A franchise is a business in which the business owners, or “franchisors” sell the rights to their business logo, name, and model to third party retail outlets, owned by independent, third party operators, called “franchisees.” Franchises are a common way of doing business because the franchisee is not just buying the right to sell the franchisor’s product, he/she is buying the right to use the successful and tested business process, thus avoiding some of the start-up uncertainties and issues that arise with new businesses.
How does one know if their business is franchisable? Well, what product or service makes your business so unique and attractive that other business owners would want to replicate it? In order to franchise, you really have to pinpoint the superiority in what you have to offer that will interest investors and potential business owners to buy one of your franchises.
The concept of your business should also be structured and set up in a way that its operations are easy to share and teach. Your business must exist outside the box that is your mind; in other words, can you get the knowledge and ideas you possess down on paper? To succeed, you must be able to take your knowledge and accurately share it in detailed operation manuals for each facet of your business, and include steps on recreating the business, operating procedures, and training for new owners, managers, and employees.
In order to assess whether franchising is the right option for your business, you also need to assess if your business is replicable. To translate, you must figure out whether your business can easily succeed when run by a different team and in a different location. If not and your success is partial to your one location, it is not replicable and therefore not franchisable.
If your business is franchisable, be prepared to go through numerous regulatory and legal obstacles involved in franchising. While the federal government has its own franchising rules, many states also have requirements that are more stringent, but also must be met, in order for you to sell franchises. Furthermore, some states remain active in the relationship between you and your franchisees by monitoring territorial rights or limiting the transfer and renewal of your franchises.
You’ve concluded that you are going to take the franchise road, so what advantages and disadvantages should you be aware of with franchising?
Owning a franchise allows you to go into business for yourself, but not by yourself, which is a major advantage of franchising. As a franchisee, not only do you get a level of independence to run your business, you also take part in growing your business through a tried and tested formula for success. You already have a brand-name recognized, successful product or service, as well as a pre-established client base that would take months, if not years to build. Lastly, franchises allow for ongoing support and training to their franchisees, to ensure that the business is retaining its consistent and well-known high levels of quality, its managers and employees remain skilled and trained, and continued brand-name recognition, as well as quality service continuously attract more customers.
Some of the disadvantages with franchising include the fact that the franchisee is not completely independent and is always under the watch of the franchisor. In other words, although franchisees operate their own businesses, they still have to operate according to the procedures and limitations set by the franchisor in the franchise agreement, which may include constraints on products and services offered, pricing, geographic territory, and terms of franchise duration. Another setback is that franchisees must continue paying ongoing royalties and advertising fees, in addition to the initial franchise fee. Franchisees must also make sure they are following franchise agreement procedures and performing at a level where the image and brand-name of the franchise is not tarnished. Lastly, because franchising incurs more costs than many other types of businesses, before you begin the franchising process, be sure that your concept will produce an adequate profit.