How Does a Business Franchise Work?

Chelsy Meyer  | 

Starting a small business and starting a franchise are in the same family, but don’t follow exactly the same process. Whether you’re the franchisor or the franchisee, there are steps throughout the process that need to be followed in order for things to work. Before opening, after opening, and looking into future opportunities all involve collaboration between franchisors and the business operator. The key to making a franchise work is teamwork through all the steps in the franchising process.

Before Opening

Before opening a franchise, there is a lot of work to be done by the franchisor, and eventually by the investor who decides to take the plunge into becoming franchisee. The franchisor will get the ball rolling in terms of location and competition. After that, the franchisee takes over and becomes the business owner/operator of the new franchise location, making all other pre-opening decisions for the business. The decisions made before opening can be crucial to the overall success of the franchise.

  • Franchisors Conduct Market Research: In order to move forward with franchise locations, it’s important for the franchisor to consider their business’s likelihood of success before moving forward. This includes evaluating competition, sales research, getting an idea of expenses, and finding the right location. Once research has been done and a location can be a confirmed a good fit, the franchisor can begin selecting an investor.
  • Investors Pay Fees: For the franchisee, the beginning stages are to find which opportunity best fits their needs and financial bandwidth. This means meeting with the franchisor and discussing franchising fees, startup fees, and meeting with their bank to organize finances. It also involves a lot of research on the brand and it’s potential for success. There are many reasons why a franchise is a great way to start a business, but potential franchisees will want to look into the franchisor’s past success, litigation history, and costs before taking the leap to take on a business and the fees associated.
  • Franchisors Provide Training and Material Support: One of the pros to buying a franchise is the support provided in terms of training and materials. Before opening, the franchisor will supply the franchisee with all necessary materials and training or access to both. Since a major aspect of a franchise is it’s consistency throughout locations, there’s an exact model for franchisee’s to follow before opening to ensure uniformity in terms of aesthetics, employee training, and building plans, among others.

After Opening

After opening a location, the real work within a franchise begins. The franchisor may be done with the heavy lifting, but they are still responsible for providing support. They are also responsible for making sure their locations are making money and remaining successful while meeting the franchise’s standards. For the franchisee, the heavy lifting continues. Investors focus on operations, maintaining numbers, and insuring their investment stays profitable.

  • Investor Operates or Employs Operators at New Location: Operations can be fulfilled by the investor or by employees the investor hires. Either way, after a location opens come the day-to-day duties. The investor is responsible for hiring, training, and maintaining the franchise standards while relaying information back to the franchisor.
  • Investor continues paying royalties and other franchise fees: In exchange for training tools, brand marketing materials, and purchasing a brand that’s already proven to be a successful business model, the investor continues paying royalties and franchise fees to the franchisor. Some franchises are more lucrative than others, but franchise fees are always a part of the deal in a franchise relationship.
  • Franchisor will continue providing marketing and research: After opening a franchise location, much of the operation is the responsibility of the investor and their employees. However, the franchisor will often continue to check back on numbers, quality, and franchise success in order to ensure the location is meeting its standards. This includes continuing marketing and research to keep the trajectory upward. This keeps both parties accountable and ready to collaborate on what can be improved for both the franchisor and franchisee to ensure success.

Future Franchise Opportunities

Both the franchisor and franchisee will be looking towards the future of their business while making financial decisions on a day-to-day basis. Looking into the future for franchise opportunities will have a lot to do with the success of the current model in place. Successful models have a tendency to do well, but not all management situations, locations, and franchise relationships are created equal. If a franchise has problems, the franchisee may consider selling or forfeiting ownership and looking for another opportunity better suited for them. If it does well, however, more doors begin to open.

  • Successful investors may gain permission to open new locations: Deciding to franchise your business is a big undertaking for a franchisor. When it goes well, there are more opportunities for both the franchisor and franchisee to expand on that success. That may mean more investment opportunities for the franchisor or more locations for the franchisee. In a perfect world, franchisor and franchisee have a great collaborative relationship and can continue to create that successful model a few times over in different locations. In reality, many established franchises do find themselves in this success snowball.

How a franchise works depends on so many different variables. Many of the same challenges of opening an independent small business affect the owners of franchised locations. In reality, success has a lot to do with implementing the correct tools before, during, and after a franchise is purchased from the franchisor by the franchisee.

The teamwork required will ensure its success or failure. Research must be done, both parties must fulfill their obligations, and both must be honest about its success in order to move forward in the future. A franchise works through collaboration. It’s a very give-and-take business model, but when it’s done correctly it can create success for both the franchisor and the franchisee.

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Chelsy is a writer from Montana who now lives in Boise, Idaho. She graduated with her journalism degree from the University of Montana in 2012. She enjoys talk radio, cold coffee, and playing Frisbee with her dog, Titan. Follow Chelsy on Twitter @Chelsy5

This post was updated February 13, 2018. It was originally published January 21, 2018.