What Is A Franchise? Everything You Need to Know Before Buying or Opening a Franchise Location
We see franchises everywhere. Chain restaurants, department stores, and retail outlets are sprinkled across the country, offering a familiar name and experience to customers no matter where they go. A franchise is basically a business that sells the rights to use its business name, logo, and marketing materials to a third party operator. In the U.S., franchises are technically a type of small business that entrepreneurs can locally own and operate.
A franchised business offers different perks to the parent business owner (franchisor), individual location owner/operator (franchisee), and customers in different ways. There are different types of franchises, certain regulations of control in franchise ownership, and reasons to franchise a business or to buy a franchise. Each relationship is slightly different, but it’s important to know if a franchise business opportunity is right for you.
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Types of Franchises
Not all franchises are created equally, though the major formula is still the same. A business will basically sell it’s model to create duplicates across the country. Whoever buys the franchise is in charge of utilizing all of the tools in that model to create their own duplicate business. Each type of franchise is a branch from this basic idea, and there are two prevalent forms that make up most of what you see today.
- Business Format Franchising: This is the traditional and most common form of franchises with about 80% of franchises using the business format. For example, McDonald’s and Pizza Hut are business format franchises. The franchisee buys the complete business system from the franchisor which results in a consistent, predictable end product for all customers regardless of location.
- Product Distribution Franchises: A product franchise is basically a supplier-retailer relationship. The franchisee sells the franchise’s branded products while following a set of guidelines. Some examples of a product franchise include Coca-Cola or Exxon.
Who Controls a Franchise
This question has no definitive answer, because there are aspects that the franchise brand and the franchisee will have control over. Understanding a franchise is about understanding who controls what in which situation. There is a difference in who makes the decisions based on circumstance. In many situations, a franchise will have an umbrella of operations that all of its franchisees must follow. However, location operations may be slightly different.
- Brand Ownership: A franchise owns its brand. For this reason, it will supply each location with marketing materials, training information, operation manuals, etc. Each franchisee location isn’t free to change recipes, billboards, or nationally advertised sales, etc. There are plenty of pros and cons to owning a franchise, including those associated with brand ownership. Regardless, much of a franchise’s branding is the franchise’s property.
- Location Ownership: The day-to-day operations of a franchise location may be dictated by the franchisor but carried out by the franchisee. Other aspects of the business, such as hiring, compensation, scheduling, employment standards, and employee discipline are up to the franchisee at their location. The franchise is a business purchased by the franchisee, but legally partnered with the franchisor. For that reason, the franchisee must follow all contractual regulations in operation.
Why People Buy Franchises
There are some major benefits to being a business owner buying a franchise. A franchise is a tried and tested business model. People buy a franchise because they have proven to be successful. Starting a new business involves so many unknowns and risks; buying a franchise is a way to avoid much of the investment risk involved in some entrepreneurial adventures. With a strong brand already created, people can help that brand’s reputation grow and reap the rewards of its success.
Not only that, but being a franchisee allows you to have a lot of operational support – more than many small business owners. With training programs, marketing assistance, access to building support and maintenance, etc., franchisee’s are given tools to help ensure success. Some franchises are more profitable than others, but buying a franchise at all is a great way to build success with less risk.
Why Companies Franchise Their Businesses
Franchising is just as helpful for the franchisor as it is to the franchisee. Companies will franchise their business for a number of reasons. The most potentially influential reason for franchising is capital. It’s essentially a way for a company to grow by using the resources of others. Franchising is a way to expand without a portion of liability or debt that would come with building more locations. In addition, franchising is also great for growth and hiring motivated franchisee’s that care just as much about the profitability of each franchise as the franchisor does — maybe moreso.
Starting a franchise as a franchisor involves a lot of risk and work upfront, but once the model is set, it’s built for success. Having franchisees allows a company to remove themselves from a lot of the daily operations and small details and focus on owners, upper management, and profitability. By lowering their liability risk and using the capital of others who are also motivated in a franchise’s success, franchising a business just makes sense for growth.
As a consumer, seeing a brand you know sets certain expectations. When you go to a Subway, you expect the sandwiches to taste a certain way. It’s up to the franchisor to set those expectations and it’s up to the franchisee to follow through with those expectations. All of the responsibility doesn’t fall into one lap or the other, but both the franchisor and the franchisee have their zone to play in order to keep their business successful. For business owners considering taking on a franchise opportunity, it’s about understanding if this type of entrepreneurial opportunity is right for them.
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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 28, 2019. It was originally published January 10, 2018.