The Complete Guide to Franchising a Business

June 10, 2024
Digital Transformation
Franchise Management

"We are an organization of small businesspeople, and as long as we give each of them an opportunity to be successful, we will all be successful."

Ray Kroc, the former CEO of McDonald's who was instrumental in transforming the company into an international giant, famously said these words. His approach focused on offering franchisees a reliable system and maintaining consistent quality, so a Big Mac would taste the same no matter where you are in the world!

Fast food chains like McDonald's and KFC became prominent giants using the franchisee business model. In this definitive guide, we will cover everything you need to know about franchising, how it works, and the advantages and limitations of franchising a business. Read on!

Business Franchising: A Brief

Franchising is a contractual business model. The process of franchising a business involves granting the owner's (franchisor's) proprietary brand, business concept, and operation method to an independent business owner.

This structure enables the franchisee to enjoy the recognition accorded to the franchisor and support in areas such as marketing, training, and supply chain management.

In exchange, the franchisee contributes a franchise fee at the time the two parties enter into the franchising agreement and continues to submit royalties on either sales or profit.

Business franchising is effective for both the parties involved in the contract—the franchisor and the franchisee. This cooperation benefits:

  • The franchisor expands the business, though the franchisor is not directly in control of the new outlets.
  • The franchisee by equipping them with a proven business model with a higher likelihood of success compared to starting a new, independent business from scratch.

How Business Franchising Works

Business franchising starts with a legal agreement, letting the franchisee use the franchisor's brand and systems. It involves paying fees, getting trained, adhering to brand rules and operating procedures, and benefiting from marketing support. Both parties share responsibilities and risks, setting the stage for mutual growth. 

Here’s a detailed breakdown of how the franchising process works in six simple steps:

Step 1: Signing the Franchise Agreement

Franchising involves a legal relationship between the franchisor and the franchisee where they come to an understanding and sign what is commonly known as the franchise agreement.

The agreement documents the relationship between the parties with terms for the duration of the franchising relationship, fees, and other responsibilities among the companies franchised. Some of the details that are often included in the franchise agreement are:

  • Franchise Fee and Royalties
  • Territory Rights
  • Brand Standards
  • Operational Procedures
  • Marketing and Advertising Support
  • Duration and Renewal
  • Termination Clauses
  • Conflict Resolution

Step 2: Payment of Initial Fee and Royalties

The franchisee usually pays an initial fee to 'access' the franchisor's brand and systems. Additionally, they agree to ongoing royalty payments, typically a percentage of their sales or profits, which provides the franchisor with a steady revenue stream.

This arrangement allows the franchisee to benefit from an established business model while the franchisor expands its brand without managing new locations directly. 

Step 3: Site Selection and Development

As the saying goes, in business, it's all about location, location, location. The franchisor usually assists the franchisee in determining the right location for the franchise business. It may place restrictions regarding the zones where the franchise can be situated, the general layout, and the design of the franchise to ensure that it is visibly uniform.

On the other hand, some brands ask franchisees to suggest locations for their new stores. Franchises must find spots that are easy to access and have good market potential. The franchisor will then review and approve the proposed sites to make sure they fit the brand's goals and standards.

Step 4: Training and Support

One major perk of being a franchisee is the training you get from the franchisor. Always check what kind of training the franchisor provides and how often. A franchisor who invests in good training is more likely to help you succeed.  

This may comprise basic training in new programs, access to manuals on the organization's operations, additional commercial promotion, and constant communication to ensure the franchisee conforms to the organization's guidelines.

Step 5: Brand Use, Advertising, and Marketing

A franchisee practices business under a brand name set by the franchisor and adheres to the franchisor's tested strategies and tactics. This comprises the use of the franchisor's registration marks, service marks, and methods of operations, thus requiring that the operations of various franchise units be standardized.

Similarly, franchisees must understand the national or regional marketing campaigns that the franchisor will run, as these benefit all franchise outlets. 

Also, they should check if they need to contribute to these efforts through advertising fees, as outlined in the franchise agreement. This way, the franchisee benefits from national or regional brand recognition, which helps attract customers and build trust.

Step 6: Compliance and Audits

All franchisees' business activities are expected to adhere to the franchisor's brand image and standard operating procedures (SOP). Therefore, franchisors perform periodic checks and assessments. In fact, many franchisors even have compliance management software and apps to ensure ongoing and proactive compliance. 

These compliance audits usually concern the quality of the products sold, the customer experience at the store, local or government regulations, and whether the franchisee adheres to best practices.

Benefits of Franchising a Business

Okay, so you've already established a reasonable brand presence and an operating model that is profitable. Now, you're thinking it's time to franchise your business. Here are some of the reasons why you should consider franchising your business:

1.  Rapid Expansion

Franchising allows for quicker growth without significant capital investment, as franchisees fund new locations. Each year, around 300 companies start franchising their business, adding to the over 3,000 unique franchises in the U.S.

2.  Brand Recognition

Expanding through franchising increases brand visibility and geographical presence, enhancing the overall strength and value of your brand. Notably, 80% of franchises are local or regional brands, which helps maintain a strong local connection.

3.  Steady Revenue Stream

Through initial franchise fees and ongoing royalties, typically around 5–6% of franchisees' sales, you secure a steady income source. Franchises contribute significantly to the economy, with an output of $827 billion across the U.S.

4.  Local Market Penetration

When it comes to penetrating local markets, franchisees, who are often local businesspeople, bring valuable insights and connections. This localized approach aids in tailoring your services or products to meet unique community needs effectively.

Disadvantages of Franchising a Business

Franchising a business is not all a bed of roses. Here are certain downsides to it that can negatively impact your existing business:

1.  Loss of Control

Franchising the business means that you, as the franchisor, relinquish some command and control over day-to-day management. Also, it may be problematic to maintain high levels of consistency across all locations. Poor experiences at franchisee outlets can weaken the company's brand perception.

2.  Initial and Ongoing Costs

The legal structure of a franchise system also poses a high barrier to entry in terms of initial capital for legal advice, marketing, and establishment costs. Also, the efforts needed to support and train new and existing franchisees and their employees can, at times, prove expensive.

3.  Complexity and Legal Challenges

Franchising is associated with many legal and regulatory issues, the specifics of which depend on the particular region and country. Compliance failures at franchised outlets may even result in lawsuits and fines for the brand.

Wrapping Up

The franchising business model allows franchisors to expand rapidly with minimal capital investment using franchisees' resources.

Similarly, franchising a business opens doors to aspiring entrepreneurs so that they can use a well-known brand and business model for faster growth. But it's a journey that involves managing startup expenses, sticking to brand guidelines, and finding a balance between independence and following franchise rules. 

Hubler's Franchise Management software is perfect for brands that want to get more out of their franchisees. Never let expensive and bloated software get in the way of your franchising success.

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