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Oct102018
INDUSTRY

How the Franchise Structure Works

If you’re an aspiring entrepreneur searching for the right career path, chances are you’re not interested in simply finding a job to provide a steady paycheck. You want more from a career – the opportunity to be a part of something bigger and to help people solve problems, more freedom to build a business of your own and more flexibility to grow that business into something great. For aspiring entrepreneurs, there are two main paths to achieving this career: starting a business from scratch or opening a franchise business.

When you start a business from scratch, you develop an idea for a product or service from the ground up. You outline a business plan and build your brand. You find your own systems and tools. You develop your own marketing strategy and training plans. Essentially, you’re in business for yourself and by yourself.

Opening a franchise business is a little different. First, you invest in an already established brand and existing franchise system that then provides you with processes and tools to help you run your business. With franchising, you’re still in business for yourself, but you’re not by yourself.

Franchising can be a terrific choice for entrepreneurs – you get to run your own business while leveraging the support and reputation of an existing brand. However, if you’re not familiar with how franchising works, it can be a little complex to navigate at first. If you’re interested in opening a franchise business but are a little unsure of the basics, this article will help you gain a better understanding of common franchising terms and how the business model works.

Common Franchising Terms

Before diving into the logistics of opening a franchise business, let’s look at some common franchising terms. 

Franchisor:

The company that grants a license to a third party (a franchisee) to conduct business and use the trademarks for that brand.

Franchisee:

A person or company that licenses the right to conduct business under a franchisor’s brand name.

Franchise agreement:

The legal, written contract between the franchisor and franchisee which defines what is expected of each party.  As a part of the agreement, the franchise license will outline the relationship between the franchisor and franchisee including:

  • The use of the franchisor’s trademarks.
  • The fees associated with opening and running a franchise.
  • The support system from the franchisor.
  • The level of control each party retains.

Trademark: 

The marks, brand name and logo that identify a franchisor that are licensed to the franchisee. 

Royalty:

The ongoing fees paid by the franchisee to the franchisor.    

Frequently Asked Questions When Opening a Franchise Business

Now that we’ve covered some of the common franchising terms, let’s look at some frequently asked questions (FAQs) that prospective franchisees commonly have when they’re investigating buying a franchise.

How do franchise systems work?

In franchising, franchisors specify the required and recommended products and services that the franchise owner must offer. Franchisors also provide franchisees with the operating systems and processes they will need to operate a franchise location, as well as ongoing business support and a license to use their trademark.

Each franchise system works a little differently. As a franchisee, your working relationship with a franchisor is laid out in the franchise agreement. Make sure to review this document carefully before investing in the business opportunity. It’s also a good idea to have a legal professional review the document before signing.

What kind of support do franchise systems provide?

Franchisor support varies from brand to brand. But, franchisors generally provide franchisees:

  • Site selection and help opening the location.
  • Operating manuals and training.
  • Brand standards and assets.
  • Marketing and advertising support.
  • Ongoing technical support and business guidance.

How much does it cost to open a franchise?

The cost to open a franchise varies quite a bit across franchise systems. And, within each system, there can be a range of franchise fees that vary depending on the location, the level of ongoing support, recurring fees, etc. Once you decide on a few potential brands, make sure you understand all of the costs associated with opening a franchise and the ongoing expenses of running that business.

Do franchise systems provide financial assistance?

Many franchise systems offer financial assistance. Depending on the situation, franchise financing may be available to help new franchise owners get their business started, to help existing franchisees do upgrades or repairs, or even to purchase new equipment necessary to run the business. The UPS Store partners with financial institutions to offer a full suite of funding options for prospective franchisees. Before you consider buying a franchise, do your research to understand the different financing options available to you.

Can I own more than one franchise location?

The number of franchise units that an individual franchisee can own varies. Many franchise brands allow – and even encourage – franchisees to own multiple locations.

What types of businesses work best as franchises?

There are a lot of business categories that lend themselves to the franchise business format. The International Franchising Association (IFA) lists more than 20 franchise industries and categories, plus another 100 or so sub-categories. Popular industries include restaurants, business services and home services.

What’s the best way to research potential franchise business models?

Finding the right franchise business model can be a difficult and lengthy process. If you’re considering franchise ownership, you’ll want to carefully review and evaluate the strengths, weaknesses, opportunities and threat for each potential brand.

Here are some helpful steps to take when you investigate franchise organizations:

  • Start with industries you have prior work experience or a strong interest in.
  • Conduct extensive market research for your top potential brands.
  • Use financial and legal advisors to help navigate the licensing and contractual agreements.
  • Develop marketing and business plans for your chosen franchise system before investing.

Where can I go to learn more about franchising?

If you’re interested in franchising and want to learn more, you’re in luck, the world of franchising has a vast collection of resources to help potential franchisees find the right brand. Here are a few to get you started: