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Franchising 101: How Does a Franchise Work?

The allure of owning a business has a powerful impact on entrepreneurs. But starting a company from scratch can be perilous. New businesses face a variety of challenges at the beginning like establishing brand awareness, developing operational systems and getting new products and services ready to go to market. According to the Small Business Association (SBA), roughly half of new businesses don’t survive for more than five years.

But starting a new company from scratch isn’t the only way to satisfy entrepreneurs’ appetites for business ownership. Franchising offers many of the same benefits as owning an independent business but with the added advantage of having the support of a well-established brand. If this sounds intriguing to you, keep reading to find out how franchising works and what you need to know before opening a franchise business.

How does a franchise work?

Let’s start by explaining how franchise systems work. When it comes to starting a new franchise location, there are two main parties:

  • Franchise owners (i.e., franchisees) – entrepreneurs like you interested in owning a franchise location
  • Corporate brands (i.e., franchisor) – a company that allows entrepreneurs to own and operate one or more of the brand’s locations

In franchising, a franchise owner partners with a corporate brand to open a business under the brand’s umbrella. The franchisee owns and operates that location using the franchisor’s brand name, logo, products, services and other assets.

For more background on how franchising works, check out this list of common franchise terms.

How to buy a franchise

Before investing in a franchise location, franchisees typically have to go through an application process and secure funding. The cost of opening a franchise business varies quite a bit between brands, as does the amount of money franchisees need to put up themselves. If you choose to get into franchising, make sure to work with the franchisor’s development team to determine costs and financing options.

After the brand approves the franchise owner, the two parties work together to get the location up and running. At the beginning of the partnership, the franchisee pays an initial fee to the franchisor to help cover the startup costs. In exchange, the corporate brand helps the franchisee find a location, negotiate a lease, learn how to operate the business and get the unit up and running.

The franchisee/franchisor relationship

With franchising, individual locations’ success is good for the brand, and vice versa. So, as the relationship continues, the franchisor continues to provide a variety of support to help franchisees run and grow their business. In return, franchisees pay the franchisor a percentage of their monthly sales. These royalty payments ensure that the corporate brand can continue providing support like product development, marketing and ongoing training.

Successful franchisee-franchisor partnerships require a symbiotic relationship between owner and brand. Franchise owners get the benefits of running their own business while also enjoying the support of an established brand. For their part, franchisors get to expand their footprint and grow their profits without having to assume all the costs of new locations.

And the benefits don’t stop there. Franchising is also beneficial for the customers who get the same product selection and quality they expect from a major national brand, but with the customized service and personal touch of a small business.

How to start my own franchise location?

Franchising sounds simple, right? Well, for the most part, it is, but franchising is also a flexible business model. This flexibility makes it slightly tougher to define franchising, but it also means franchise owners have a lot more freedom in how they run their business. To help explain this point, let’s look at the variety of ownership models available within most franchise systems.

Single-unit franchise ownership

The single-unit model is the most common type of franchise agreement, and the easiest to understand. Single-unit franchise ownership is precisely what it sounds like – a franchisee owns and operates one franchise location. Many franchisees start as single-unit owners and eventually invest in additional locations as they learn the business and become more comfortable with the brand’s operating model.

Multi-unit franchise ownership

When single-unit franchise owners start seeing success from their original investment, they often move on to multi-unit franchise ownership. Again, this franchising model is exactly what it sounds like – a franchisee owns and operates multiple locations in a single franchise system.

Master or regional franchise ownership

In this model, franchise owners take on some of the responsibilities of the corporate brand by franchising out locations within their designated territory to other franchisees. Regional franchisees receive fees and royalties from their “sub-franchise owners” while performing support activities like training customarily carried out by the corporate brand.

Opening a franchise business

If you’re like most entrepreneurs, odds are you like to do things your way. By offering multiple ownership models, franchise systems provide entrepreneurs like you the flexibility you crave and the potential to grow your business far beyond a single location.