business format franchise. The products typically require pre- and post-sale service. Product distribution franchises generally are found in the automobile, gas and oil industry. Car dealerships and service stations are good examples of product distribution franchises. The products are provided by the franchise, along with the branded logo. However, the site selection, method of running the business, and even advertising the company is often at the discretion of the product distribution franchise owner.
Examples of Each Type of Franchise
Business format franchises are easy to spot. These are the chain restaurants, stores, and services that offer franchise opportunities.
According to Business Insider, the top 10 franchises in the world are:
- Anytime Fitness
- Pizza Hut
- Auntie Anne’s
- Circle K
- Papa John’s Pizza
As this list demonstrates, fast food isn’t the only profitable franchise opportunity. In the top slot is a fitness center franchise. GNC also makes the list of the top 10 franchises. Among the top 50, also included in the Business Insider list, are JAN-PRO janitorial services, Super 8 Motels, H&R Block tax services, and many others.
Examples of product franchises include Coca-Cola franchises, which license distributors to sell to stores in a local area, Ford car dealerships, and Exxon gas and propane providers.
How Does Franchising Differ from Other Business Models?
A franchise is a unique business model governed by state and federal franchise regulations. It differs from chain stores and buying a small business in the following ways.
- Chain stores are stores that look like franchises but do not operate as independently owned businesses. A franchise owner actually owns his own franchise; a chain store is owned by the parent company. Chain store parent companies pay rent, lease, utilities, and salaries of the employees. Franchise owners are responsible for these business expenses on their own.
- Purchasing a small business provides another way in which individuals can obtain an existing business. An existing business may offer a loyal clientele, a well-known location, a strong brand name, established products and more that make it much easier to run than starting a business from scratch. It differs from a franchise, however, because it does not include the support, training, trademarks, and recognition of a national product line. Buying an existing small business may mean purchasing a single location that is only known in one town. A franchise may offer a trademark and brand with regional, national, or even global recognition.
Buying a Franchise: Pros & Cons
As with all business opportunities, there are numerous pros and cons to franchising. It’s essential that anyone interested in franchising opportunities takes the time to do their homework on the opportunity itself.
The International Franchise Association offers information for people considering owning a franchise. Once you’ve studied the background of the franchising industry, take the time to evaluate each unique franchise opportunity under consideration.
Franchises are required to provide a written package or franchising prospectus that clearly outlines the opportunity, provides easily understandable costs and details on the franchise owner’s responsibilities and obligations. You may also wish to visit one or more franchise locations, speak with independent franchise owners, and talk to their teams to see if they are happy with their franchise opportunity.
Another method of obtaining a franchise is to purchase an existing franchise from an independent franchise owner who wishes to retire, leave the business, or sell the location. Some franchises offer a list of existing, established franchise locations for sale so that you can decide whether you wish to buy one that is already in operation or start a new location.
The pros and cons of owning a franchise include:
- Turnkey system: Franchises offer turnkey systems. Buy into the franchise and receive everything you need to join an established business. The trademark, logo, product, system, marketing, and more are all included. If you’re a better business operator and manager than an innovator, this may be very appealing.
- Support and training: Starting a new business can be exciting but daunting. It’s frightening to be thrust into business ownership after working for many years for someone else. Suddenly, all the decisions are yours to make ― and yours to accept if you’ve made a poor choice. Franchises offer training in all methods of their business model plus mentorship and support from fellow franchise owners, so you never feel alone. There are others in the franchising system to call with a question or ask for ideas. Training methods may be established and provided, such as assembly-line style cooking methods for a fast-food restaurant, so all you need to do is learn them and implement them.
- Recruiting: Recruiting may be easier when you own a franchise because potential employees know the business name, what you do, and the work environment. They want to have a “brand name” on their resume too and understand the value of working for an accepted, recognized company.
- Products: Products may be purchased at lower costs for resale in a franchise situation. You may also have access to proprietary products marketed only under the franchise’s trade name. People may come to your business solely for licensed products.
- Costs: Not only are franchises expensive to buy into, but franchisees owe a royalty payment to the parent franchise company. These payments are typically made annually to renew the franchise license, but they can get expensive.
- Control: You give up some measure of control when you buy into a franchise. The way the business operates may be dictated by the franchise. Everything from the color of the tablecloths to the lighting may be dictated by the parent franchise. While you obtain the benefits of the instant brand recognition such consistency provides, you also give up autonomy and control. You may not be able to offer items customers want, for example, because they go against franchise policy.
- Negative PR: You benefit from the trademarks and massive brand support from the parent franchise. However, as the parent brand goes, so goes your business, too. That means if negative press comes out about the products offered by the franchise, your business may be affected. Consider, for example, a fast-food franchise that offers lawn care services coming under fire for hiring illegal workers. It may not be your franchise hiring people without their green cards but because the national name is in the news your business may suffer.
The Bottom Line
Franchising offers a turnkey business model with a recognized and valuable trademark. Because the products, systems, and concepts are provided as part of the franchising fee, new business owners may feel more confident in their new business model. The valuable trademark and strong market recognition for many franchise names also help new businesses gain customers and sales.
Franchising isn’t for everyone, however. The high initial cost is coupled with an annual royalty fee that can get expensive. Many franchise owners chafe at the tight control the parent company exerts over their independent business. Others suffer when the franchise itself takes a downturn or experiences negative publicity.
As with all business opportunities, franchising isn’t for everyone. Many have made their fortunes opening a franchise, but just as many have made their fortune by opening their own business. However, with the right opportunity and person to handle it, a franchise offers good business potential.