Franchising gives entrepreneurs an opportunity to buy into an existing company and own one or more locations of that company. But what types of businesses can you open with this approach? What are the advantages of this entrepreneurial option? And is this always the right approach?
Franchise Basics
Through franchising, aspiring entrepreneurs have the option to “buy in” to an existing brand and own one or more locations as part of that business. The person or entity buying into this arrangement is called the franchisee.
The franchisee is expected to comply with existing brand standards, and they pledge to follow certain rules and regulations throughout the course of their business ownership. This way, the company is protected; its logo, brand, and reputation can remain in good standing.
In exchange, franchisees will typically receive a license to run their location, education and training for how to make that location successful, marketing materials, supplies, and other forms of support.
Different companies handle franchising in different ways. As a franchisee, you might be required to pay a franchise fee annually or upfront, you may be required to have a specific minimum amount of liquid assets, and you may need to go through several rounds of applications, interviews, and background checks. Some franchises are much pickier than others.
The Benefits of Starting a Franchise
So why would you want to start a business as a franchisee?
There are several benefits, including:
- An existing business model and strategy. One of the hardest parts of starting a business is coming up with a business model and strategy. In other words, how is your business going to make money reliably? Franchisees don’t need to worry about this. When they buy into an existing brand, they tap into an existing business model and strategy. This has already been established and it’s been proven profitable – you just have to take the reins for yourself.
- Brand equity. Some franchisees love the opportunity to tap into the power of existing brand equity. [Franchise owner] of Freedom Fun in South Houston, Texas, says, “Starting a business with a brand that people already know and love takes some of the pressure off. Customers already know what they can expect from the brand, so your new location can hit the ground running.” The more recognizable and trusted the brand is, the more powerful this benefit is. And as an aspiring business owner open to franchising, you may have access to some of the most recognizable brands in the world.
- Easier financing. It’s often easier to get financing for a franchise location than it is for a conventional startup. That’s because there’s already an established business model in place. Additionally, banks and lenders understand that franchisees are usually required to undergo classes and training to maximize their chances of success.
- (Arguably) less risk. It’s arguably less risky to start a franchise location than to start a new business from scratch. Many of the variables are already well understood, and if your business hits a rough patch, you’ll have plenty of support to keep it going.
- Access to resources. Some entrepreneurs like starting franchise locations because it gives them access to more resources. They can get the education and training they need to be effective business owners, as well as marketing materials, access to new technologies, and more.
The Downsides of Starting a Franchise
Of course, there are some downsides to consider as well:
- High startup requirements. Some franchises have high startup requirements. You may be required to pay an exorbitant upfront fee or have a specific liquid net worth before you’re allowed to open a franchise location. Not everyone has the financial status necessary to pursue this.
- Compliance with rules and regulations. As a franchisee, you’ll be required to comply with rules and regulations set by your corporate leaders. It can be challenging to stay within the confines of these limitations, and it may limit your options as an entrepreneur.
- Ongoing franchise fees. Franchise fees vary, but you can expect to pay at least some recurring fees – including royalties, marketing fees, technology fees, and more. While many franchise owners can still profit significantly, these fees can affect your profitability.
- Limited flexibility and control. You simply won’t have as much flexibility and freedom in a franchise location as you would in a business of your own.
Opening a franchise location could be the perfect move for satisfying your entrepreneurial desires while minimizing risk and giving you a head start with marketing and brand equity.
At the same time, due to the high startup requirements and operational restrictions, it’s not the right fit for everyone. Always do your due diligence before moving forward with any major business decision.
