WHAT IS A FRANCHISE?

A franchise is the right, or license, to market a product or service in a defined territory for a specified length of time. The franchisor grants the right to the franchisee. The franchisee is authorized to use the franchisor’s trademarks, marketing system, intellectual property, technology, training, support, and so on, as spelled out in the franchise agreement, in exchange for a franchise fee and ongoing royalties.

Leading franchisors deliver turnkey business models, provide strong and repeatable operating systems, and generate robust revenue streams. They provide the product or service, marketing and sales system, operational infrastructure, technology platform, and world-class initial and ongoing training and support. Importantly, all aspects of the system will be predictable and consistent.

It is precisely the efficient and reliable nature of franchises that makes them desirable and drives their success. In addition, basic business model mistakes and kinks have been worked out of the system. Finally, franchises gain economies of scale because the franchisees band together, pool their resources, experiences, influence, and buying power. That is the power of a great franchise system!

Franchisors provide products and services but, to a large extent, the business model itself is the most important aspect of the business. Following the business model creates expected and recurring results. That is why people flock to franchising as a method to build a business.

The best franchises are ones that you can launch, run, and scale effectively at a lower cost, even with the expenses associated with a franchise, than if you did it on your own.

The best franchise businesses are systems-based and not people dependent. Yes, you need people, but if the system is good, so are the results. The idea is that people, though a crucial part of a franchise, perform at a higher level because of the systems that define and simplify the tasks. Some brands are so successful at this that they can succeed at a high level even if their product or service is merely good.

For example, you can probably make a better hamburger than McDonalds, but do you want to compete with them? Nope, because they have killer systems. Think about it. One of the most iconic and successful brands in the world is run by a bunch of seventeen-year-old kids flipping burgers and making fries!

That is the power of franchising.

FRANCHISE FEES

There are several fees associated with a franchise and these will vary by brand.

FRANCHISE FEES

Franchise fees are the price of admission to a franchise. This is the fee the franchisee pays to the franchisor for the right to license use of the brand, its systems, products, or services.

Franchise fees vary, and when purchasing multiple units, franchisors generally reduce each incremental fee. All franchise fees are not created equal. For example, some franchise fees include training or provide a laptop/iPad loaded with company software, whereas others do not include these extras.

It is interesting to note that franchisors usually do not profit on the franchise fee. Indeed, the fee generally barely covers the cost of recruiting, training, and onboarding a franchisee.

ROYALTIES

Royalties are the fees paid to franchisors for the ongoing rights to use the business model and support. They are generally paid as a percentage of gross sales, but sometimes can be flat rates. Royalties pay for the franchisor’s operating expenses and generate the franchisor’s profit. Franchisors use royalties to pay corporate staff and expenses, provide support to franchisees, and generate profit. Royalties vary widely between franchises. The critical aspect of a royalty is not its amount but what you receive for it.

Some brands will have higher royalty costs but provide bells and whistles such as call-center support or client billing. Obviously, these save significant costs and time for a franchisee and are typically well worth the expense. While it is easy to think that a lower royalty percentage is better, that is often incorrect. Do your validation and find out how franchisees feel!

AD FUND

Most franchises have a national advertising fee. This is used to create brand recognition, marketing materials, search-engine optimization, and lead generation at the national level.

TECH FEES

Finally, franchises charge technology fees. These fees are the passing through of actual costs of program licenses, such as Salesforce or other CRMs, Microsoft Office Suite, and proprietary systems.

A lot of the expenses associated with franchising are ones that you would incur in any business. And in many cases, they are more than offset by financial benefits such as buying products at lower costs because of the franchise volume.

If you want to build an empire, multiunit franchising may be the way to go. Multiunit franchisees, as the name implies, own and run more than one location or territory. Multiunit ownership is very common. In fact, multiunit franchisees own over 50 percent of all franchise units.

Franchisors encourage multiunit ownership because it results in improved performance. With multiple units you create a development plan with the franchisor that will allow you to sequentially open your locations. It is important to open over time and not try to launch everywhere at once. Overextending yourself by opening too much too fast is a recipe for failure. Leading franchise brands have models on how to build multiple units both in terms of timeline and team-building protocol.

Success is generally replicable, especially in franchising, and successful operators manage multiple units well  and earn additional income in two ways. First, having more units means more revenue and profit potential. Second, they are often able to gain efficiencies and economies of scale, leveraging their infrastructure and staff.

Franchisees learn a lot from their first units and can share management and/or employees between locations. Shared staffing also reduces the risk and stress of employee turnover. Additionally, some franchises provide reductions in royalties above certain breakpoints. These breakpoints are generally based on a franchisee, not a territory or location, so multiunit franchisees are more likely to achieve the discounted status, thus saving royalty payments.

The final benefit of owning multiple units is that franchisees can transition from an owner-operator to a semi-absentee owner. Multiple units provide greater income potential, and that allows for the hiring of a manager to run the business and the owner to reduce their involvement. While possible to do with a single unit, the revenue potential may not make it financially feasible.

The Perfect Franchise

The Perfect Franchise is the one book you need to read if you are considering franchising.

Mark Schnurman is one of America’s top Franchise Consultants, and the founder of The Perfect Franchise. Mark outlines a clear process for finding the perfect franchise.

In straightforward language, he explains how to:

  • Decide whether franchising is right for you;
  • Determine which franchise will optimize your chances of success;
  • Conduct due diligence;
  • Fund your franchise investment;
  • Live the life you dream about.

If you want to be your own boss, this is the book for you!