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Which Franchise Model Is Right for You? Here's How to Choose There are thousands of brands and concepts, but franchises generally fall under two business models: "brick-and-mortar" and "service-based." Which is the best choice for you?

By David Busker • Feb 13, 2024

Opinions expressed by Entrepreneur contributors are their own.

A major decision potential business owners must make when considering a franchise is determining what type of business they should run. There are thousands of brands and concepts, but franchises generally fall under two business models: "brick-and-mortar" and " service-based ."

Think about a franchise you know. Any franchise. Possibly one that offers services that you use consistently. Is it a hair salon? A fitness studio? A lawn care company? Maybe a moving service?

All of these are franchises, but in terms of a business model, the hair salon and fitness studio fall under one umbrella — location-based businesses with retail storefronts where the customer receives the service at a fixed-base location. Meanwhile, the lawn care company and moving service fall under another umbrella — service-based brands — which do not have a storefront or customer-facing real estate and the service is provided at the customer's location.

Here are some of the key differences between brick-and-mortar and service-based businesses, as well as the criteria to build one, so you are more informed when choosing a franchise model.

Related: 7 Essential Questions to Ask Yourself Before Starting a Franchise

1. Investment cost

Real estate is what usually drives franchising investment costs . The more real estate intensive, the greater the investment level. Location-based, brick-and-mortar franchises generally have higher initial investments. Building the retail space can be pricey. Picture a fitness studio — you need equipment, like bikes or pilates machines, but also a high-tech sound system, televisions, changing rooms, showers, etc. Not to mention the flooring, interior architecture (walls, stage, various rooms), trade dress and more.

On the other hand, a service-based brand doesn't necessarily require real estate (some may even operate from a home office). Some service-based brands require storage space to house vehicles or equipment that are deployed at the customer's location. Less visible and lower cost industrial spaces are ideal for these franchises. Typically, these spaces require few leasehold improvements compared to a customer-facing retail space.

So what can you expect the investment costs to be for each of these options for a single unit or territory?

While it isn't definitive (there are always exceptions), common ranges are:

  • Brick-and-mortar: $250,000+
  • Service-based brands: under $300,000

2. Ramp-up time

Ramp-up time goes hand-in-hand with investment costs. The time it takes to ramp up to a monthly positive cash flow and establish repeat business both indicate important benchmarks for any sustainable business. In terms of speed, service-based brands are more likely to ramp up quickly because of a lower investment cost upfront and lower fixed overhead costs . Let's consider a moving service brand. Once you have the equipment and employees in place, the month-over-month operation costs are more closely linked to revenue growth; thus, these models can often grow to cash flow more quickly.

Alternatively, a brick-and-mortar brand (like a salon) will have high upfront investment costs (retail space, individual stations, chairs, mirrors, hair wash/dry stations, etc.) and will likely take time to establish a strong customer base in a particular community. But they tend to have more repeat business and durable income streams over time.

Related: The Rise of Click and Mortar — Why Online Businesses Should Consider Opening a Physical Store

3. Scalability

Brick-and-mortar businesses are typically more scalable . Once you have a single successful franchise, it's easier to manage and build an empire by spreading costs over multiple locations. But remember, due to the costly initial investments, building costs will be similar each time you open a new location.

With a service-based brand, rather than building more physical locations to expand, you can expand your territory and drive more penetration within your territories. While this isn't without additional costs (consider gas money, employees to keep up with demand, more frequent equipment maintenance, etc.), it requires incremental investments since your revenue justifies it and creates economies of scale. By purchasing additional territories in a service-based brand, you scale your revenue and income multiplier without the same proportional increase in capital investment.

4. Technology

One area that is relatively equal in terms of usefulness and accessibility is technology. In recent years, technology has transformed the franchise world . Specifically, repeatable but necessary tasks have been streamlined and simplified through technology. For brick-and-mortar brands, it's common to see customers scheduling services directly (hair appointments, fitness class bookings, etc.). For service-based brands, customers can book service calls, and employees can perform tasks in real time to keep business moving, such as ordering parts, creating estimates, etc.

5. Location risk

Location is key for brick-and-mortar franchise brands. It's often a balancing act of finding real estate that is within an acceptable price range and in a popular location that creates consistent repeat business. You will be offering services in a fixed location, so the further away you are from the customer, the less likely the customer will travel to your location. For example, a fitness studio needs to be convenient for customers to come to your location three to four times per week. The more frequently a customer would ideally like to visit your franchise, the higher density is needed for the same market radius.

For a service-based brand, location is not as important for overall success. Since you or your employees will be traveling to the customer's location, there is no site selection risk and you are free to penetrate deeper and deeper into a market. However, it is worth noting that, if you do expand to multiple territories, you may want to consider renting additional warehouse or storage space to optimize efficiency.

Related: Start Your Own Business or Buy a Franchise: Which Is Right For You?

6. Recession resistance

Lastly, one factor to consider lies in the recession resistance of your franchise. Brick-and-mortar brands often offer more discretionary services. These are everyday services to be sure — hair care, nail salon, etc. — but they are not always considered everyday essential services. On the other hand, service-based brands often are essential everyday services that must be performed despite fluctuating market trends — think HVAC, plumbing, yard care or restoration.

At the end of the day, there is no one-size-fits-all franchise for every potential franchisee. But by understanding the basics of these umbrella categories, you can start to consider which business model type matches most closely with your business goals.

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The Franchising Business Model Explained: A Comprehensive Guide

Unlock the secrets of the franchising business model with our comprehensive guide! Discover the ins and outs of this popular business model, from the benefits and challenges to the key steps in getting started.

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Understanding the Basics of Franchising

Franchising is a fascinating business arrangement that has revolutionized the way entrepreneurs can start and operate their own businesses. By exploring the world of franchising, individuals can tap into the power of established brands, proven systems, and ongoing support to increase their chances of success. Let's delve deeper into the basics of franchising and discover the key elements that make it such a compelling business model .

What is a Franchise?

At its core, a franchise is a business arrangement where one party, known as the franchisor, grants another party, known as the franchisee, the right to operate a business using its established brand, systems, and processes. This arrangement allows the franchisee to leverage the reputation and recognition of the franchisor's brand, benefiting from the trust and loyalty already established by the franchisor in the market.

When a franchisee purchases a franchise, they are essentially investing in a proven business model. This means that they don't have to start from scratch and figure out every aspect of running a successful business. Instead, they gain access to a comprehensive set of guidelines, procedures, and strategies that have already been tested and refined by the franchisor.

Furthermore, the franchisor provides ongoing support and training to ensure the franchisee's success. This support can include assistance with site selection, marketing campaigns, operational guidance, and continuous training programs. By receiving this support, franchisees can navigate the challenges of starting and growing a business with the backing of experienced professionals.

Key Elements of a Franchise

A successful franchise requires several key elements to thrive. Firstly, there needs to be a well-defined brand and business concept that has been proven to be successful. The brand serves as the foundation of the franchise, encompassing its values, image, and reputation. A strong brand helps attract customers and differentiate the franchise from competitors.

Additionally, the franchisor must provide ongoing support and training to ensure the franchisee's success. This support can take various forms, such as regular communication, field visits, training programs, and access to a network of fellow franchisees. The franchisor's commitment to supporting their franchisees is crucial in maintaining the overall success of the franchise system.

Furthermore, a franchise agreement, a legal document outlining the rights and responsibilities of both parties, is an integral part of any franchise. This agreement ensures that both the franchisor and the franchisee understand their roles and obligations, providing a framework for the relationship between the two parties. It covers areas such as fees, territory, intellectual property rights, and termination conditions.

Types of Franchise Models

Franchises come in various shapes and sizes, catering to different industries and business models. Understanding the different types of franchise models can help entrepreneurs choose the one that aligns with their interests, skills, and financial capabilities.

One common type of franchise model is the product distribution franchise. In this model, the franchisee sells products supplied by the franchisor. This can include retail stores, where the franchisee sells physical products, or distribution centers, where the franchisee supplies products to other businesses. Product distribution franchises often benefit from the established reputation and quality of the franchisor's products, making it easier to attract customers.

On the other hand, there are service-based franchises, where the franchisee provides services using the franchisor's established methods. These franchises can span various industries, such as cleaning services, home repairs, tutoring, or fitness centers. Service-based franchises offer entrepreneurs the opportunity to tap into a growing market demand for specific services while benefiting from the franchisor's expertise and support.

Additionally, there are also business format franchises, which encompass both product and service aspects. In this model, the franchisee not only sells products but also provides a range of services related to those products. For example, a car dealership franchise not only sells cars but also offers maintenance and repair services. Business format franchises provide a comprehensive solution to customers, allowing them to fulfill their needs in one place.

As you can see, franchising offers a wide range of possibilities for entrepreneurs looking to start their own business. By understanding the basics of franchising, the key elements that make a franchise successful, and the different types of franchise models available, individuals can make informed decisions and embark on a rewarding entrepreneurial journey.

The Pros and Cons of Franchising

Franchising offers numerous benefits that make it an attractive option for aspiring business owners. Firstly, you are buying into a proven business model with a track record of success. This significantly reduces the risk compared to starting a business from scratch. When you invest in a franchise, you are essentially purchasing a blueprint for success. The franchisor has already done the hard work of figuring out what works and what doesn't, saving you valuable time and resources.

Secondly, when you become a franchisee, you gain access to the franchisor's established brand, marketing materials, and customer base, which puts you ahead of the game. Building a brand from scratch can be a daunting task, but with a franchise, you are already starting with brand recognition and a loyal customer following. This gives you a head start in attracting customers and generating revenue.

Furthermore, ongoing support and training from the franchisor ensure that you are never alone on your entrepreneurial journey. The franchisor is invested in your success and will provide you with guidance and assistance every step of the way. Whether it's help with marketing strategies, operational challenges, or employee training, you can rely on the franchisor's expertise and experience to help you navigate any obstacles that may arise.

While franchising has its advantages, it also comes with its fair share of drawbacks. One significant disadvantage is the upfront investment required to purchase a franchise. Unlike starting a business from scratch, where you have more control over your initial costs, buying into a franchise can be quite expensive. You not only have to pay for the franchise rights but also cover the costs of equipment, inventory, and any necessary renovations or modifications to the premises.

Additionally, as a franchisee, you must adhere to strict guidelines and business practices set by the franchisor. While this can provide a sense of security and stability, it can also limit your flexibility and creativity as a business owner. You may have to follow standardized procedures and operate within a predetermined framework, which can be restrictive for those who prefer more autonomy in decision-making.

Furthermore, ongoing franchise fees and royalties may eat into your profits. In addition to the initial investment, franchisees are typically required to pay ongoing fees to the franchisor. These fees can include royalties based on a percentage of sales or fixed monthly fees. While these fees are meant to cover the ongoing support and benefits provided by the franchisor, they can impact your bottom line and reduce your overall profitability.

It's crucial to carefully consider these factors before taking the leap into franchising. While franchising can offer a proven business model, brand recognition, and ongoing support, it's important to weigh the financial commitment, potential limitations, and ongoing fees against the benefits. Conduct thorough research, seek advice from professionals, and evaluate your own goals and preferences to determine if franchising is the right path for you.

The Legal Aspects of Franchising

Franchising has become a popular business model for entrepreneurs looking to start their own business while benefiting from an established brand and proven business system. However, before entering into a franchise, it is crucial to understand the legal aspects involved to protect both the franchisor and franchisee. Two key legal documents that play a significant role in franchising are the franchise agreement and the Franchise Disclosure Document (FDD).

Franchise Agreement: An Overview

A franchise agreement is a legally binding contract that outlines the rights, obligations, and expectations of both the franchisor and franchisee. This agreement serves as the foundation for the franchisor-franchisee relationship and covers various essential aspects of the franchise business.

One crucial element addressed in the franchise agreement is the territory. The agreement specifies the geographic area in which the franchisee has the exclusive right to operate the franchise. This ensures that the franchisor does not grant additional franchises in the same area, which could potentially lead to competition between franchisees.

Another critical aspect covered in the franchise agreement is the fees. The agreement outlines the initial franchise fee, which is the upfront payment made by the franchisee to the franchisor for the right to operate the franchise. Additionally, it may include ongoing royalty fees, marketing fees, and other financial obligations that the franchisee must fulfill throughout the duration of the agreement.

Intellectual property rights are also addressed in the franchise agreement. This includes the use of trademarks, logos, and other proprietary information owned by the franchisor. The agreement specifies how the franchisee can use these intellectual property rights and the consequences of any infringement.

Furthermore, the franchise agreement includes termination clauses that outline the circumstances under which either party can terminate the agreement. These clauses protect both the franchisor and franchisee in case of breaches, non-compliance, or other unforeseen circumstances.

Given the complexity and legal implications of a franchise agreement, it is essential for both parties to consult legal professionals experienced in franchising. These professionals can ensure that the agreement is fair, balanced, and favorable to both the franchisor and franchisee, reducing the risk of potential disputes or legal issues in the future.

Understanding Franchise Disclosure Document (FDD)

In addition to the franchise agreement, the franchisor is legally required to provide the franchisee with a Franchise Disclosure Document (FDD) before the franchisee signs any binding agreements or makes any financial commitments.

The FDD is a comprehensive document that provides detailed information about the franchise system. It serves as a valuable resource for potential franchisees to evaluate the franchise opportunity and make informed decisions. The FDD typically includes the following sections:

  • Franchisor's Background: This section provides information about the franchisor's history, experience, and key personnel. It helps the franchisee assess the franchisor's credibility and track record.
  • Franchisee Obligations: This section outlines the responsibilities and obligations of the franchisee, including operational requirements, training, and ongoing support provided by the franchisor.
  • Initial and Ongoing Costs: Here, the FDD details the initial investment required to start the franchise, including franchise fees, equipment costs, and other expenses. It also covers ongoing costs such as royalties, advertising fees, and any other financial obligations.
  • Financial Performance: This section provides historical financial information about the franchise system, including sales figures, profitability, and other relevant financial data. It helps the franchisee assess the potential profitability of the franchise.
  • Legal and Litigation History: The FDD discloses any past or ongoing legal disputes involving the franchisor, such as lawsuits or regulatory actions. This information allows the franchisee to evaluate any potential legal risks associated with the franchise.

Reviewing the FDD thoroughly is crucial for potential franchisees as it provides valuable insights into the risks and opportunities associated with the franchise. It is recommended to seek professional advice, such as consulting with a franchise attorney or accountant, to ensure a comprehensive understanding of the FDD and its implications.

In conclusion, understanding the legal aspects of franchising is essential for both franchisors and franchisees. The franchise agreement and Franchise Disclosure Document serve as vital tools in establishing a fair and mutually beneficial franchisor-franchisee relationship. Seeking legal guidance and conducting thorough due diligence before entering into a franchise agreement can help mitigate risks and set the foundation for a successful franchise venture.

Steps to Buying a Franchise

Researching potential franchises.

The first step in buying a franchise is conducting thorough research. Start by identifying industries that align with your interests and skills. Then, compile a list of potential franchises and delve into their backgrounds, success rates, and financial requirements. Consider seeking advice from franchise consultants or attending franchise expos to gather all the necessary information.

Evaluating Your Financial Capability

Once you have a list of potential franchises, it's time to assess your financial situation. Determine how much capital you can invest and explore financing options if needed. Remember to factor in not just the initial investment but also ongoing expenses such as royalties, marketing fees, and inventory costs. It's crucial to have a clear understanding of your financial capabilities before proceeding.

Negotiating and Signing the Franchise Agreement

After selecting the franchise that suits your interests and finances, it's time to negotiate the terms of the franchise agreement with the franchisor. Seek legal advice to ensure that you are getting a fair deal. Once both parties have come to an agreement, sign the franchise agreement and get ready to embark on your entrepreneurial journey!

Running a Successful Franchise

Essential skills for franchise owners.

To run a successful franchise, certain skills and qualities are essential. These include strong leadership and management skills, effective communication, problem-solving abilities, and a customer-centric mindset. Additionally, being adaptable and willing to learn from both successes and failures will help you navigate the ever-changing business landscape.

Marketing Your Franchise

Marketing plays a crucial role in the success of any business, including franchises. As a franchise owner, you will have access to the franchisor's marketing materials and strategies. However, it's important to localize your marketing efforts to target your specific customer base. Utilize both traditional and digital marketing channels to reach a wider audience and create a strong brand presence in your local market.

Managing Franchise Operations

Effective operations management is vital for the smooth running of a franchise. This includes managing inventory and supply chains, maintaining quality control, and ensuring adherence to the franchisor's established systems and processes. Implement efficient processes and leverage technology to streamline operations and provide an exceptional customer experience.

Now that you have a comprehensive guide to franchising, it's time to take the leap and explore the exciting world of franchising. Remember, success as a franchisee requires dedication, hard work, and a passion for providing outstanding products or services. So, seize this opportunity and turn your dream of owning a business into a reality!

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Franchise Fundamentals: A Comprehensive Guide to the Franchise Model

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Under the umbrella of The Franchise Business Model, we embark on an insightful journey to uncover the complex yet fascinating world of franchising. This article delves into the core elements that define this business strategy, examining how it blends brand consistency with entrepreneurial spirit to create pathways for expansive business growth and success across various industries.

What is a Franchise Business Model?

The franchise business model is a dynamic approach to business expansion, combining the entrepreneurial drive of a franchisee with the established system and brand of the franchisor. In this model, a franchisor grants the franchisee the right to operate a business under its brand, leveraging the franchisor's trademarks, business strategies, and operational procedures. The franchisee invests in this opportunity, paying an initial fee and ongoing royalties, which affords them access to a proven business model, training, and support systems. This symbiotic relationship allows the franchisee to run an independent business while benefiting from the brand recognition and established customer base of the franchisor. The success of this model is evident in various sectors, ranging from fast food and retail to services, reflecting its versatility and scalability. However, it also demands adherence to the franchisor's guidelines to ensure consistency and quality across all franchise units, preserving the brand's integrity and customer experience.

The Franchisor and Franchisee Relationship 

The relationship between a franchisor and a franchisee is pivotal to the success of the franchise business model. This partnership, characterized by mutual dependence and collaboration, is the cornerstone of franchise operations. Understanding the dynamics of this relationship is crucial for both parties involved.

Franchise Model: Franchisor and Franchisee relationship

Roles and Responsibilities

Franchisor: The primary role of the franchisor is to develop and maintain the overall brand and operational system. This includes creating marketing strategies, establishing brand standards, conducting research and development, and providing ongoing support and training to franchisees. The franchisor also ensures quality control across all franchise units to maintain brand integrity.

Franchisee: The franchisee's main responsibility is to manage the day-to-day operations of the franchise according to the franchisor's established guidelines. This involves hiring and training staff, managing finances, adhering to brand standards, and implementing marketing strategies provided by the franchisor. The franchisee acts as the face of the brand at the local level, directly interacting with customers and the community.

Financial Arrangements

In the franchisor-franchisee relationship, financial arrangements play a pivotal role. The franchisor typically charges an initial franchise fee and ongoing royalties, which are a percentage of the franchisee's sales or profits. These fees fund the support services provided by the franchisor, including training, marketing, and business development. Additionally, franchisees may be required to contribute to a national marketing fund. It's crucial for both parties to have clear, transparent financial terms to ensure mutual understanding and profitability.

Compliance and Quality Control

Compliance and quality control are essential to maintain brand integrity and customer satisfaction across all franchise units. The franchisor sets specific operational guidelines and standards that the franchisee must follow. Regular audits and evaluations are conducted to ensure these standards are met. This oversight ensures consistency in customer experience, product quality, and service across all franchise locations, which is fundamental to the brand's reputation and success.

Conflict Resolution

Conflict resolution mechanisms are vital in the franchisor-franchisee relationship to address disagreements or disputes effectively. Open communication channels, mediation processes, and clear contractual terms can help prevent and resolve conflicts. Both parties should strive for a cooperative approach, recognizing that the success of one directly impacts the other. It is beneficial to have predefined procedures for conflict resolution in the franchise agreement to manage disagreements constructively.

Mutual Goals and Success

The relationship between a franchisor and a franchisee is built on the foundation of mutual goals and shared success. The franchisor aims to expand its brand and increase market presence, while the franchisee seeks to run a profitable business. Collaboration, support, and shared objectives are key to achieving these goals. Regular communication, performance reviews, and a focus on collaborative strategies can help align the franchisor's vision with the franchisee's local market insights and operational expertise, leading to collective growth and success.

The franchisor-franchisee relationship is a delicate balance of guidance, independence, mutual respect, and shared objectives. Both parties must work collaboratively towards common goals, with a clear understanding of their roles and responsibilities, to ensure the prosperity and longevity of the franchise business.

What Franchisees Can Expect from Their Franchisor

Entering into a franchise agreement, franchisees can anticipate a range of support and resources from their franchisor. This support is designed to maximize the chances of success for each franchise unit, while maintaining the integrity and consistency of the brand as a whole. Understanding what to expect from a franchisor can help prospective franchisees make informed decisions and set realistic expectations.

  • Training and Education: Franchisees can expect comprehensive training programs from their franchisor. This often includes initial training on business operations, staff management, customer service, and the specific products or services offered. Ongoing training may also be provided to keep franchisees updated on new developments, products, or changes in business operations.
  • Operational Support: Franchisors typically provide a detailed operations manual that serves as a blueprint for running the franchise. This manual covers every aspect of the business, from day-to-day operations to employee conduct and customer service standards. Support might also include assistance with business planning, financial management, and operational problem-solving.
  • Marketing and Advertising: Franchisees can expect to benefit from the franchisor’s national or regional marketing campaigns. This includes brand advertising, promotions, and other marketing initiatives designed to attract customers and build brand recognition. Franchisors may also provide guidance or resources for local marketing efforts, helping franchisees to effectively market their specific location.
  • Site Selection and Setup: Many franchisors assist with site selection, leveraging their experience and data to identify locations with the best potential for success. Support might extend to the design and setup of the franchise location, ensuring that each site reflects the brand’s image and standards.
  • Supply Chain Access: Franchisees often have access to the franchisor’s established supply chain, benefiting from bulk purchasing agreements and preferred vendor relationships. This can lead to cost savings and consistency in product or service quality. Franchisors may also provide guidance on inventory management and control.
  • Ongoing Consultation and Support: Regular support and consultation are typically part of the franchisor’s offering. This can include periodic visits from franchisor representatives, ongoing business reviews, and access to a help desk or support team. This support aims to ensure franchisees are operating effectively and are aligned with the brand’s standards and goals.
  • Innovation and Development: Franchisees can expect the franchisor to continuously innovate and develop the brand, products, and services. This is crucial for staying competitive in the market. Franchisees benefit from these innovations, which can help attract new customers and retain existing ones.
  • Community and Network: Franchisees become part of a larger community of fellow franchisees. This network can be a valuable resource for sharing best practices, advice, and support. Franchisors often facilitate networking opportunities through conferences, meetings, or online platforms.

Franchisees can expect a substantial level of support and resources from their franchisor. This includes initial and ongoing training, operational guidance, marketing assistance, supply chain access, and continuous innovation. Such support is essential for the franchisee’s success and contributes significantly to the overall strength and growth of the franchise brand.

Types of Franchise Business Models

The franchise industry offers a diverse range of business models, each catering to different market sectors and investment levels. Understanding the various types of franchise models can help prospective franchisees identify the best fit for their goals, interests, and investment capacity. Here are some of the primary types of franchise business models:

Types of Franchise Business Models

Product Distribution Franchise:

  • This model is similar to a traditional supplier-dealer relationship. The franchisee is licensed to sell the franchisor’s products. It is commonly seen in industries like automotive (tire manufacturers, car manufacturers), beverage companies, and other product-based sectors.
  • The focus is more on the product than on the system of doing business, although franchisees may still be required to adhere to certain operational guidelines.

Business Format Franchise:

  • The most common and identifiable type of franchise, this model involves a deeper relationship between franchisor and franchisee. Franchisees not only sell the franchisor’s products or services but also follow their proven business format and processes.
  • This model includes comprehensive support from the franchisor, including marketing, branding, training, and systems for running the business. Examples include fast food restaurants, retail stores, and service-based businesses like gyms or cleaning services.

Management Franchise:

  • In a management franchise, the franchisee primarily focuses on managing the business rather than carrying out day-to-day operations. This model is ideal for individuals with strong management skills.
  • The franchisee hires staff to perform the service or sell the products while they concentrate on growing the business, managing teams, and developing strategies.

Investment Franchise:

  • This model requires a significant financial investment from the franchisee, who often acts more as an investor than an operator. The franchisee may hire a management team to run the business.
  • Investment franchises are common in large-scale businesses like hotel chains or large restaurant brands.

Conversion Franchise:

  • Conversion franchising involves converting an existing business into a franchise unit. This model allows independent business owners to become part of a larger, well-known brand to leverage their systems, support, and brand recognition.
  • It is common in sectors like real estate, florists, home services, and other professional services.

Job-Franchise:

  • Also known as a micro-franchise, this model typically requires a lower investment and is often service-oriented. The franchisee usually works alone or with a small team.
  • Examples include lawn care, cleaning services, and other home-based business opportunities.

Master Franchise:

  • In this model, the franchisee, known as a master franchisee, acquires the rights to a specific geographic area and is responsible for recruiting new franchisees in that area.
  • The master franchisee often provides training, support, and operational guidance to the sub-franchisees in their territory, acting as a mini-franchisor.

Area Developer Franchise:

  • Similar to the master franchise model, area developers have the right to open and operate a set number of locations within a given area, often over a specified period.
  • The area developer is responsible for managing each location and ensuring adherence to the franchisor’s standards and practices.

Steps to Start a Franchise

Starting a franchise requires a detailed and structured approach, encompassing various stages from market research to legal compliance and marketing. Here’s a breakdown of the essential steps to start a franchise:

Franchise Model: steps to start a franchise

Step 1: Conducting Market Research

This initial step involves gathering and analyzing data to understand the market landscape and identify potential opportunities for your franchise.

  • Identify Market Needs: Understand the needs and preferences of the target market. Research what products or services are in demand and how your franchise concept can fulfill these needs.
  • Competitive Analysis: Analyze competitors in the franchise sector you are interested in. Understand their strengths, weaknesses, and market positioning.
  • Feasibility Study: Conduct a feasibility study to assess the practicality of your franchise concept in the chosen market. This includes evaluating economic, technical, and legal aspects.
  • Location Analysis: For physical franchises, location is crucial. Research the best locations for visibility, customer access, and potential market size.

Step 2: Developing a Franchise Business Plan

In this phase, you will outline a comprehensive plan that details your franchise's operational, financial, and growth strategies.

  • Define Business Model: Outline the franchise structure, including details on the operational model, training, support, financial arrangements, and growth strategies.
  • Financial Projections: Include detailed financial projections covering initial investment, ongoing costs, royalty fees, and break-even analysis.
  • Franchisor and Franchisee Roles: Clearly define the roles and responsibilities of the franchisor and the franchisees.
  • Growth Strategy: Develop a clear strategy for scaling the franchise, including target markets, number of units, and timelines.

Step 3: Legal and Regulatory Compliance

This crucial step ensures your franchise adheres to all legal standards and regulatory requirements, setting a solid foundation for lawful operations.

  • Understand Franchise Laws: Familiarize yourself with the legal requirements for franchising in your country, including any specific laws that govern franchise operations.
  • Consult Legal Experts: Engage with attorneys who specialize in franchise law to ensure compliance with all legal requirements.
  • Develop Contracts: Prepare comprehensive franchise agreements detailing the terms of the relationship, rights, and obligations of both franchisor and franchisee.

Step 4: Creating Franchise Disclosure Document (FDD)

Developing the FDD is a key legal requirement, providing prospective franchisees with all necessary information about your franchise.

  • Draft the FDD: The Franchise Disclosure Document is a legal document that must be provided to prospective franchisees before any agreement is signed. It includes detailed information about the franchise, including business experience, litigation history, initial and ongoing costs, restrictions, and support.
  • Legal Review: Have the FDD reviewed by a legal expert to ensure it complies with regulatory standards.
  • Update Regularly: Keep the FDD updated with any changes in the franchise operation, financial condition, or legal requirements.

Step 5: Franchise Marketing and Sales

This stage focuses on strategies for effectively marketing your franchise and recruiting potential franchisees to expand your brand's reach.

  • Develop Marketing Strategy: Create a comprehensive marketing strategy to attract potential franchisees. This includes digital marketing, franchise expos, and print advertising.
  • Sales Process: Establish a clear sales process for recruiting franchisees. This includes interviews, background checks, and financial assessments to ensure the suitability of candidates.
  • Brand Consistency: Ensure that all marketing and sales materials reflect the brand’s values, ethos, and quality standards.
  • Training for Sales Team: Provide thorough training to your sales team about the franchise model, benefits, and expectations to effectively communicate with potential franchisees.

Advantages of the Franchise Business Model

The franchise business model offers a unique blend of benefits for both franchisors and franchisees, making it a popular choice in various industries. Here are some of the key advantages:

Advantages of the Franchise Business Model

  • Proven Business Model: Franchises operate on a tried-and-tested business model, reducing the risks associated with starting a new business. Franchisees benefit from the franchisor's experience and established procedures, increasing the likelihood of success.
  • Brand Recognition: Franchisees gain immediate access to a recognized brand, which can take years to build from scratch. This brand awareness attracts customers and instills trust, providing a competitive edge in the market.
  • Support and Training: Franchisors offer extensive training and ongoing support to franchisees, covering operational practices, marketing strategies, and management skills. This support is invaluable for entrepreneurs new to the industry.
  • Economies of Scale: Being part of a larger network allows for economies of scale in purchasing, marketing, and operational expenses. Franchisees can leverage collective buying power, leading to lower costs and increased profitability.
  • Expansion Opportunities: For franchisors, this model provides an efficient way to expand their business without the high capital investment typically required for opening new locations. It enables rapid growth and market penetration.
  • Motivated Management: Franchisees, as business owners, are highly motivated to succeed, leading to better-run units and higher overall performance compared to directly managed outlets.
  • Innovation and Local Adaptation: While maintaining brand consistency, franchisees can also bring in local market insights and innovations, which can be beneficial for the entire franchise system.
  • Risk Distribution: The franchising model distributes the risks between the franchisor and the franchisees. While the franchisor invests in brand development and support systems, franchisees invest in individual units, spreading the financial risk.

Overall, the franchise business model offers a unique pathway to business ownership with the support of an established brand and system, making it an attractive option for both entrepreneurs and established businesses looking to expand.

Challenges in the Franchise Business Model

While the franchise business model presents numerous advantages, it also comes with its own set of challenges. These hurdles can impact both franchisors and franchisees and understanding them is crucial for anyone considering entering the franchising world. Here are some of the key challenges associated with the franchise business model:

  • ‍ Initial Investment Costs: Starting a franchise often requires a significant initial investment, which can be a barrier for many potential franchisees. This includes franchise fees, start-up costs, and the capital needed to sustain the business until it becomes profitable. ‍
  • Ongoing Fees and Royalties: Franchisees must pay ongoing fees and royalties to the franchisor, which can be a substantial portion of the revenue. These fees are for the continued use of the brand, support services, and sometimes for national marketing efforts. ‍
  • Limited Operational Flexibility: Franchisees are required to adhere to the franchisor’s strict operational guidelines and procedures, limiting their ability to make independent decisions or changes to the business model, products, or services. ‍
  • Dependence on Franchisor's Reputation: The success of a franchise can be closely tied to the franchisor's brand reputation. Any negative publicity or issues at the corporate level can adversely affect individual franchise units. ‍
  • Market Saturation: In some cases, franchisors may oversaturate a market with too many franchise units, leading to competition among franchisees of the same brand, which can impact profitability. ‍
  • Territorial Restrictions: Franchise agreements often include territorial restrictions, limiting where franchisees can operate and market their business. This can restrict expansion opportunities and market reach. ‍
  • Quality and Consistency Challenges: Maintaining quality and consistency across all franchise units can be challenging, especially as the number of franchisees grows. This can impact the overall brand image and customer experience. ‍
  • Contractual Disputes: Disputes can arise between franchisors and franchisees over contract terms, operational practices, or financial arrangements. Resolving these disputes can be time-consuming and costly. ‍
  • Exit Difficulties: Exiting a franchise agreement can be complex and challenging. Franchise contracts often have strict conditions and terms for selling or transferring the franchise, and there may be financial penalties for early termination. ‍
  • Staff Recruitment and Retention: Finding and retaining skilled staff can be challenging for franchisees, particularly in competitive labor markets or industries with high turnover rates.

What Role Does a Franchise Agreement Play in a Franchise Business Model?

The franchise agreement is a critical document in the franchise business model, serving as the legal foundation of the relationship between the franchisor and franchisee. It outlines key aspects vital for the operation and success of the franchise:

  • Relationship Definition: Establishes the legal basis of the franchisor-franchisee partnership, including support and training responsibilities.
  • Rights and Obligations: Details the rights granted to the franchisee, such as brand usage, and outlines their obligations like adhering to operational guidelines and fee payments.
  • Duration and Renewal: Specifies the terms of the agreement and conditions for renewal, allowing both parties to understand and plan for the franchise's longevity.
  • Territorial Rights: Defines the geographical area for the franchisee's operations, helping prevent market saturation.
  • Financial Arrangements: Lays out all financial aspects, including initial fees, royalties, and other monetary commitments.
  • Quality Control: Sets brand standards and quality control measures, ensuring consistency across all franchises.
  • Training and Support: Outlines the franchisor’s duty to provide initial and ongoing support and training.
  • Marketing and Advertising: Includes clauses on marketing strategies, detailing both franchisor and franchisee responsibilities.
  • Dispute Resolution: Provides mechanisms for resolving conflicts between franchisor and franchisee.
  • Termination Conditions: Explains conditions for ending the franchise agreement, including breaches or failures.
  • Post-Termination Obligations: Details the franchisee's responsibilities after the agreement ends, such as non-compete clauses and handling proprietary information.

The franchise agreement acts as a comprehensive guide for operational, financial, and legal aspects, ensuring a clear understanding of each party's role in the franchise system.

Final Thoughts

In conclusion, the franchise business model offers a unique blend of entrepreneurial opportunity and structured support, appealing to a wide range of business aspirations. However, it's crucial for both franchisors and franchisees to navigate its complexities with a clear understanding of roles, responsibilities, and the inherent challenges and advantages. By doing so, participants in this model can unlock significant potential for growth, innovation, and sustained success in the dynamic world of franchising.

Javier is an experienced franchise industry professional with a focus on development, operations, and performance. With almost a decade of experience in the industry, he has witnessed both the successes and failures of franchise owners. Javier strongly believes that buying a franchise is not just an investment, but a life-changing event that presents a unique opportunity for personal and professional growth. He enjoys helping aspiring franchise owners navigate the decision-making process and increase their chances of success.

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What Is a Franchise?

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A franchise is a type of license that grants a franchisee access to a franchisor's proprietary business knowledge, processes, and trademarks, thus allowing the franchisee to sell a product or service under the franchisor's business name. In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual licensing fees .

Key Takeaways

  • A franchise is a business whereby the owner licenses its operations—along with its products, branding, and knowledge—in exchange for a franchise fee.
  • The franchisor is the business that grants licenses to franchisees.
  • The Franchise Rule requires franchisors to disclose key operating information to prospective franchisees.
  • Ongoing royalties paid to franchisors vary by industry and can range between 4.6% and 12.5%.

Investopedia / Mira Norian

When a business wants to increase its market share or geographical reach at a low cost, it may franchise its product and brand name. A franchise is a joint venture between a franchisor and a franchisee. The franchisor is the original business. It sells the right to use its name and idea. The franchisee buys this right to sell the franchisor's goods or services under an existing business model and trademark .

Franchises are a popular way for entrepreneurs to start a business, especially when entering a highly competitive industry such as fast food. One big advantage to purchasing a franchise is you have access to an established company's brand name . You won't need to spend resources getting your name and product out to customers.

The franchise business model has a storied history in the United States. The concept dates to the mid-19th century when two companies—the McCormick Harvesting Machine Company and the I.M. Singer Company—developed organizational, marketing, and distribution systems recognized as the forerunners to franchising. These novel business structures were developed in response to high-volume production and allowed McCormick and Singer to sell their reapers and sewing machines to an expanding domestic market.

Before buying into a franchise, investors should carefully read the Franchise Disclosure Document, which franchisors are required to provide. This document contains information about franchise fees, expenses, performance expectations, and other key operating details.

The earliest food and hospitality franchises were developed in the 1920s and 1930s. A&W Root Beer launched franchise operations in 1925. Howard Johnson Restaurants opened its first outlet in 1935, expanding rapidly and paving the way for the restaurant chains and franchises that define the American fast-food industry until this day.

There were 790,492 franchise establishments in 2022 that supported the U.S. economy, with an expected 805,436 for 2023. These franchises contributed over $500 billion to the economy. In the food sector, franchises included recognizable brands such as McDonald's, Taco Bell, Dairy Queen, Denny's, Jimmy John's, and Dunkin'. Other popular franchises include Hampton by Hilton and Days Inn, as well as 7-Eleven and Anytime Fitness.

Franchise Basics and Regulations

Franchise contracts are complex and vary for each franchisor. Typically, a franchise agreement includes three categories of payment to the franchisor. First, the franchisee must purchase the controlled rights, or trademark , from the franchisor in the form of an upfront fee. Second, the franchisor often receives payment for providing training, equipment, or business advisory services. Finally, the franchisor receives ongoing royalties or a percentage of the operation's sales.

A franchise contract is temporary, akin to a lease or rental of a business. It does not signify business ownership by the franchisee. Depending on the contract, franchise agreements typically last between five and 30 years, with serious penalties if a franchisee violates or prematurely terminates the contract.

In the U.S., franchises are regulated at the state level; however, the Federal Trade Commission (FTC) established one federal regulation in 1979. The Franchise Rule is a legal disclosure a franchisor must give to prospective buyers. The franchisor must fully disclose any risks, benefits, or limits to a franchise investment.

This information covers fees and expenses, litigation history, approved business vendors or suppliers, estimated financial performance expectations, and other key details. This disclosure requirement was previously known as the Uniform Franchise Offering Circular before it was renamed the Franchise Disclosure Document in 2007.

Advantages and Disadvantages of Franchises

There are many advantages to investing in a franchise, and also drawbacks. Widely recognized benefits include a ready-made business formula to follow. A franchise comes with market-tested products and services, and in many cases established brand recognition .

If you're a McDonald's franchisee, decisions about what products to sell, how to layout your store, or even how to design your employee uniforms have already been made. Some franchisors offer training and financial planning, or lists of approved suppliers. But while franchises come with a formula and track record, success is never guaranteed.

Disadvantages

Disadvantages include heavy start-up costs as well as ongoing royalty costs. To take the McDonald’s example further, the estimated total amount of money it costs to start a McDonald’s franchise ranges from $1.3 million to $2.3 million, on top of needing liquid capital of $500,000.

By definition, franchises have ongoing fees that must be paid to the franchisor in the form of a percentage of sales or revenue. This percentage can range between 4.6% and 12.5%, depending on the industry.

For uprising brands, there are those who publicize inaccurate information and boast about ratings, rankings, and awards that are not required to be proven. So, franchisees might pay high dollar amounts for no or low franchise value.

Franchisees also lack control over territory or creativity with their business. Financing from the franchisor or elsewhere may be difficult to come by. Other factors that impact all businesses, such as poor location or management, are also possibilities.

Ready-made business formula

Market-tested products and services

Established brand recognition

Large decisions already made

List of approved suppliers

Training and financial planning provided

Success not guaranteed

Large start-up costs

Ongoing fees

Lack of territory choice

Lack of creative control

If you don't want to run a business based on someone else's idea, you can start your own. But starting your own company is risky, though it offers rewards both monetary and personal. When you start your own business, you're on your own. Much is unknown. "Will my product sell?", "Will customers like what I have to offer?", "Will I make enough money to survive?"

The failure rate for new businesses is high. Two-thirds of businesses survive just two years, and 50% survive just five years. If your business is going to beat the odds, you alone can make that happen.

To turn your dream into reality, expect to work long and hard hours with no support or expert training. If you venture out solo with little or no experience, the deck is stacked against you. If this sounds like too big a burden, the franchise route may be a wiser choice.

People typically purchase a franchise because they see other franchisees' success stories. Franchises offer careful entrepreneurs a stable, tested model for running a successful business. On the other hand, for entrepreneurs with a big idea and a solid understanding of how to run a business, launching your own startup presents an opportunity for personal and financial freedom. Deciding which model is right for you is a choice only you can make.

What Are the Advantages of Franchises?

Some of the widely recognized advantages of franchises include a ready-made business formula to follow, market-tested products and services, and, in many cases, established brand recognition. For example, if you're a McDonald's franchisee, decisions about what products to sell, how to layout your store, or even how to design your employee uniforms have already been made. Some franchisors offer training and financial planning, or lists of approved suppliers; however, despite these benefits, success is never guaranteed.

What Are the Risks of Franchises?

Disadvantages include heavy start-up costs as well as ongoing royalty costs. By definition, franchises have ongoing fees that must be paid to the franchisor in the form of a percentage of sales or revenue. This percentage can range between 4.6% and 12.5%, depending on the industry.

There is also the risk of a franchisee being duped by inaccurate information and paying high dollar amounts for no or low franchise value. Franchisees also lack control over territory or creativity with their business. Financing from the franchisor or elsewhere may be difficult to come by and franchisees could be adversely affected by poor location or management.

How Does the Franchisor Make Money?

Typically, a franchise agreement includes three categories of payment to the franchisor. First, the franchisee must purchase the controlled rights, or trademark, from the franchisor in the form of an upfront fee. Second, the franchisor often receives payment for providing training, equipment, or business advisory services. Finally, the franchisor receives ongoing royalties or a percentage of the operation's sales.

A franchise can be a great way for an individual to enter the world of entrepreneurship , as the majority of the groundwork has already been laid and you are leveraging off an established, successful, and well-known business and brand name. There are also many businesses with franchises to choose from.

For a fee and start-up costs, you can be on your way to being your own boss and entering a possibly lucrative career. Though it must be noted that success is not guaranteed and franchises require a lot of work to be profitable.

Federal Trade Commission. " Franchise Rule Compliance Guide ," Pages 1, 24-119.

International Franchise Association. " Royalty Fee Requirement Definitions ."

Thomas S. Dicke. "Franchising in America: The Development of a Business Method, 1840-1980," Pages 12-13. UNC Press Books, 1992.

Thomas S. Dicke. " Franchising in America: The Development of a Business Method, 1840-1980 ," Page 119. UNC Press Books, 1992.

International Franchise Association. " 2023 Franchising Economic Outlook ," Page 6.

Franchise Help. " McDonald's Franchise ."

Small Business Administration. " Small Business Facts ."

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Understanding the Franchise Model: Benefits, Business Model, and How It Works

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Have you ever dreamed of owning a successful business but felt overwhelmed by the idea of starting from scratch? The franchise model may be the perfect solution for you! Not only does it offer a reliable and established business structure, but it also provides support and guidance to help you achieve success. In this blog post, we will delve into the world of franchising, exploring its benefits, challenges, and how to evaluate a franchise opportunity, ensuring that you make an informed decision about your entrepreneurial journey.

Key Takeaways

Franchise model provides reduced risk and access to established brand & support system.

Initial investment includes franchise fee, rent, inventory etc., with ongoing fees for royalties & marketing.

Evaluate opportunity thoroughly, seek professional advice, adhere to franchisor standards and build strong relationships with other franchisees for success.

Exploring the Franchise Model

Franchising, a franchise business model, provides a unique opportunity for aspiring entrepreneurs to become a part of an already established business. The franchisor, the owner of the successful brand, permits an independent business owner, the franchisee, to employ their branding, business model, and intellectual property through a franchise agreement. This ready-made business opportunity grants franchisees access to:

A proven system

An established brand

Ongoing support

Initial training provided by the franchisor

Franchisor and Franchisee Roles

In a franchise relationship, the franchisor supplies the brand, business model, and necessary support, while the franchisee invests in the business and operates it according to the franchisor’s guidelines. Leveraging the franchisor’s experience through adherence to their established business systems allows the franchisee to fast-track success, compared to starting a business from scratch.

The success of a franchise largely depends on the relationship between the franchisor and the franchisee. A strong partnership built on mutual respect, understanding, and encouragement is essential when starting a new business. A healthy franchise relationship facilitates collaborative work between both parties to ensure a successful franchise and business prosperity.

Types of Franchise Models

There are various types of franchise models for potential franchisees to choose from. Some of the most common models include product distribution, manufacturing, business-format, and master franchises. In the product distribution franchise model, the franchisor, who is also the manufacturer of the product, grants the franchisee the right to sell the brand exclusively. Coca-Cola, John Deere, and Ford Motor Company are some examples of companies that follow the product distribution franchise model. They have been successful in building large networks of distributors within their respective industries.

The business-format franchise, the most prevalent business format franchise model, provides franchisees with access to the franchisor’s:

marketing and sales strategies

distribution and operations systems

training and support

This allows franchisees to start their own business with the proven success of the business format franchise model.

Companies such as McDonald’s and Burger King employ this model. Understanding the variety of available franchise models empowers aspiring entrepreneurs to choose one that best aligns with their goals and resources.

Benefits of Choosing a Franchise Model

Choosing a Franchise

Choosing a franchise model offers several advantages for entrepreneurs. One of the most significant benefits is:

Reduced risk associated with investing in an established brand and support system provided by the franchisor

Proven business plan, tested products and services, and an established brand recognition

Franchisees can focus on growing their business instead of starting from the ground up

Reduced Risks

When opting for a franchise model, entrepreneurs can take advantage of a well-established business model and receive ongoing guidance and training from the franchisor. These elements significantly lower the risks and uncertainties involved in starting a new business. As a result, franchisees can enter the market with greater confidence and a higher likelihood of success.

Established Brand and Support

Established Brand

Franchisees also benefit from the established brand recognition and support provided by the franchisor. With an established brand, customers are more likely to be familiar with the products or services offered, which can ultimately lead to increased sales and success for the franchisee.

Additionally, franchisors offer a range of support services, such as training, marketing, and operational assistance, which can help franchisees overcome challenges and achieve success more quickly than if they were to start a business from scratch.

Costs and Challenges of Franchise Ownership

Franchise Challenges

Despite its many benefits, franchise ownership also comes with its share of challenges. Costs, such as initial investment and ongoing fees, as well as limited control over the business, are some of the hurdles that franchisees may face.

Before committing to this business model, a careful evaluation of the pros and cons of franchise ownership is advised.

Initial Investment and Ongoing Fees

Franchise ownership requires a significant initial investment, which includes:

The franchise fee

Rent to build and equip an outlet

Initial inventory

Operating licenses

A grand opening fee

In addition to the initial franchise fee, franchisees must also pay ongoing royalties and advertising fees to the franchisor.

Despite the considerable costs, they should be viewed as an investment into a proven business model with potential for success and growth.

Limited Control and Flexibility

Franchisees may also experience limited control over their business, as they must adhere to the franchisor’s standards and guidelines. These guidelines ensure uniformity and quality across the franchise, but they can limit the franchisee’s ability to make decisions that are advantageous for their specific business circumstances.

Despite the challenging lack of control, bear in mind that the franchisor’s standards and guidelines are crafted from years of experience and have been instrumental in the success of the franchise brand.

Evaluating a Franchise Opportunity

Evaluating

A thorough evaluation of the opportunity, which includes analysis of the Franchise Disclosure Document (FDD) and consultation with lawyers, accountants, and other professionals, is a crucial step before investing in a franchise.

A careful assessment of a franchise opportunity enables potential franchisees to make informed decisions and circumvent potential pitfalls.

Analyzing the Franchise Disclosure Document (FDD)

The FDD is a legal document that provides essential information about the franchisor, fees, obligations, and other important aspects of the franchise opportunity. Prospective franchisees should carefully review this document to understand the details of the franchise relationship, including support and training provided by the franchisor, and any risks, benefits, or limitations associated with the investment.

Items such as litigation history, financial statements, and the franchisor’s trademark information should be closely examined to ensure a well-informed decision is made.

Seeking Professional Advice

In addition to analyzing the FDD, potential franchisees should also seek professional advice from lawyers, accountants, franchise brokers, and other experts who specialize in franchising. These professionals can help identify any potential issues, offer guidance on contract negotiations, and provide insights into the financial aspects of the franchise opportunity.

Additionally, connecting with current and past franchisees can offer invaluable first-hand insights into their experiences with the franchise.

Tips for Success as a Franchisee

Success

Keeping certain key strategies in mind is crucial for maximizing success as a franchisee. Adhering to the franchisor’s standards and building a strong network with fellow franchisees are two essential factors that can significantly impact the success and growth of a franchise business.

Adhering to Franchisor’s Standards

Following the franchisor’s guidelines and maintaining high standards are essential for the success of a franchise business. Adherence to the franchisor’s system standards, encompassing rules, policies, and techniques related to:

products and services

equipment use

methods of operation

Ensures uniformity and quality across all locations. This adherence not only helps maintain the reputation of the franchise but also contributes to the success of the individual franchisee.

Building a Strong Network

Developing a robust network with fellow franchisees can provide valuable support, advice, and resources for overcoming challenges and achieving success in the franchise industry. By attending industry events, joining online forums, and engaging in networking activities, franchisees can build relationships with others in the same sector, exchanging information and learning from each other’s experiences.

In conclusion, the franchise model presents a unique and exciting opportunity for aspiring entrepreneurs to become part of an established brand and benefit from proven business systems. While franchise ownership does come with its share of challenges, such as initial investment costs and limited control, the benefits of reduced risks, established brand recognition, and ongoing support from the franchisor often outweigh the drawbacks. By carefully evaluating a franchise opportunity, seeking professional advice, and employing strategies for success, franchisees can position themselves for a thriving and rewarding business venture.

Frequently Asked Questions

What is a franchising model.

Franchising is a business model that allows the owner (franchisor) to utilize another party’s (franchisee) services, using their branding and intellectual property. It is most often associated with fast-food chains but can be traced back to the Singer sewing machine company.

What is a franchise model example?

A franchise model example is the Business Format Franchise, such as Dunkin Donuts and McDonald’s. Franchises are a common way of doing business in the U.S., with well-known examples including McDonald’s, Subway, UPS, and H&R Block.

What are the 4 types of franchise arrangement?

Four types of franchise arrangements include Single Unit Franchise, Multi Unit Franchise, Area Development Franchise, and Master Franchise.

What are the main benefits of choosing a franchise model?

Choosing a franchise model provides significant benefits such as reduced risks, established brand recognition, and ongoing support from the franchisor.

What are the costs and challenges of franchise ownership?

Owning a franchise can be costly, with the initial investment and ongoing fees adding up quickly. There is also a lack of control over the business, making it a challenging endeavor.

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The Franchise Business Model: Understanding Franchising 101

blocks representing franchising

In the U.S., there are more than 750,000 franchises that employ around 7.5 million people and generate nearly $700 billion annually. Clearly, franchising is big business, but why is it so popular? The answer is simple – there are many advantages to buying a franchise. If you’ve been thinking about opening a small business but can’t decide whether it’s better to buy a franchise or start a company from scratch, keep reading to learn more about the franchise business model and how it can quickly propel you onto the road towards success.

What is the Franchise Business Model?

Franchising is a form of business in which the owner (franchisor) develops, markets, and brands a product and/or service and then sells a license to other entrepreneurs (franchisees) so they can replicate the concept in new locations. In exchange for paying the franchisor an upfront franchise fee and ongoing royalties, the franchisee is allowed to use the franchisor’s brand name and business model. Additionally, the franchisee receives training and ongoing support from the franchisor to maintain consistency across the brand and to encourage success.

While there are many types of franchise agreements, the following three are the most common:

  • Product franchise – Perhaps the oldest type, the product franchise allows franchisees to distribute or sell the franchisor’s products or services within a certain territory. Think of car dealerships like Ford or Toyota.
  • Manufacturing franchise – In this model, the franchisor gives the franchisee exclusive rights to manufacture and distribute items using the franchisor’s brand and trademark. For instance, Coca Cola sells its concentrated syrup to a franchisee that then adds water to the syrup and bottles the finished product for distribution.
  • Business Format Franchise – Because it’s the most common type, the business format franchise is what many people think of when they hear the word franchise . In this model, the franchisor offers its business model and brand name to franchisees in exchange for fees and a percentage of sales revenue. Many fast food restaurants, such as Taco Bell or Subway, are business format franchises, as are service providers such as Molly Maid. While franchisees own their individual locations, they are obliged to buy all of their products and supplies (food, paper products, uniforms, etc.) from the parent company. In return, the franchisees receive ongoing support, national advertising, and continued product development.

What is the Franchisor/Franchisee Relationship?

The franchise business model creates an interesting partnership between the franchisor and the franchisee. Some people liken the relationship to that of a parent (the franchisor) with a child (the franchisee). While the franchisor certainly offers support and guidance and wants the franchisee to succeed, the parent/child analogy doesn’t hold up because the franchisee pays to receive that support and is promoting the franchisor’s brand in order to earn revenue for both parties. As such, the franchisor and franchisee are in an interdependent relationship with the franchisor working to protect and grow its brand and the franchisee striving to protect their investment and build a profitable business. In a healthy and successful franchisor/franchisee relationship, each partner accepts certain responsibilities.

Franchisor’s Responsibilities

Of course, the franchisor’s first responsibility is to develop a brand and build a successful business model. This includes creating logos, trademarks, advertising slogans, etc. and continuing to refine and strengthen the brand name over time. A good franchisor also understands that in order for the brand to be successful, the company’s franchisees must be successful. To that end, the franchisor provides initial and ongoing training for franchisees and their employees and helps franchisees attract and keep clients by creating strong marketing and advertising campaigns. Because reliable suppliers can be difficult to find, the franchisor locates top-notch vendors and develops strong working relationships with them in order to secure the best prices and services for all franchisees. Additionally, the franchisor stays on top of industry trends and changes in technology to assure that the brand stays current and isn’t being outpaced by competitors with fresher ideas.

Franchisee’s Responsibilities

The franchisee isn’t an employee of the franchisor but is contractually obligated to implement the franchisor’s business model and to comply with company guidelines and standards. It’s the franchisee’s responsibility to promote the brand in a positive light and to adhere to the franchisor’s mission statement and core values. As the owner of their particular franchise location, the franchisee also has all the usual responsibilities that come with operating a business – paying the bills; hiring, training, and managing employees; meeting payroll; managing inventory; maintaining the office and work equipment; selling products and services; networking and promoting the business; overseeing customer relations; and more.

What are the Advantages of the Franchise Business Model?

One of the biggest advantages of purchasing a franchise is that it enables an entrepreneur to get a jump start in an industry by buying into an established brand with a proven business model. If you start a business from scratch, you’ll have to do market research, negotiate with vendors, create an advertising campaign, and estimate costs based on no previous experience. When you buy a franchise, however, you get a ready-made business. The franchisor does the research to ensure that your new location is being opened in a viable market. You then receive training on how to set up and operate your business based on the franchisor’s proven formula. You don’t have to find vendors or figure out how much inventory to stock; you don’t have to come up with a marketing strategy or create a customer relationship management system – your franchisor has already done the hard work for you.

Furthermore, you receive ongoing support once your business is up and running. A good franchisor will continue to provide training, networking opportunities with other franchisees, new marketing tools, updates on industry trends, and much more. While you get to be the boss at your location, you have the comfort of knowing that an entire team is working to build the brand and to encourage success for the whole company.

Why Should I Buy a Cabinet IQ Franchise?

Cabinet IQ is a high-tech cabinet and countertop company that is transforming the kitchen and bathroom remodeling industry. Just as we provide our customers with outstanding quality, service, and value, we present potential franchisees with a five-star brand and business model. Currently, we’re offering a ground-floor opportunity to entrepreneurs who are self-motivated and determined to succeed. If you’re ready to open a new business and want to know more about how franchising works, our franchise development team can answer all of your questions. Fill out and submit the form on our website to get started on your franchise journey today.

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How to Franchise a Business: The Definitive Guide

  • 2 years ago

There comes a time in every entrepreneur’s life where they have to decide “am I content or do I want to continue growing my business?” If you’ve reached that point, you’re probably looking for new ways to increase your business and have wondered how to franchise a business.

Mike Andes, the founder of Augusta Lawn Care , started a franchise model two years ago and now supports over 60 franchises. Next year, he plans to reach 150 franchises and he has joined us to help you prepare your own franchise business model.

Mike shared tips with us on everything from how he prepared and set up his franchise to hiring consultants, creating his franchise model, systemizing the proper support, and ongoing operations. We’ll share concepts from him and other resources to help you franchise a business.

What is a franchise business?

A franchise business is a business structure in which the owner (a franchisor) creates the legal path to allow other people to use the company’s brand name and processes to offer products or services to customers in their area.

Often, a franchise business model is used with local businesses that are confined by geographical constraints. For instance, an Augusta Lawn Care in Georgia would not do work in California, nor could the business owner be at both locations on a daily basis.

There are thousands of different franchised businesses, many of which you can find on the International Franchise Association website . Reviewing how franchises operate in your industry is probably a good first step, but Mike told us:

If there’s a franchise in another industry that you would love to have in your location, it might be a great way to get hands-on experience with a franchise. Let’s look at some other questions you might want to answer before going through the process.

How much does it cost to franchise a business?

Mike told us:

He also mentioned that most people would disagree with him and say that you should expect two to three years and $500K, but he’s always liked moving faster than other people.

How to franchise a business with no money

If you are thinking about franchising an existing business but don’t have the $100K+ to start it, there are some options. The most common ways are:

  • Get a loan. (Check out our preferred lenders for loans up to $5M.)
  • Get a partner.
  • Convert to a C-Corp with a retirement plan, and buy your shares with the retirement plan. (This strategy is a legal strategy called ROBS. Learn more about ROBS .)
  • Wait until your business has been successful enough to self-fund franchising.

He went on to explain that many franchisors never get to ten franchise locations. Instead, they go bankrupt and take down the franchisees with them. 

That’s why I suggest waiting until you can independently fund franchising a business before attempting to do so. If you are barely meeting day-to-day operations, a loan and the extra work will not make it easier.

Do franchise owners make money?

Yes, but not at first. You have to spend the start-up costs to create the franchise system. You’ll need new systems in place to support your franchise program, and then you’ll need a marketing strategy that may require $10 to 20K in commissions for a franchise broker to help you find new franchisees.

Mike told us,

He also told us:

He explained how his company earns money instead. His franchise fees are:

  • $4K initial fee plus $699 per month for a solo operator with no protected territory
  • $15K initial fee plus $1,200 per month for a franchise with a five-mile protected territory

This varies from most franchise agreements that take between 5 and 10% of revenue. He feels it adds a level of trust within his franchise network to charge a flat franchise fee because the business model shows that the franchising process helps them make more money with no additional gain for him.

Listen to the podcast below to hear the entire discussion with Mike:

How profitable is owning a franchise?

I crunched some numbers based on conversations with Mike and found his business model brings in 25 to 50% of the revenue that they would if he were charging a percentage of revenue. He’s still making $2 million a year and growing though

I also took the time to see how one of the most profitable franchising businesses, McDonald’s, performs. We’ll look at the different business models below.

Analyzing Mike vs. Percentage Models

I took the statements from Mike and combined them with information from his website. Then, I compared the first three years of his franchise revenue model including a 5% royalty and a 10% royalty. I used the assumption that in all scenarios, the revenue was $39,000 per month.

As you can see, his model makes 1/4 to 1/2 as much as the revenue share business model.

Comparing Franchisor Profits with Corporate Store Profits: A Look at a McDonald’s Annual Report

McDonald’s had 36,521 franchise stores, and 2,677 corporate-owned stores according to their 2020 Annual Report . Their net income percentage was 24.63% overall, but I wanted to see what the differences were between running your own stores and selling franchises.

I used operating margin to establish this. When there were revenue or expenses on the Net Income Statement that were not directly attributed to franchises or corporate stores, I attributed 93% to the franchises and 7% to the corporate stores. 

As you can see, if a franchise can scale globally, it is nearly five times more profitable to sell franchises and support business owners than it is to open more corporate stores.

I hope these figures help you understand the potential difference in profitability between opening more corporate stores and selling a proven business concept to a prospective franchisee. Despite McDonald’s great performance, not every franchise opportunity can grow to its size.

Like Mike said, most franchise companies don’t reach 10 locations.

Keep reading to learn more about how to start a franchising business.

Requirements to start a franchise

Selling franchises is a lengthy process that can take about a year of planning and paying franchise consultants, a franchise attorney, and potentially franchise brokers. After franchising your business, you’ll also need to find new franchisees and support their operations by giving business advice and creating new business practices.

Let’s look at 10 steps on how to franchise your business:

  • Prepare for franchising your business
  • Create a Franchise Disclosure Document
  • Create a franchise agreement
  • Establish the initial franchise fee
  • Establish the royalties
  • Establish the training program
  • Market your new franchise
  • Screen potential franchisees
  • Onboard each franchise owner
  • Ongoing support

Ready to learn how to start a franchise?

Step 1. Prepare for franchising your business

The first step of how to become a franchise owner is preparing your organization for the franchise journey. In this step you will:

  • Write a business plan focused on the franchise relationship. It should include all the normal parts of a business plan but focus on a solid expansion strategy, brand recognition, marketing tools, business systems, and supporting franchisees. Learn more about business plans .
  • Hire an experienced franchise consultant and franchise attorney. 
  • If you aren’t already a limited liability company or corporation, change your business licensing to the standard for the franchise industry. Use Better Legal Services and the code UpFlip for $30 off.
  • Get funding, which we discussed earlier.

Once you’ve done all this, it’s time to create a Franchise Disclosure Document. Let’s discuss it now.

Step 2. Create a Franchise Disclosure Document

When you franchise your business, the Federal Trade Commission (FTC) requires you to provide a Franchise Disclosure Document (FDD) to qualified franchisees. You can find the full laws on the FTC website, but in general, an FDD needs to include:

  • Cover page with specific requirements
  • Table of contents, which is found on the same link as the cover page
  • Franchisor and any parents, predecessors, and affiliates
  • Business experience
  • Initial fees
  • Estimated initial investment
  • Restrictions on sources of products and services
  • Franchisee’s obligations
  • Franchisor’s assistance, advertising, computer systems, and training
  • Patents, copyrights, and proprietary information
  • Obligation to participate in the actual operation of the franchise business
  • Restrictions on what the franchisee may sell
  • Renewal, termination, transfer, and dispute resolution
  • Public figures
  • Financial performance representations
  • Outlets and franchisee information
  • Financial statements
  • Franchise Agreement
  • Any additional references not included in the previous section

This will need to be created with a franchising consultant and a licensed attorney well-versed in both federal and state laws because there may be specific requirements in each state. According to the Franchise & Business Law Group , most states have some requirements.

In addition, you are required to update the FDD for material changes quarterly, and after your annual report.

Step 3. Create a franchise agreement

A franchise agreement is a legally binding contract that a prospective franchisee will sign before the franchise relationship is in place. This document will include many of the parts from the FDD including:

  • Your responsibilities in the franchise business operations
  • Any other terms that are deemed necessary by a lawyer to protect the franchisor

The signing of the franchise agreement, combined with the payment of franchise fees is the point at which prospective franchisees become a franchise location.

Step 4. Establish the initial franchise fee

A new franchisee is required to pay upfront for the rights to operate their own business using the company’s intellectual property and business processes as outlined in the FDD.

Most successful franchises will be charging enough to cover the onboarding costs and the additional system resources that will be needed during the first year.

While you can find some companies that sell franchises for as low as $3,000, most will sell franchise opportunities for amounts between $10K and $100K. 7-eleven upfront fees are $1M, but they also provide all the equipment and finance up to 65% of the fees.

When structuring your franchise fees and royalties, consider the following:

  • What is my revenue and profit at my location(s)?
  • What is the maximum fee where the new franchisee can still make a 15% net income during the first year based on company-owned units’ performance?
  • What is my estimated cost of recruiting a new franchise location? Mike suggests assuming $40K for each of the first 10 new locations.
  • What is the level of investment that will encourage only truly committed business owners to apply?
  • What level of investment will encourage the growth of new locations?

After you answer these questions, you should have a nice range of values for what the combined cost of the initial fee, royalty fees, and marketing fees should be. Then, it’s just a matter of how to distribute it amongst the three concepts.

Mike’s structure for his franchise system is a good way to go when you consider how to start a franchise business. He gave examples of others like Jimmy John’s and Anytime Fitness that have been successful using a similar strategy.

Step 5. Establish the royalties

Royalties are monthly fees that the franchisor charges the franchisee for using their intellectual property, vendors list, and processes. But how much money should you charge?

As mentioned before, don’t focus solely on how much you make, but also on how it will impact prospective franchisees when they are considering your franchise opportunity.

He went on to tell us about problems that can occur when you run nationwide promotions and use monthly royalty fees:

That’s bad for the FDD, bad for Subway, and bad for the franchises. If you want to have any specials that might impact profitability negatively, you probably want to consider how to open a franchise with flat monthly fees.

Step 6. Establish the training program

You’ll want to start getting the training program and business systems ready for new franchisees to be onboarded. Whether this is having them come to your location or later having them go work with a top-performing franchisee, you’ll want to have everything well documented.

Knowledge Anywhere has a great article on how to create a great franchisee training program.

Keep reading to learn about marketing your new franchise.

Step 7. Market your new franchise

Mike told us that there are three methods of marketing to get people to reach out about how to buy into a franchise:

  • Spend lots of money on online marketing. He warned us to expect spending of $40K per franchise for the first 10 franchisees.
  • Hire a broker with big commissions. He warned that broker commissions can be up to $20K, which would make it where Augusta Lawn Care didn’t make a profit on a franchise until year three.
  • Start building a network from the start so that you have a built-in audience from the start.

He told us:

Selling his first franchises to high-performing employees helped him get past the hardest part (the first franchise) because there were already multiple units by the time he was searching for franchisees.

Mike also told us that marketing support for new franchisees must be considered when you are learning how to own a franchise. He told us:

He went on to explain why he doesn’t run a nationwide marketing budget:

He pointed out that, for most businesses, good market data would include some nationwide market data, but with the lawn care industry, it doesn’t work. It would be too generic.

Step 8. Screen potential franchisees

Screening is another important aspect of building your franchise network. The process will normally follow this process:

  • Entrepreneur finds information about your franchise opportunity from a broker or online.
  • The person submits information and schedules a consultation.
  • The franchisor (or their representative) has a call with the interested party.
  • If both parties are interested in working together, the franchisor sends the qualified franchisee the FDD and franchise agreement.
  • Some do training first, then sign the agreement. Some sign the agreement first, then train. Mike requires the payment and signed agreement before training.

He gave a lot of advice on screening. here are some of the best tips he shared:

He also advised about owners who want to own multiple franchise locations:

Some franchises may allow you to book a larger territory with a lower franchise fee per location, but Mike doesn’t really feel like that model is best for his brand practices. If quality is something you are heavily focused on, I suggest you follow his lead because you’ll be able to sell more franchises, and the franchisors will be more involved.

He also explained how the franchisor grew over time:

Finally, he warned if you want to start franchising your business consider that:

Step 9. Onboard each franchise owner

Onboarding is just setting up the systems for the franchise owner, providing training, and advising them in anything that they need assistance on like marketing or supplier suggestions. You’ll want to follow the policies you created in the FDD to make sure you are in compliance with your contract.

Step 10. Ongoing support

Ongoing support will vary among franchisors. It can include:

  • Marketing materials as discussed earlier.
  • Public relations guidance if there is a scenario that can impact the whole franchise system.
  • Updates on training.
  • Training for new products and services

You want to do everything you can to help them succeed.

Now that we’ve had a look at the process of franchising a company, there are some additional considerations for franchising your business in other countries. Keep reading to find out the challenges.

Opening and operating a franchise in a different country

Many franchises hope to go global and if they can, as it can be a boost to the brand. It also comes with a lot of challenges that Mike has experienced. He told us:

He also mentioned that international franchises have to deal with currency exchanges. He has dealt with it by keeping the costs in Canadian dollars but could see having to change that if he grows to other countries.

Also, be aware that the lawyer who assisted you in starting your franchise journey may not be skilled with international business law. You’ll also have new tax requirements for supporting new locations in other countries.

In general, there are over 300 cities that have over 100,000 people in the US. Franchising your business in other countries can wait until you have at least 100 franchises so you have a good base for international expansion.

We’ve answered the common questions people have about franchising a business, shared insight from someone who has sold more than 60 franchises, and provided a step-by-step guide on the process of starting your own franchisor. I want to leave you with this last piece of advice from Mike:

If you found the podcast and our blog useful. Subscribe to our channels so you’ll get more great information on starting, selling, and buying businesses. 

What franchises would you like to know more about?

Brandon Boushy

Brandon Boushy lives to improve people’s lives by helping them become successful entrepreneurs. His journey started nearly 30 years ago. He consistently excelled at everything he did, but preferred to make the rules rather than follow him. His exploration of self and knowledge has helped him to get an engineering degree, MBA, and countless certifications. When freelancing and rideshare came onto the scene, he recognized the opportunity to play by his own rules. Since 2017, he has helped businesses across all industries achieve more with his research, writing, and marketing strategies. Since 2021, he has been the Lead Writer for UpFlip where he has published over 170 articles on small business success.

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Understanding the Franchise Business Model: From Fast Food to Home Services

What is the first thing that comes to mind when you think of franchising? For a lot of people, a fast-food franchise is the first thing that will come to mind when thinking of buying a franchise. And understandably so, as fast-food establishments have long dominated the franchise industry. Fast food franchises include global brands and household names. But there's a rising franchise industry – home services.

Learn why the home services franchise business model is compelling for many aspiring business owners today.

The Fast-Food Franchise Business Model

The fast food franchise business model has historically been the most well-known, as f ood franchises account for an estimated 30% of the total franchise establishments in the U.S.

Like the franchise model in other industries, fast-food franchises enable entrepreneurs to operate their restaurants under the franchisor’s name, business processes, and guidelines. In exchange for an initial franchise fee and ongoing royalties, fast food franchise owners benefit from the brand's recognition, established customer base, and business processes. In a truly mutually beneficial arrangement, the franchisor benefits from expanding its reach through a network of independently owned and operated franchise locations. It’s a win/win.

Challenges and Considerations for Fast-Food Franchises

Despite an impressive history, the fast-food franchise model comes with its challenges.

1. High Initial Investment

Acquiring a fast-food franchise typically requires a substantial upfront investment, including franchise fees, real estate costs, and extensive equipment purchases.

2. Employee Turnover

The fast food industry is known for its high employee turnover rates, with an average 150% yearly employee turnover rate. A turnover rate of this magnitude can lead to training and staffing challenges which affect overall consistency and operational efficiency

3. Intense Competition

There is heavy market saturation in the fast-food franchise industry. Not only that, but it is also an industry marked by intense competition from existing and new brands that frequently change menus, concepts, and strategies as they vie for market share. The tough competition in the food industry may often limit the franchisee’s growth potential.

4. Price Sensitivity

Fast food franchises often operate at relatively low margins as they must consider the cost of labor and goods and spoilage, waste, theft, and other issues that may be less common to other franchise industries. And whenever there is an economic downturn, customers can cut back on times they eat away from home as they attempt to cut their expenditures and save money. This can cause food franchises to be very price sensitive.

The Rise of Home Service Franchises

From plumbing and electrical work to landscaping and cleaning services, the home services franchise industry is gaining momentum as an appealing and promising business opportunity. Home services have a variety of offerings that tap into an essential need . Homeowners continuously turn to trusted professionals to repair, enhance, and maintain their homes, causing the demand for home services to remain steady.

4 Advantages of the Home Service Franchise Business Industry

Home services franchises are some of the best to own and have several advantages compared to franchises in other industries.

1. Cost Efficiency and Recurring Revenue

Home service franchises often enjoy lower overall costs compared to fast food franchises. Many can operate without needing high-profile real estate and a traffic rich brick-and-mortar location, particularly when just starting, which can significantly reduce the initial investment and ongoing overhead costs. In addition, home service franchises often benefit from recurring revenue from repeat customers. This provides a consistent income stream that franchise owners can benefit from.

2. Steady Demand

The need for home services remains consistent regardless of economic fluctuations. From routine maintenance to emergency repairs, homeowners rely on these services year-round. Regardless of what goes on in the broader economy, when somebody needs a plumber, they call a plumber.

3. Work-Life Balance

Home services franchises frequently offer a better work-life balance . The nature of their services allows for flexibility as franchise owners can set their schedules and build the type of lifestyle that they would like to have.

4. Positive Impact

Home service franchises are uniquely positioned to directly contribute to homes’ aesthetics, functionality and livability. Some services, such as landscaping, exterior painting, and home improvement, can enhance property value. Other services like house cleaning, pest control, and home organization can directly improve the quality of life for customers. 

Additionally, home service franchises have a significant and positive community impact and meet specific local needs. By owning a small business, franchise owners are creating local jobs, circulating money in the local economy, and inspiring entrepreneurship in others within the community.

Choosing the Right Franchise with Neighborly®

While fast food franchises have historically succeeded, entrepreneurial preferences are shifting toward the home services franchise model. As the world’s largest home services company, Neighborly® offers a range of franchise brands focused exclusively on repairing, enhancing, or maintaining homes.

With steady demand, lower overhead costs, recurring revenue potential, and a positive impact on the community, the home services franchise industry is an opportunity for those seeking financial independence and personal fulfillment in business ownership.

Which franchise brands are right for you? Take the Quiz

To learn more about the benefits of franchising with Neighborly, contact us today .

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Best tips on How To Master Franchise Business Model

Franchise Business model

What is a franchise business model?

Franchise deck overview:, how does the franchise business model works, why does a franchisor need a franchise business model, the business:, the market and industry overview, place of business and infrastructure, franchise financial plan , royalties and entry fees, store place deposit, conditioning works, the mercantile society’s constitution, this is a statement of your expected sales minus direct costs (sales costs) and overheads (wages, rent, rates, and others)., franchise operation manual, franchise legal documentation, the fdd is separated into 23 sections, and the franchisee should read each one before signing., franchise agreement, franchise marketing plan and business deck:, conclusion .

When a curious mind opens this article, the first question that comes to mind is: Does franchising truly work? Let me tell you, yes, it does! The franchise business model is more than simply fast food; it’s the force that drives most of the world’s entrepreneurial metro. 

Today, you couldn’t drive down the main street in any big city in the world without passing by a franchised firm, and those enterprises can be in any of more than 100 different lines of industry.

The economic output of franchise establishments in the United States has fluctuated significantly since 2007. In 2020, the sector suffered significant losses due to the COVID-19 pandemic, generating an estimated economic output of 670 billion U.S. dollars, compared to 787.5 billion U.S. dollars in 2019.

franchise business model in

The franchise business with a robust franchise business model has prevailed and generated regular profits for its franchise owners.

Examples of such systems include Ford Motors and John Deere. McDonald’s and Dunkin Donuts are two famous examples of recurring business models. 

These franchise models are an excellent fit for aspiring entrepreneurs looking for a hassle-free way to earn an income.

A franchise business model means creating a business prototype for a company you want to franchise or that you currently have.

 It’s similar to a business canvas with the tools you’ll need to be a successful franchisor, including pre-and post-sales materials.

It’s also about the brand owner’s relationship with the local operator.

When a company (Franchisor) licenses its trade name (brand)) and operational procedures to a person or group (franchisee), the franchisee undertakes to operate according to the prerequisites of the contract. 

The franchisor offers assistance to the franchisee and exerts control over how the franchisee works under the brand.

The next critical stage in selling your franchise is to realize your franchise ambitions. 

Suppose your brand doesn’t have a well-documented franchise framework and business offering. You’ll almost certainly need to find an investor to bridge the gap between what you have today. 

You’ll need to start and run your franchised firm until you’ve spent much money on costly franchise marketing and sales campaigns.

We promote lean franchise models, which require less investment from franchisees and provide a faster return on investment. 

Additionally, franchisors will grow across geographies more easily and quickly using these models.

The most successful franchisors have a straightforward, foolproof procedure that can be scaled and operated by anyone with a basic understanding of the industry.

Franchise Business model

Investing in a franchise can be a risky business.

Franchise businesses can be successful, but it takes hard work and patience. 

Franchising a process-oriented. 

The franchisor needs to tailor it when planning to franchise their business initially.

Later on, followed by the franchisee and well monitored by the franchisor in the complete process of a franchise business.

Many risks come along with franchising, like how the franchisor will handle your concerns or if they will be willing to help you if the business is not going well.

In this process, investors buy franchises from the company and make their own management decisions on managing their own business. 

The franchising process is simply buying a license or right to do something from another company that already has it, like McDonald’s selling franchises of their restaurants to other businesses owners.

The franchise business model allows a franchise owner to buy a license to operate the business and sell its products or services in return for granted royalties.

For example, if you own a Starbucks , you will pay the company franchise fees to use their branding. The guidelines regarding making coffee drinks, their logo, and other things they have created.

 In return, you are given the license to run your coffee shop as you like.

In many nations, franchising–the most dynamic business arrangement ––has become the dominating force in the distribution of goods and services. 

Franchise Business model

According to national and international authorities, the franchise has become a significant way of doing business worldwide.

According to estimates, there were 753,700 franchise establishments in the United States by 2020, generating $670 billion in revenue and employing 7.5 million people.

  Quick service restaurants are the most profitable segment of the franchising industry , accounting for about 241 billion dollars in total economic output, followed by business services at around 121 billion dollars. 

Franchises in full-service restaurants, real estate, and business and residential services round out the top five. (Statista)

Despite its widespread appeal and significant economic influence, franchising is still a strange idea. Some regard it as a separate industry, while others link it to a particular type of business, such as fast-food restaurants.

The franchise business model is designed to create brand recognition by allowing entrepreneurs to sell products and services under an established company’s brand.

In exchange for the right to use the franchisor’s business system and trademark, this entrepreneur also agrees to abide by the franchisor’s marketing program and policies.

A franchise model is required to convince potential franchisees and investors that your franchise opportunity is worthy of their time and money. 

The franchisor or franchise consultant will lay out a business plan to assess if a potential franchisee is on the right track to success.

Our franchise business model template is the most up-to-date way to assist your business expansion. You cannot expand your firm for limited budgets and resources for franchise development due to a lack of funds from the onset! 

When you dive deeper into the franchise growth opportunity with Franchise Deck, you’ll discover that most business owners can find out how to franchise a firm with a minimal initial investment.

franchise business model in

What is a franchise business plan?

A successful business has a clearly defined franchise business plan . Developing a franchise business model plan is crucial to franchise your business. 

Franchise Business model

Here are the top six sections of your franchise business plan that you should include.

The introduction, or executive summary, of your aims and objectives is arguably the most significant element of the business strategy. 

This section shall explain how the prospective franchisee sees your company first. It should be succinct and to the point, with the most critical issues highlighted. 

Your strategy is thwarted if the introduction is unclear or long

This component of the plan will show you’ve done your research. Also looked at the size of the market and the possibilities for growth in your sector. 

The franchise business strategy defines goals that are stated, measurable, and attainable, as well as timetables for accomplishing them.

Regardless of how at ease an investor or prospective franchisee is when talking money, every investor in a firm must judge the franchisor’s quality. 

When institutional investors, such as fund management organizations, consider whether or not to buy a franchise, the quality of management is an essential factor.

Sales is a separate topic from marketing and deserve its area. 

When paired with sales forecasting, a sales plan allows you to focus on growing your firm rather than reacting to day-to-day sales and marketing events.

Pricing, profit margins, supply sources, and credit terms offered by vendors are all covered.

It will encompass where the franchise business plan to work – from home, a store, an office, or a small industrial outlet – and costs like equipment, business rates, insurance, and rent. 

The franchisee will want to hear all about your plans because the location is crucial for starting a business. 

List the products you’ll need under the category’ equipment,’ including tools, machines, computers, and the like, as well as whether you’ll be leasing or buying. 

These are merely for reference and do not form part of your strategy’s main presentation. 

They provide more detailed reference material, samples, statistics, an ideal franchise profile, and a job description for employees. 

Although there is no perfect formula for creating a franchise business plan, these primary components are essential.

Franchise Business model

The Financial plan details every part of your prospective business that includes money, from what you’ll put into what you’ll get out, as well as the connections between the two. 

The investor’s financing choice is based on your financial plan’s financial information.

The more precise, detailed, and rational the facts and statistics are, the happier the manager. 

The predicted profit and loss account and the cash-flow prediction are essential elements of this financial presentation.

Computation of total franchise cost:

When purchasing a franchise, keep in mind that the entrepreneur will have to pay the standard royalties and entry fees and deal with various other costs associated with the start-up of any firm.

The following are the most frequently encountered:

They are the fees that franchisors charge from their new franchisees. 

The destination of these funds is typically specified in the franchise agreement (training, advice and others).

If the franchisee does not have their place to start the firm, they will pay rent. 

In this situation, the initial outlay will comprise the month’s rent and the deposit as per market standards.

It’s not always easy to find a suitable location and meet all of the essential standards to start a business. 

In fact, in most situations, a series of modifications are required for the locals to accommodate the gathered business. 

The matter of fact includes the cost of the work itself and the payment of the necessary municipal taxes, construction permits, and architect fees.

The franchisee must form a legal entity for his firm; therefore, the connection with the franchisor is a company-company one rather than a boss-employee relationship. It also includes a slew of administrative fees.

I recommend Legal Zoom to franchisees and franchisors in the United States for legal services such as business formation, legal draughts, and disclosure forms.

Nearly every reputable franchisor has a financing scheme explicitly tailored for their franchisees. 

Some people may do it on their dime, and others may work with other investors to achieve their goals. 

Whichever option you choose, your franchisor is the most reliable source of capital.

Financial projections

Profit and loss forecast:.

A cash-flow projection is a record of when you expect money to come into your business and when it will leave. 

We have a franchise financial template for you that you or your employees can create a complete franchise financial plan. 

The cost of the template is minimal for us to continue operating and provide more business ideas and tips in the franchising world.

You can also employ a full-time franchise business consultant or subscribe to services like Liveplan to get your company franchise-ready.

A franchise business model’s DNA – the basis that regulates franchise unit performance, processes, and conduct – is a franchise operations manual. 

The changes in the franchisor’s system need to be reflected, and franchisors are granted considerable discretion to update, amend, and edit the manual regularly.

A well-written franchise operations manual will cover the following five topics:

  • The objectives of the franchise system.
  • The franchisee’s day-to-day practices ensure customer experience consistency throughout all franchise units.
  • Payroll and bookkeeping.
  • Customer service, which includes themes like greeting customers and dealing with complaints.
  • Personnel, which provides training.

The specific subjects covered in a franchise operation manual are frequently determined by the franchise offered.

The way franchising works worldwide varies by country, as each country has its own set of franchising rules.

The country’s commercial contract laws govern the franchise agreement. The countries such as the United States, Europe, and Australia have franchise disclosure document (FDD) regulations by their respective state governments.

Several laws regulate many Asian countries, explored in greater depth under the Franchise Agreement.

Nonetheless, beginning a franchise in India, the world’s most populous democracy is significantly easier than in most other countries.

Franchise Business model

Franchising implemented correctly using franchise business model. The most profitable solutions are rewarded by most of the markets using systematic franchise business model and strong legal documentation.

Franchise Disclosure Document (FDD)

Being part of the pre-sale due diligence process, persons interested in buying a franchise must receive a franchise disclosure document (FDD) from the franchisor. 

FDD includes vital information to prospective franchisees considering a substantial investment.

The following sections, in the order shown below, must be included in every document:

  • The franchisor and any parents, predecessors, and affiliates
  • Business experience
  • Bankruptcy 
  • Initial fees
  • Estimated initial investment
  • Restrictions on sources of products and services
  • Franchisee’s obligations
  • Franchisor’s assistance, advertising, computer systems, and training
  • Patents, copyrights, and proprietary information
  • Obligation to Participate in the actual operation of the franchise business
  • Restrictions on what the franchisee may sell
  • Renewal, termination, transfer, and dispute resolution
  • Public figures
  • Financial performance representations
  • Outlets and franchisee information
  • Financial statements

The Federal Trade Commission requires franchisors must present the franchisee with the FDD at a minimum of 14 days before it is due to be signed or any money is exchanged. 

After the franchisor has accepted the petition and consented to consider it, the franchisee has the right to copy the FDD.

You can consider Legalzoom for your FDD and other legal services in United States.

Franchise Business model

The franchisor sets the standards and expectations for a franchisee to operate under their brand name in a franchise agreement. 

Every company form can be franchised, and restaurants and small retail establishments are frequently used as examples.

The franchisor lays out the restrictions that the franchisee must obey, but there are also provisions in the agreement that safeguards the franchisee. 

Franchise Business model

A franchise pitch deck is a PowerPoint presentation used by franchisors or corporations to provide a concise yet practical outline of their franchise opportunity or start-up to potential investors or franchisees.

 A pitch deck is a crucial tool for raising funding for a business. As a franchisor, you must design methods for promoting your franchise to potential new franchisees, and one of the first alternatives is a pitch deck presentation. 

It is not a complicated process to pitch a franchise. 

The Franchise Pitch Deck template has made things a lot easier! Depending on the type of business you’re starting, you can make it as simple or detailed as you like.

We also offer a deck content template for you to use to quickly write about your franchise opportunity so that potential franchisees can grasp it and make quick decisions about whether or not to partner with you.

A franchise business model can assist you in growing a small company into a huge one. 

What are we waiting for now that we have a plan and the necessary documents? 

franchise business model in

Let’s take a plunge into the world of franchising with our help and knowledge earned by burning our fingers with costly franchise consultants and marketing activities! 

It is elementary to franchise your business, build lean business models , scale your firm at low or no cost franchise marketing concepts, pass on savings to prospective franchisees, profit from regular royalties, and build your brand.

We’ll help you manage the narrow line between franchising and business growth by investing in people, business systems, and procedures. 

If you’re a business owner or a start-up, please tell us about yourself and your franchise business model in the comments section.

We want to help you at every step, and the best part is that it’s entirely free for our early-bird subscribers. We will analyze existing franchise models and make recommendations free of charge.

Catch us early in your franchise development process and grow with us!

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This model requires the master franchisee to invest heavily in setting up franchise operations in the foreign country.

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Franchise business model is a great way for businesses to expand their reach and presence in new markets. With the franchise model, the franchisor is able to leverage the expertise and resources of a network of franchisees to expand their business quickly. Franchising helps reduce the cost of entry for potential franchisees, making it easier for them to launch their own business. It also allows the franchisor to benefit from the efforts of the franchisees, since they are responsible for the marketing, customer service and day-to-day operations of the business. Franchisees benefit from the franchisor’s established brand, systems and procedures, which provide a solid foundation on which to build their business.

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Franchisees also have access to ongoing support and training from the franchisor, as well as brand recognition and customer loyalty that come with a well-known brand. The franchise business model is a great way for entrepreneurs to start their own business with minimal risk, since they have the backing of a successful brand. Franchising has become increasingly popular over the last few years, and is a great way for businesses to grow and reach new customers. While theres are some risks involved with franchising, such as a lack of control over the business and potential disputes between the franchisor and franchisees, these are typically outweighed by the potential rewards. Franchising can be an excellent way for businesses to expand quickly and profitably without having to invest heavily in new infrastructure or personnel.

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The franchise business model is a great option for entrepreneurs who want to own their own business, but don’t want to take on all the risk of starting from scratch. There are a variety of different franchise models available, so it’s important to do your research and find the one that best fits your needs and goals. A successful franchise business requires good communication, collaboration and commitment between the franchisor and the franchisees. A well-developed franchise business model can help ensure that the franchisees are successful and profitable. With the right franchise model in place, a business can achieve long-term success and growth.

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How to Write a Franchise Business Plan + Template

A collage of burgers, fries, soda, and coffee cups laid out in multiple rows.

Elon Glucklich

8 min. read

Updated February 7, 2024

Free Download:  Sample Franchise Sandwich Shop Business Plan Template

Owning a franchise is an excellent way for business owners to gain instant brand recognition. 

By paying a franchise fee, you can own a fast-food restaurant like McDonald’s, Subway, or Kentucky Fried Chicken, a 7-Eleven convenience store, a gym chain, or even a hotel like a Marriott or Hilton. 

For franchises with fees between $25,000 and $100,000, recent research indicates that the 5-year business failure rate is about 5 percent , just one-tenth of the overall business failure rate. Put simply, you have a much higher chance of success opening a franchise than a traditional business.

But getting a proven brand name doesn’t guarantee success. You’ll need to ensure you understand the franchise’s business model and expectations. 

Plus, you need to determine if there’s a big enough market for your business to be successful, what potential customers expect from businesses like yours, and how many competitors you’ll face.

Fortunately, answering these questions are all part of writing a comprehensive business plan . Here are the steps to writing a franchise business plan that shows your business’s unique value—while answering critical financial and operational questions your franchisor or lender will want to know.

Ready to write your plan? Check out our selection of franchise business plan examples to inspire your own.

  • Why you need a business plan for your franchise business

Writing a detailed business plan is crucial for two reasons. 

First , it demonstrates to the franchisor that you understand how their business operates. 

Since the company sets your prices , controls your product inventory, and will likely tell you what marketing tactics you can use—the business plan puts in writing that you understand how their rules and guidelines affect your business.

Second , the plan also organizes all of your expectations, assumptions, and research about your business into one document that serves as a roadmap for success:

  • Business objectives
  • Franchisor requirements
  • Funding needs
  • Financial goals
  • Growth strategies

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How to write a business plan for your franchise 

1. understand your franchise business model.

Since the franchisor has already established the company’s business model, your business plan should focus on how you can adapt it to be successful in your chosen location .

Imagine you’re planning to open a fast food restaurant, chain hotel, or convenience store. How do these kinds of businesses operate successfully? Consider the business models of each:

Fast food restaurant: Standard menu, streamlined kitchen operations, marketing strategy leaning heavily on national advertising campaigns.

Hotel: Efficient room turnovers, maintaining cleanliness and amenities that the brand promises.

Convenience store: High foot traffic, quick inventory turnover, and flexible operating hours.

Each case presents different business dynamics – and considerations for your business plan. You should be able to show in your plan that you understand the revenue streams and direct costs of running this type of business, and what your customer acquisition costs might be.

2. Conduct a market and location analysis

Buying into a franchise gives you some marketing advantages. You have a widely recognized brand to attract customers, access to promotional materials, and maybe even some information about customer buying patterns from your franchisor.

But operating a franchise doesn’t take away the heavy lifting of market research . Each franchise has to consider local factors that could affect its profitability.

A good starting point is to conduct a SWOT analysis , documenting the strengths, weaknesses, opportunities, and threats facing your business. Here are some other key elements to consider:

Demographic study

  • Employment status

Understanding the demographics of the people most likely to visit your business could help you set operating hours or decide who to target with promotions.

Competitor analysis

  • Identify your competitors
  • Compare your product or service offerings with theirs
  • Compare price points
  • Compare marketing strategies
  • Define the competitive advantage of your business

Don’t just look at direct competitors that are similar to your franchise. If you’re opening a 24-hour 7-Eleven, you should also look at supermarkets, drugstores, or food delivery services in your area.

Geographic analysis

  • Neighborhood characteristics
  • Population trends

A chain restaurant in a busy downtown probably has different customers and peak times than the same restaurant in a shopping center near a residential area. So it’s essential to understand the characteristics of the neighborhood you’re operating in.

Consumer behavior patterns

  • Technology use

Understand what drives consumers interested in your business to make the choices they do. This is where you will want to do online research and, ideally, go out and talk to potential customers.

Franchise-specific research

You should also answer questions about the competitive positioning of the franchise – and franchises as a whole – in your area.

  • How do similar franchises perform in your area?
  • What is the brand perception of the franchise you intend to start?
  • Is there a large enough market in the area for your franchise?
  • What non-franchise options are available? What are the advantages or disadvantages for customers who shop there instead?

Be sure to examine what potential customers discuss on social media platforms and online message boards like Reddit to understand what they expect from businesses like yours.

3. Highlight your unique value proposition within the franchise

Even though you’re buying into a proven business model , you’ll still face competition. Your business plan gives you a chance to put on paper what gives you a competitive advantage. 

In the case of a franchise business , your franchisor may be the most important stakeholder to read your business plan. So the plan is to show them you can run a successful business under their name.

Maybe the 7-Eleven convenience store you want to open is in a location with a lot of foot traffic and no larger grocery stores nearby. Or maybe your restaurant offers late-night delivery in an area with few alternatives. 

By outlining your unique value proposition in your business plan—you can align your individual strengths and market opportunities with your franchisor’s proven business model.

Backing up your unique value proposition with any data or information about customers will be especially important if you’re operating in a crowded market with lots of competition.

4. Do your own financial projections and scenarios

The franchisor may provide some guidance, but this is your business.

That means your business plan should include the same financial details and projections as if you were starting a business from scratch. Your financial plan should include:

Start-up costs : The initial investment required to get your franchise off the ground. This should include the franchise fee, the cost of equipment, initial inventory, license fees, and any expenses related to your location.

Ongoing fees and operational costs: These are costs that recur monthly or annually. They include fixed costs like franchise royalties, lease payments, and staff salaries, and variable costs like utilities, inventory, maintenance costs, and marketing expenses.

Revenue projections : Detail how much revenue you expect to bring in monthly. Forecast revenues out into the future, and don’t be afraid to make projections several years out. 

Remember, good financial forecasts are meant to be adjusted as real numbers come in, and comparing your projections with actuals over time can help you make better business decisions.

Break-even analysis : This is where you calculate how long it will take for your franchise unit to cover its initial investment and start making a profit. Knowing your break-even point is essential not just for you but also for lenders.

5. Create an operational plan

Even though the franchise provides the business model, you must ensure it runs smoothly daily. Your business plan should provide a clear operational plan that outlines :

Staffing needs 

You should be specific about the staffing level your business needs . You’ll need cashiers, cooks, and delivery drivers if you’re running a fast-food franchise. List the skills and experience needed for each role, and outline your plans for training new hires.

Inventory management

While a franchise agreement might take some of the pressure off of sourcing your inventory, it’s still your responsibility to develop processes for managing it. 

You’ll need to understand if there are seasonal trends in your business, how often various products are returned, how long an item can sit on your shelves, and a variety of other factors that affect how much of a product you should order and when you should order it.

Quality control

Since you’re operating under a franchise agreement, you must comply with the standards the franchisor sets out for operating their business. Detail the quality control procedures you’ll put in place to meet those standards. 

Also, take some time in the business plan to address how you’ll stay compliant with local, state, and federal laws and the franchise’s policies.

6. Review and adjust your business plan

The business plan for your franchise should not be a static document . Market conditions evolve, consumer demands change, and new competitors emerge. Additionally, Franchisors often update their business models, add new products, or change their marketing strategies.

You may also be expected to periodically share financial reports or general updates about your business with the franchisor. (LivePlan lets you create and share visually engaging, professional reports using information from your business plan.)

Either way, your plan should outline how you’ll account for market shifts or franchise changes in your operations. Just as important, you should make it a habit to review your business plan periodically – many business owners review their plans quarterly or even monthly, especially when starting out. 

That way, they can adapt the plan as their business evolves.

  • Download your free sample business plan for a franchise business

If you need help getting your franchise business started, check out one of our free sample franchise business plans . You can download this document in Word form and customize it to get you started on your own business plan. 

It’s just one of 550+ sample business plans we’ve made available to download.

You can also review our step-by-step guide on how to write a business plan for a detailed look at how to write specific sections of a traditional business plan.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Content Author: Elon Glucklich

Elon is a marketing specialist at Palo Alto Software, working with consultants, accountants, business instructors and others who use LivePlan at scale. He has a bachelor's degree in journalism and an MBA from the University of Oregon.

Check out LivePlan

Table of Contents

  • How to write a business plan for your franchise 

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Types of Franchise Models Explained

  • Insite Blog

Adam Heitzman

Seasoned business owners and budding entrepreneurs have been attracted to the franchise business model for centuries.

As a franchisor, the model lets you grow your business through partnerships with other entrepreneurs and extend your brand’s reach to new locations. And as a franchisee, it gives you a ready-made framework for launching a business with a greater chance of success than starting with a blank slate.

But if you’re new to the world of franchising, the whole concept can seem a little confusing. Franchising is used by a variety of business types across a range of industries, and there are several ways to structure a franchise business.

Our goal in this post is to help you understand the most common types of franchise models. Knowing how they differ will help you pinpoint the kind of model that will work best for your particular business needs and objectives.

So let’s start with the fundamentals.

  • What is franchising?

Franchising is when one business (the franchisor) gives another business (the franchisee) a license to sell products and services under the franchisor’s brand name.

Typically, the franchisor provides the franchisee with a range of resources, like access to their operational processes, proprietary knowledge, franchise marketing support, and trademarks.

In return for these benefits, the franchisee pays ongoing royalty fees to the franchisor.

  • Different types of franchise models

Although all franchise arrangements rest on the same foundational franchisor-franchisee relationship, several franchise models are available that cater to different business needs and preferences.

Here are some of the most popular franchise model variations out there.

Business-format franchise model

The business-format franchise model is by far the most common and is usually what comes to mind when thinking about franchising.

This model replicates the franchisor’s entire business concept across all franchise units (locations).

Not only do franchisors give franchisees the right to sell products and services under the franchise brand name, but they also give them comprehensive guidance and ongoing support for setting up and operating their business.

In other words, the franchisor develops a standardized system that all franchisees must follow. This system covers everything from equipment procurement, staff training and recruitment, standard operating procedures, customer service protocols, and sales and marketing strategies .

Under this model, franchisees typically pay an initial fee to join the franchise network in addition to recurring royalty fees based on a percentage of revenue. Sometimes, franchisees will also pay marketing and advertising fees.

The business-format franchise model is particularly popular within the fast food, fitness, retail, restaurant, and business services industries. McDonald’s is probably the most iconic example of a business using this model.

Product distribution franchise model

Under the product distribution franchise model, franchisors grant franchisees the right to sell their products, often within designated territories.

This model is less all-encompassing than the business-format model. Franchisees sell products under their own brand identity and have greater autonomy over their business operations.

The product distribution model has a lot in common with a conventional supplier-retailer relationship. One difference is that the franchisee typically sells the franchisor’s products on an exclusive basis. Another difference is that franchisees either pay a fee to sell the franchisor’s trademarked goods or agree to minimum purchase requirements.

In essence, franchisors focus on manufacturing the products, while franchisees handle the distribution and sales within their local markets. This can include responsibilities like warehousing, inventory management, product transportation, and customer relationship management.

The product distribution model is popular in several industries, including consumer goods, automotive, and electronics. Coca-Cola is a well-known example of a company using this model.

Manufacturing franchise model

Under this model, franchisors grant franchisees exclusive rights to manufacture and distribute their products using the franchisor’s established processes and intellectual property.

This means franchisees must adhere to the franchisor’s set guidelines when manufacturing products (like following recipes and using specific equipment) to ensure quality and consistency.

Franchisees are also responsible for supply chain management, including sourcing raw materials, coordinating production schedules, and ensuring products reach end-users in time. Typically, franchisors will provide ongoing support and training to ensure these operations run smoothly.

This model is used across a range of industries, such as food and beverage, consumer goods, and pharmaceuticals. Subway is a notable example of a company that uses the manufacturing franchise model.

Conversion franchise model

The conversion franchise model allows existing independent businesses operating within the same industry as a franchise to join the franchise’s network.

When such businesses become franchisees, they typically adopt the franchisor’s brand identity, operational standards, and processes. However, conversion franchisees often retain some degree of autonomy over day-to-day operations and marketing activities within their respective markets.

Common examples of businesses using this model include established medical clinics, retail stores, and home service providers.

Master franchise model

The model enables franchisees to become “master franchisees” or sub-franchisors.

Essentially, this means the franchisee gets to develop, manage, and sub-franchise multiple units of the franchise within a specific geographic territory.

Acting as middlemen for the franchise company, master franchisees provide oversight and support to the sub-franchisees within their designated area. This may include responsibilities like training and onboarding, recruitment, and supply chain management.

Master franchisees pay a fee to the parent franchisor for the rights to develop and manage sub-franchisees and receive royalties from those sub-franchisees.

Investment franchise model

Under the investment franchise model, capital investors provide the necessary financial resources to set up or buy a franchise unit with the goal of making a return.

These franchisees are typically corporate investors with a proven track record within the relevant industry. They don’t usually contribute to the franchise’s day-to-day operations or strategic planning, leaving such responsibilities to the franchisor or a dedicated management team.      

In return for their financial investment, franchisees receive a share of the profit generated by their franchise unit.

Some common examples of investment franchises include fitness centers, hotel chains, and real estate brokerages.

  • Franchise unit ownership models

Now that we’ve covered the most prevalent franchise business models, let’s quickly address the four kinds of franchise ownership structures.

Company-owned, company-operated (COCO)

Under this model, the franchisor directly owns and operates their outlets. Technically, this doesn’t count as a franchise model since no independent franchisees are involved.

Typically, franchisors use the COCO model as a testing ground for their business concept and to iron out best practices. If the business proves viable, they can begin searching for franchising opportunities.

Company-owned, franchise-operated (COFO)

The COFO model is a more collaborative approach to franchising where the franchisor maintains ownership of franchise units but delegates day-to-day operations to a franchisee.

Franchisors are still responsible for providing franchisees with guidelines, training, and support, while franchisees handle routine functions like staffing, inventory management, and customer service.

Franchise-owned, franchise-operated (FOFO)

This is the most common form of franchising, where franchisees both own and operate individual franchise units under the franchisor’s brand name.

While franchisees retain significant control over business operations (like staffing, inventory management, and local marketing efforts ), they also must follow the franchisor’s guidelines and brand standards to ensure consistency.

Franchise-owned, company-operated (FOCO)

Finally, under the FOCO model, franchisees own the units, but day-to-day operations fall into the franchisor’s hands.

This approach is often adopted by franchisors who want to maintain complete control over their brand image, operational consistency, and customer experience. 

  • Final thoughts

Franchising is a proven avenue for businesses looking to expand their customer reach, all while enjoying the benefits of increased brand recognition and the efficiency of standardized operational processes.

As we’ve seen, there are several ways to structure a franchise, with each model catering to different business needs and preferences.

But remember, whichever franchise model works best for you, you also need to develop and implement a coherent marketing strategy to ensure your business grows. Whether you’re an established or aspiring franchisor or franchisee, we can help you develop winning franchise SEO campaigns to boost your organic traffic, leads, and sales.

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Different Types of Franchise Business Models

Kinnary Nensee

Kinnary Nensee

A franchise can be defined as a license that is granted by a brand owner, known as the franchisor, to an individual or a corporate, known as a franchisee, to access business proprietary knowledge, process, and trademarks and to sell products or services under the brand name within a specified territory or region.

The franchisee gets access to a few things from the owner to conduct business.

  • To operate under the franchisor’s brand name.
  • Use of the franchisor’s trademarks.
  • Operations Manual.
  • Marketing support from the franchisor.
  • Software and other operational requirements depending on the nature of the business.
  • Relevant proprietary knowledge and materials.

How Does a Franchise Operate? Types of Franchise Business Models Company Owned Franchise Operated (COFO) Franchise Owned Company Operated (FOCO) Franchise Owned Franchise Operated (FOFO) Hybrid Franchise Model

How Does a Franchise Operate?

Generally, a franchise business is fairly simple. A franchisee purchases a licence to operate a business using the franchisor’s proprietary knowledge, process, trademarks, and brand name. The licence cost depends upon the size of the business, its brand goodwill and the demand for its products. Apart from this initial investment, the franchisee is also required to pay an ongoing annual royalty, which is usually a certain percentage of annual gross sales.

The business processes and operations of a franchise are defined by the operations manual and is a part of the franchise contract. The franchisee is required to uphold the terms and conditions of the contract and maintain set standards of hygiene, quality, visual merchandising, products, pricing, offers, etc.

Types of Franchise Business Models

Examples of Different Types of Franchise Business Models

There are essentially three different types of franchise business models:

  • Company Owned Franchise Operated – COFO
  • Franchise Owned Company Operated – FOCO
  • Franchise Owned Franchise Operated – FOFO

The type of franchise model that a brand offers is dependent on the nature of the business. Of course, there are associated advantages and disadvantages of each one.

Company Owned Franchise Operated (COFO)

The company invests in the franchise business , which then runs it as per the guidelines issued by the company. This model of a franchise business is not very common, as companies that invest in expanding their operations through a franchise model usually prefer to operate it themselves. One example of a COFO business model is call centres that handle phone calls for the company.

Advantages of the COFO Model

  • The operational expenses are borne by the company.
  • The productivity and efficiency of employees is high as the outlet is managed by the entrepreneur.
  • The company has the advantage of opening outlets where it is otherwise difficult to find franchisees.

Disadvantages of the COFO Model

  • The customer experience is dependent on how the franchise chooses to manage its operations . It can harm the company’s goodwill if it is not managed properly.
  • In the event of the franchisee exiting the contract, it can leave the company with no alternative.

Franchise Owned Company Operated (FOCO)

In this type of model, the franchisee owns the property and is responsible for all the resultant additional capital expenditure. The daily operations of the store or the outlet are managed by the franchisor. A prime example of this type of franchise model is Bistro 57.

Advantages of the FOCO Model

  • The end customer experience is controlled by the company or the brand and hence better in quality.
  • The expenses are well distributed as the company does not pay for the set-up expenses and the franchisee does not pay for the operational expenses.

Disadvantages of the FOCO Model

  • It is not a suitable option for property owners who want to rent their properties.
  • It is a continuous, collaborative business model , and the franchisee has no say in the day-to-day operations of the business.

Franchise Owned Franchise Operated (FOFO)

The term is self-explanatory in which the company allows the franchisee to use its brand name, process, and trademarks in its franchise outlet. The contract involves a non-refundable franchise fee and is for a pre-determined period, which can then be renewed. The product price is decided by the brand, and the franchise owner bears all the operational costs of the store. The franchisee is required to pay an annual royalty, which is essentially a percentage of the profits to the company. This is the most popular type of franchise model that is used in the market.

Advantages of the FOFO Model

  • There is a wide variety of business and franchise opportunities available.
  • A successful franchise operation translates into an excellent return on investment.

Disadvantages of the FOFO Model

  • This model of the franchise has a higher percentage of failure in comparison to the others.
  • The return on investment in this type of franchise model may not be very high due to the higher investments and fees.

Within the FOFO type of franchise business model, there are two variations –

Stock purchased by the Franchise

This Franchise Owned, Franchise Operated business model works with brands by purchasing the stock from the brand and then selling it to the end consumer. There might be a contractual clause between the parties to return a part of the unsold stock and purchase new stock.

Franchise Outlet Stocked by Brand

This franchise model, while being owned and operated by the franchise owner, receives stock on a consignment basis. The brand provides the merchandise as per their indent to ensure a correct representation of the stock in the franchisee outlet.

franchise business model in

There is a fourth variation which is not really a franchise model but is called Company Owned Company Operated (COCO). Just as the name suggests, the store unit is owned and run by the brand. The outlet is entirely funded by the brand and run by the employees of the brand. Some examples of a COCO model are Reliance JioMart and Big Bazaar .

Advantages of COCO

  • The brand earns and keeps the total profits as there are no channel partners to share.
  • The company can expand into geographical locations where franchises are difficult to find.
  • A COCO model allows the company to showcase its outlet and product range.

Disadvantages of COCO

  • The only major disadvantage is that the company spends monetary and manpower resources on activities that are not its core business.
  • Hybrid Franchise Model

This is a relatively new concept within the parameters of the franchise business model. It combines physical and digital franchises where traditional enterprises are digitally turned into multi-functional hybrid franchise platforms.

This type of franchise gives the franchise owner scope of expansion while working within the concept and structure of a larger corporation. This business model can include running a brick-and-mortar store while also keeping an internet store and employing catalogue sales to generate orders via mail.

A franchise business model is a great option for a new and budding entrepreneur as the systems and operations are already set. The base platform is ready for the entrepreneur to then focus on expansion and building a customer base within their geographical boundaries.

What is a franchise?

A franchise can be defined as a license that is granted by a brand owner to an individual or a corporate entity to access business proprietary knowledge, process, and trademarks and to sell products or services under the brand name within a specified territory or region.

What are different franchise business models?

Different franchise business models are:

  • Company Owned Company Operated Model – COCO

What is a hybrid franchise business model?

The hybrid franchise business model combines physical and digital franchises where traditional enterprises are digitally turned into multi-functional hybrid franchise platforms.

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The Benefits of the Franchise Model

The Benefits of the Franchise Model

Franchising provides benefits for both seller and buyer. For franchisors, the primary benefit is the ability to use other people's money to expand the brand more rapidly than they could either on their own or through investors or lenders. The initial franchise fee and ongoing royalties they collect allow franchisors to build their brand without sacrificing control to outsiders or the pressure of repaying lenders. The fees and royalties are used to fund operations at corporate headquarters, train and support franchisees, market and advertise the brand, improve the quality of goods or services, and build the brand in the marketplace.

For franchisees, benefits include: a higher chance of success than in a sole proprietorship; shorter time to opening; initial training and ongoing support; assistance in finding an optimal site; the selling power of a known brand; lower costs through group purchasing; use of an established business model; national and regional advertising campaigns; customer lead generation through websites and centralized call centers; and a network of peers (fellow franchisees) to provide advice and moral support through a company intranet, annual conferences, and franchisee associations; and, increasingly, assistance with securing funding.

Potential downsides for franchisees include: lack of independence, from the goods and services they sell to the color of the paint on their walls; mandatory company-wide promotions that may not work in their market (price cuts, new products or services), yet cost money to implement; costly required redesign of their unit(s); and, after signing a 10- or 15-year contract, a change in management or ownership that takes the brand in a new, unwanted direction.

As with any business opportunity, there is no guarantee of success, and there are trade-offs to be made. In some ways, franchising is like paying condo fees instead of owning a home. In a condo association, monthly fees are pooled for common external maintenance (mowing, snow removal, roof repairs, etc.) – a tradeoff many are willing to make to free themselves to concentrate on their "core business" of living their lives (or business) within the walls of their condo (or franchise) unit. And unlike renters, who can be evicted (or corporate employees who can be fired or "downsized") franchisees have some power of their own: a franchisor cannot "fire" a franchisee who is operating in compliance with the franchise agreement.

"Follow the system" is a mantra in franchising and critical to a franchisee's success. Franchisees buy into the franchisor's operating system believing that if they follow it to the letter they will succeed and be profitable. Smart franchisors are always open to suggestions from their franchisees for change (as well as local or regional variations), but any franchisee departing from the "system" without franchisor approval risks violating the terms of the franchise agreement, which can result in revocation of the franchisee's right to do business under the franchisor's name. Franchisees also must agree to keep the franchisor's proprietary system and trade secrets confidential, as well as sign some type of noncompete agreement.

Not everyone is cut out for franchising. Some need total independence to succeed or fail on their own, while others prefer the tradeoffs found in working for a larger organization. For the franchise partnership to succeed, the buyer must be comfortable not only with the franchise model, but also with the culture, values, and goals of the franchisor — and vice versa.

In this light, many view franchising as a commitment much like a marriage. A good match between franchisor and franchisee, sharing mutual goals over the long term, is essential to the success of each franchise unit, and thus the brand as a whole — an essential factor that must be considered seriously by both parties before any contract is signed.

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The Franchise Business Model; a win-win relationship

The franchise business model makes a win-win relationship between parties

The franchise business model is one of the most amazing models used by business owners. They use it to expand their businesses using  other people ‘s money and efforts. But it doesn’t only benefit the business owner. The beauty of the model is in making a win-win situation between the mother company (franchisor) and the individual investor entrepreneurs (franchisees).

A franchise enables you, the investor or franchisee, to operate a business even when you don’t have enough experience in an industry or even in business ownership. This win-win relationship gives reason to a successful business owner to support you for his or her benefit. The franchisor who has years of experience in the business, have the best reason to help you become successful because of its success.

But how exactly the franchise business model makes such a relationship? We have discussed it in this article.

Financial relationship in the franchise business model

In the franchise business model, two parties enter into a win-win relationship together. This win-win situation is mostly due to their mutual financial benefit of working together.

Let’s review the most common financial arrangements between them to understand how exactly it works. We have explained what we usually see in a typical franchise agreement:

Let’s consider how both the franchisor and the franchisee benefit from the financial relationship with each other. We can divide their financial relationship to two different stages: Initial investments and ongoing expenses.

Initial Investments

The initial investment of one unit of a franchise includes a franchise fee and other establishment costs. The franchise fee is usually between $30k to $50k. The franchisee pays this fee directly to the franchisor. But, other than franchise fee, the franchisee will have additional costs anyone would have in establishing a new business.

These costs include but are not limited to:

  • the cost of buying equipment
  • leasehold improvements
  • getting licenses
  • buying initial inventory
  • paying utility deposits
  • establishing the legal entity, and similar expenses.

Other than that, the franchisee will have to spend on marketing, including the grand opening expenses.

Franchisor’s benefit

A good franchisor is not looking for financial gains at this stage. Most of the time, good franchisors almost spend all the franchise fees they get from a new franchisee on the marketing cost of bringing them in! Instead, they are looking for their long term benefit. 

What we just mentioned is one sign of the right franchise. As mentioned  in this article , there could be red flags when you want to buy a franchise. One of these red flags is having a very higher than industry norm franchise fee in a franchise.

Franchisee’s benefit

You might think that the franchisees even have to pay more when starting a franchise business compared to starting an independent one. However, the savings of using a proven franchise business model could even save you money when you don’t expect it!

When starting a new independent business, you might not consider several items considerable costs. However, based on experience small business owners, they might turn to be significant.

Some examples of these costs include but are not limited to:

  • making a website for the business
  • selecting an appropriate name and deciding about the branding of the company
  • designing the marketing material
  • finding the best specifications that match your business model
  • finding the best target market your business wants to serve
  • trying different marketing venues to decide on the best marketing strategy for the business
  • finding the best product or service that fits the target market and so many other similar expenses.

These are the expenses that a new franchisee saves when they choose to buy a franchise compared to starting their own independent business.

So, even though it seems that you need to pay more when buying a franchise, you may also save money when you decide to start a good franchise business.

Ongoing expenses

After the initial stage, the story will be different. The franchisee will have to pay the franchisor, an ongoing fee, which is called “ Royalty .” 

Royalty could be in any of these different formats:

  • a percentage of the gross sales of a franchisee’s business
  • fixed monthly fee
  • a portion of the net profit of the company

While using a percentage of gross sales is very common, using the net profit as base rarely happens due to complications of verifying the net profit in small businesses.

Other than that franchisees, most of the time, have to pay a national or regional marketing fee. Franchisor gathers that money from all franchisees and spend it to the benefit of the franchise.

Although it seems that the franchisor is the only one benefiting in this stage, in reality, again, it could be a win-win relationship.

Franchisor’s main advantage, as explained in the above, would be gathering the royalty fees, which is the main reason it started the franchise from the beginning. 

The franchisor is not the only one benefiting at this stage. In a credible well-established franchise, different items could benefit a franchisee when compared to an independent business. Examples of these benefits would be: 

  • the increase in sales that a franchisee gets because of the  brand name  of the franchise
  •  using the successful  business model  of the franchise
  •  utilizing the benefit of  negotiation power  of a franchise in buying the raw material and equipment
  • getting  better terms  in different contracts
  • being in a  better situation  when  leasing  a location
  •  using the  marketing power  of the franchise using the added marketing budgets of different franchisees
  • using the result of the  research and development  of the franchisor

The above are only some examples of what a good franchisor provides for its franchisees. If you can add the benefits of all those items, you understand why a lot of experienced business owners still prefer to be part of a franchise instead of being independent business owners.

In this article, we tried to explained why the financial relationship of a franchisor and franchisee, as defined in the franchise business model, could be a win-win situation for both of them. Through the website, we are trying to help you understand how you can recognize if a franchise has the backbones of being a robust and well-established franchise and how to find a good one if you are looking to invest in one. Read more articles to educate yourself more about the specifications of a good franchise.

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How to start a franchise

12 steps to franchising a business..

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In this guide

How to start a franchise business

How to buy a franchise with no money, buying a franchise vs. starting a business, bottom line, frequently asked questions.

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Business formation

Opening a franchise allows you to flex your entrepreneurial skills without starting from scratch. You get a proven business model while still being your own boss. However, the startup fees can be pricey, and you must sign a contract committing to the franchisor’s playbook.

Starting a franchise can take three to four months from your initial research to the final purchase, according to the Small Business Administration (SBA) (1) .1 After you’ve signed the contract, it could take another two to six months until you’re ready to welcome customers.

That said, running your own franchise can be rewarding — and lucrative. These 12 steps can help guide you from conception to opening day.

1. List your top companies or businesses

When putting together a list of franchises you’d like to own, start by thinking about your favorite businesses. Consider your strengths, weaknesses and passions against what you think could make you money.

Franchises are available in nearly every industry:

  • Business services
  • Convenience stores
  • Real estate
  • Educational and learning
  • Entertainment
  • Specialty retailers
  • Travel agents
  • Health and fitness
  • Home healthcare

2. Research the franchise market

You can gather information about market conditions in your area, including demand and predictions for economic growth, through the SBA, the Census Bureau and private market firms to help you choose which franchise to open.

Take advantage of the resources at your local Small Business Development Center or a business school at a nearby college or university.

People who already own franchises can be invaluable resources. Ask about their experience and whether the process was worth it.

3. Evaluate investment and franchise costs

After you’ve pinpointed a market, research and compare the costs associated with your top picks. Franchise costs vary widely depending on the industry and business you choose to invest in, not to mention where you live or plan to do business. (2)

Note that some franchise owners — called franchisors — require a minimum net worth for franchisees.

When calculating the cost of starting your chosen franchise, look beyond upfront fees to costs that come with everyday business ownership.

4. Request a franchise disclosure statement

Reach out to the franchisor for a copy of its franchise disclosure document (FDD), which contains detailed legal information about its franchise group, along with financial data like the average gross revenue of its locations.

Sometimes you can find FDDs available for free from online databases around the web. Just make sure you obtain the most recent version, as franchisors release a new FDD every year.

Also, consider the retention rates for your chosen franchise. A retention rate is the percentage of locations that close each year. Section 20 of the FDD breaks down closures by state, so you can see how many have closed in your area compared to those in operation.

What else can I find in the franchise disclosure document?

An FDD covers more than 20 elements of buying a franchise, such as fee requirements, estimated initial investments and performance and revenue details.

It’s the legal information a franchisor is required to disclose to you, the franchisee, as part of due diligence before you invest.

The franchisor must provide you with the FDD at least 14 days before you sign a contract, though it’s a good idea to request a copy for your initial research. You can typically download a PDF of the FDD, though some franchisors might send you a hard copy.

5. Consider forming an LLC or corporation

Purchasing a franchise as a limited liability company (LLC) or corporation, rather than as a sole proprietor , provides financial and legal protection of your personal assets.

As an LLC or corporation, you aren’t held personally accountable for debt incurred by the franchise. If you remain a sole proprietor, you’re legally indistinguishable from your business — so you must cover business debt out of pocket, if necessary.

The same goes for lawsuits. As an LLC or corporation, your personal assets are covered if someone decides to sue your franchise.

6. Write a comprehensive business plan

A good business plan can help you analyze costs, predict sales and estimate profits before signing an agreement. Research what to expect in the months and years ahead to gather the information you need to take the next step — or pause if you’re not ready.

A successful business plan typically includes eight key components:

  • Executive summary
  • Company description
  • Market research
  • Organization structure
  • Product research
  • Financial analysis and funding needs
  • Financial projections

A business plan is necessary if you plan to apply for funding. Lenders want to see a viable plan for turning a profit and sustaining your business over the long haul, as it helps them evaluate if you’ll repay.

7. Get the financing you need.

If you don’t have the initial investment costs at the ready, you may need outside financing to launch or run your franchise. Many banks, the SBA and franchise-specific lenders offer financial help for would-be franchisees.

Other options include crowdfunding or lenders based entirely online. Online lenders like Kiva and Bluevine tend to leverage technology for more streamlined or automated approval processes. You could also use an online business marketplace like Lendio or Fundera to compare a network of funding options in one spot.

Some franchisors, like the UPS Store, Chem-Dry Carpet Cleaning and Cruise Planners, offer financing assistance, either through in-house programs or partnerships with third-party lenders. For example, Cruise Planners finances 50% of your franchise costs over the first 12 months, while Chem-Dry offers in-house financing for the initial licensing fee. This information is available in section 10 of the FDD.

8. Apply for the franchise and an interview

How you apply depends on the franchise you choose. For example, McDonald’s allows you to fill out an application online, while Chick-fil-A requires an expression of interest form to get the ball rolling.

Plan to attend interviews with the company, which allows time to parse through important details and determine if you’re a match for the franchise.

Expect questions that cover your plans, experience, finances and support, including your:

  • Goals, timeline and territory
  • Previous franchise and industry experience
  • Reasons for choosing the industry and franchise
  • Personal support system
  • Financial capital and business plan
  • Leadership experience
  • An exit strategy

9. Review and sign the franchise contract or agreement

If after your interview you and the franchisor decide it’s a good match, it’s time for the paperwork. You’re required to complete a franchise contract, which is a binding legal document that details:

  • Location and territory
  • Equipment and operations
  • Royalties and ongoing fees
  • Advertising and marketing
  • Trademarks, patents and signage
  • Training and ongoing support
  • Quality control and insurance
  • Dispute resolution
  • Renewal rights
  • Termination and cancellation policies
  • Exit strategies

Franchise contracts come with terms of five to 20 years. At the term’s end, you can often choose whether to renew the contract or discontinue your franchise.

At contract signing, you’ll likely need to also pay any upfront fees or initial investment expenses. Talk with the franchisor about preferred payment methods so you’re prepared.

10. Comply with state and local permit requirements

Most state and local governments require you to obtain licenses before launching your franchise — including health permits, occupational licenses, tax registrations and business licenses — or face fees.

While most states require the franchisor to apply for business licensing, a handful of states require a franchisee to register:

  • Connecticut
  • North Dakota
  • Rhode Island

You may also need to register for a license on a county or city level. Your franchisor should be able to help you anticipate permits required for your area and navigate the legal requirements. The SBA also provides information about franchise licenses that depend on your industry and state.

11. Build your location and assemble your team

The franchisor provides you with the essential elements of preparing your space — like signage, blueprints, fixtures and general decor — but you’re in charge of hiring contractors for the construction work.

You’re also responsible for hiring and training employees . Most franchisors provide training resources for franchisees, even sending a representative to help bring everyone up to speed about company branding, culture and expectations.

12. Stage a grand opening

In the days and weeks leading up to opening day, generate an awareness of your brand within the surrounding community. Most franchisors provide a marketing game plan and might even send a corporate team to help with your grand opening.

When preparing for your big day, a few tips can help make it a success:

  • Choose a date with high traffic to attract as many people as possible.
  • Send press releases to local media and advertise to your market.
  • Invite friends, family and city officials.
  • Decorate the store to attract attention and generate a festive feeling.
  • Organize exciting activities on opening day, like door prizes or giveaways.

If you’re short on cash, you aren’t disqualified from starting a franchise — but you’re going to need to explore funding and financing to get from planning to opening day.

  • Small business loan . Available amounts for small business loans range from $5,000 to $5 million, and rates start at around 5%.
  • Personal loan for business . A personal loan typically comes with fewer requirements. However, they often max out at $50,000, and expect rates from 4% to 36%.
  • SBA loan . Loans from the Small Business Administration (SBA) are known for low interest rates, but strict requirements and a lengthy application.
  • Home equity loan or HELOC . Consider borrowing against the equity in your home as a home equity loan or line of credit . But, because your financing is tied to your home, you risk losing your property.
  • Rollovers for business startups . A rollover for business startups — or ROBS — allows you to invest retirement funds into your business without paying taxes, fees or interest. However, this puts your retirement at risk.
  • Business partnership . Partners can assume part of the financial risk if you can’t fund the business alone. However, while you split the funding, you also split the profit.

When deciding between buying a franchise and starting your own business from scratch, a major difference is the initial investment compared to the ongoing fees. Buying a franchise usually costs more upfront, while the expense of starting your own business varies widely but is typically cheaper in the beginning. (3)

How important is autonomy to you? With a franchise, you’re buying into an existing business with limited control, as you’ll need to follow strict branding, marketing and legal guidelines. Starting your own business, on the other hand, offers more creative freedom. But, that comes with the challenge of building a customer base from nothing.

Overall, buying a franchise means you’re part of a proven system with more restrictions, but also with the benefit of brand recognition and corporate support. A new business means you’re building everything from the ground up, with more risk but also more freedom.

Case study : Opening a Critter Control franchise

Let’s say you want to open a Critter Control franchise in San Jose, California — a city with a population of about 1 million people. At an average of $582,828 gross revenue for that market, according to Critter Control, here’s what you could reasonably expect.

To estimate your profits in the first year of opening, you’d subtract the franchise fee, initial investment, operating costs and royalties from the average gross revenue.

Average gross revenue – (franchise fee + estimated initial investment) – operating costs – royalties

= First-year profit

$582,828 – ($70,100 + $116,550) – $326,384 – $46,626

Using this equation, you can expect to pocket about $23,168 after your first year in business. Because the franchise fee and initial investment are one-time fees, you should be able to make more money in the following year — some $209,818, assuming your average gross revenue stays about the same. As the business grows — and your gross sales increase — your profit is expected to increase over time, barring unforeseen circumstances in the market and industry.

Starting a franchise might be the right choice if you’ve got a solid game plan for raising funds and like the idea of following a tried-and-true business model. But if you’re still on the fence or want to research other options, browse our small business guides to starting, buying or growing a business.

How much money do you need to start a franchise?

The cost of buying a franchise depends on various factors, such as the location and industry. A restaurant in New York will cost significantly more than one in a small town — even just for the real estate alone. Startup costs can range from $10,000 to $5 million, with the average falling between $100,000 and $300,000, according to APD.2

How profitable is owning a franchise?

The profitability of a franchise varies significantly based on the brand’s strength, industry, startup costs and other factors. Data from 2017 shows that for food and beverage franchises, the median annual income is around $70,000 for two years or more in business and around $50,000 for startups. Only 34 percent earned more than $100,000, while many earned much less, according to a survey by the Franchise Business Review.3

How do franchise owners get paid?

Franchise owners and franchisors profit from the business’ success. Franchisors earn income through the royalties and fees paid by their franchisees, while franchise owners generate income from the net profits of sales and services, which is the remaining revenue after deducting overhead expenses. These overhead expenses include the cost of equipment, inventory, staffing and maintenance of a physical location, including utilities like electricity and internet.

  • “How long does it take to start a franchise?,” US Small Business Administration, September 6, 2018
  • “Franchise startup costs,” ADP
  • “How much do franchise owners make and is it profitable?,” Franchise Business Review, October 6, 2018

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Holly Jennings

Holly Jennings is an editor and updates writer at Finder, working with writers across all niches to deliver quality content to readers. She’s edited hundreds of financial articles ranging from credit cards to investments. With empathy at heart, she especially enjoys content that breaks down complex financial situations into easy-to-understand information. Prior to her role at Finder, she collaborated with dozens of small businesses to maximize the reach and impact of their blog posts, website copy and other content. In her spare time, she is an award-winning author for Penguin Random House, writing about virtual reality worlds, magical girls and lasers that go pew-pew.

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Franchise Business Model and How It Works

As an entrepreneur, you can confirm that starting a business from scratch is not a walk in the park. The journey comes with a lot of hurdles and challenges. First, you need to build and establish your brand. Next, you must put operational systems in place. Also, developing your products and services and introducing them to the market is another challenge.

These issues make it hard for many new businesses to survive beyond five years. Fortunately, you do not need to do all the above tasks. You can become an entrepreneur without starting from scratch. This is possible through franchise business model application. 

In this article, we cover what the franchise business model is, how it works, as well as its pros and cons. So, let’s get started and read through together!

What is Franchise Business Model?

A franchise business model is where you pay an initial fee to an established business to use its brand name, strategies, and systems.  You benefit from its recognized brand and operate your business by this company’s rules and standards. This aspect guarantees you a quick return on your investment.

In return, the brand gets a percentage of your sales revenue. You get support through training, market research, and the provision of business systems. So, it comes with a win-win situation for you and the brand owner. But how does the franchise business work?

How Does Franchise Business Model work?

The franchise model is not a complicated aspect. This model involves two major parties which are the franchisor and the franchisee. Franchisors are corporate brand owners. This party allows entrepreneurs to own and operate businesses using their brands, systems, and strategies. In other words, they become the umbrella for different entrepreneurs running businesses under the company’s brand. The franchisor offers ongoing support to the new businesses and all of you to sell their services and products.

The franchisee is the next party in this model. Franchisees are entrepreneurs that want to own businesses but lack enough capital to start from scratch. For this reason, they approach an established brand for a partnership. This relationship allows them to sell the brand’s products and services following all the quality, design, business strategies, and operational systems. The franchisee pays an initial fee and follows the required rules for engaging in a relationship with these brands.

As well, they pay a percentage of their returns to the corporate brand and benefit from ongoing support. So, the franchise business model offers a win-win situation for the two parties.

Examples of Franchise Model Businesses

In this decade, many established brands seeking to expand are opting for a franchise business model. The approach is helping them to partner with upcoming entrepreneurs seeking to run a business under their brands.

MacDonald’s is a good example of a franchise business. This reputable fast-food company partners with entrepreneurs seeking to run MacDonald stores in given cities or towns. The entrepreneur needs to have the required investment and ready to undergo a nine-month training. The training involves learning how MacDonald’s operate, their business strategies, production rules, and quality standards.

Mcdonald Company

Taco Bell, Subway, Domino’s, Pizza Hut, and other leading fast food restaurants are other examples of franchise businesses.

Pros and Cons of the Franchise Business Model

The franchise model is a shortcut to entrepreneurs with the desire and determination to run businesses but lacks enough capital. But like other business models, it has a number of benefits and shortcomings. Here they are:

Support from the franchisor

No doubt, start a business from zero is tricky. You face many challenges particularly when you do not have any prior experience. The franchise model saves you from all these troubles. When you join the franchise partnership, your franchisor provides ongoing support to help you get your feet on the road.

The franchisor takes care of the legal requirements, connects you with suppliers, and offers the needed training to kick off your venture. This support helps you to run a successful business even though you have little or zero experience. 

High business success rate

Many new businesses fail within the first six months to three years. The challenges of building their brand are the major reason why they do not succeed. When it comes to franchises, there is a high success rate. The new business uses an already established brand name.

Also, they offer known products and services. Hence, unlike the ventures starting from scratch, franchisees do not struggle to establish themselves in the market. Ease of accessing credit

Low marketing cost

As noted, franchisees run their ventures under established brand names. You provide products and services that the users have knowledge about. Also, the franchisors allow you to use their systems and business strategies to reach out to the customers.

As such, you do not need to spend months or years trying to establish loyalty and trust from customers. You launch the market and start earning returns from it. So, you spend little to zero cost on marketing.

Profit sharing

The desire of every entrepreneur is to make a profit and take the whole package home. But this is not the case with the franchise. One of the agreement terms is the payment of a royalty fee. You will need to pay a given percentage of your profits to the franchise. The rate can range from 4% to 20% of the annual returns. As such, you have to share your profits with your franchisor.

No brand control

Independence is critical for every entrepreneur. You want to control your brand and have a say in whatever happens to it. In the franchise business, your success relies on the brand reputation. If the brand suffers a bad reputation, it will affect your sales.

Also, you face limitations on the products or services you can offer. You cannot add items that your franchisor does not offer or introduce them on your menu without the approval of the franchisor.  

In a word, starting a business from scratch can be a challenge for many entrepreneurs. You have to create your products and services, brand yourself, and develop business strategies. Only a few startups achieve this goal.

With a franchise business model, you do not need to struggle with all these issues. You work as a branch of an established brand. So, your chances of success are high. However, you have zero control of the brand, and sharing of profit in form of loyalty fees is a norm.

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What Is A Franchising Business Model?

Franchising is a business model where the owner (franchisor) of a product, service, or method utilizes the distribution services of an affiliated dealer (franchisee). Usually, the franchisee pays a royalty to the franchisor to be using the brand, process, and product. And the franchisor instead supports the franchisee in starting up the activity and providing a set of services as part of the franchising agreement. Franchising models can be heavy-franchised, heavy-chained, or hybrid (franchained).

Table of Contents

A business model or a growth strategy?

As the story goes  McDonald’s started to use a franchising model  to grow its restaurant business, and it became over the 1960s a giant in the restaurant business (or real estate depending on the perspective). 

McDonald’s leveraged the existing “ Speedy Service System ” developed by the McDonald’s brothers (what we would later call “fast food”) which was an incredible process development able to provide an improved product at a faster pace.

The speedy system itself represented the application of the manufacturing process to the restaurant business. Later another important building block was added. 

The franchising model really became widely applied during the 1920s and 1930s in the restaurant business.

As new physical communication networks (in the US, the Interstate Highway System) enabled people to move long distances with their cars. 

Later on, Ray Kroc would apply, in its most aggressive form, the franchising model (different formats already existed centuries before) to McDonald’s existing operation to create one of the most scalable restaurant businesses in the world. 

But is franchising a business model, a revenue model, or a growth (expansion)  strategy ?

Well, franchising alone is just a  distribution /growth/expansion  strategy . 

Yet, franchising combined with a product delivered differently (the “speedy system”) made up a whole new experience that made it a new business model: the heavily franchised McDonald’s business model.

Therefore, as we’ll see throughout this research, franchising here is considered a business model, as it embraces product, distribution , and growth as a whole.

Understanding franchising

Modern franchising, as conceived in today’s business world, came as a bio-product of the incredible expansion of the restaurant chains business across the US, like the automobile and the infrastructure of highways built around it, also enabling people to travel distances to go to their favorite restaurants.

From there, especially after the 1950s, franchising was used as a great way for restaurants to expand their operations across the country.

This model today, while it has become a standard, it’s all but a unified model.

In fact, as we’ll see, several companies mastered it and tweaked it to make it in line with their business philosophy, growth model, and strategy .

When a business is looking for a cost-effective means of increasing market share or geographical reach, it may opt to franchise its product and brand name. 

Franchising is essentially a joint venture between a franchisor and a franchisee.

The franchisor is the original business that sells the rights to its name, idea, brand, or systems.

The franchisee then buys these rights, which allows it to sell the franchisor’s goods and services under an existing trademark and business model.

The franchise business model itself is an attractive proposition for franchisees, particularly those wanting to leverage the brand equity of a franchisor in a highly competitive market.

Franchising is thought to have originated in the United States, with the model first implemented by the Singer sewing machine company in the mid-19 th century. 

Today, some of the world’s leading fast-food restaurant companies utilize the franchise model.

These include McDonald’s, Dairy Queen, Taco Bell, Dunkin’ Donuts, and Jimmy John’s Gourmet Sandwiches.

In the United States alone, the franchising industry employs approximately 8.67 million people across more than 785,000 establishments .

Some of the key points to take into account when it comes to franchising:

Franchising can work for sure as a growth propeller as you can easily increment the speed of opening up new locations by also reducing initial capital requirements, operational costs, and time to market.

While franchising is a great model to speed up operations and test new markets. It also comes with the loss of control over products, brands and standards when executed too fast.

As we’ll see throughout this research, different franchising models have come up over the years to make up for the loss of control over speed (like McDonald’s land operations trying in franchisees and making them accountable for the company’s best practices).

The speed of execution is definitely one of the key advantages of the franchising model.

And as the market widens up or shrinks, a franchising model can help the company adapt fast, as locations can be open or closed according to market trends.

Product development

While franchising is a great model for increasing the growth of the business. It might also come at the expense of product development.

Imagine the case of a company only running franchised stores that loses the understanding of the customer.

Instead, as we’ll see, franchising models have adapted also to leave a small percentage of owned stores, where the franchising company can experiment and test new product lines.

Also, here, franchising can make or break a whole brand.

And this all depends on whether the company has been able to balance out the speed and ability of the franchisees to stick with the company’s standards and be true to the company’s mission.

How franchising agreements work

Like any agreement between two parties, successful franchising depends on both companies demonstrating professional competence and acting in good faith.

To some extent, this can be facilitated by:

A code of conduct

Which sets out how each party must act toward the other.

Most codes outline disclosure requirements, a good faith obligation, a predetermined cooling-off period, dispute resolution mechanisms, and procedures for ending the agreement. 

Legislation

In addition to the code of conduct, franchise parties are also required to act in accordance with laws and regulations.

In general terms, franchising agreements must operate within the bounds of fair work legislation, relevant tax laws, state licensing schemes, and anti-competitive conduct guidelines.

As we’ll see, franchising agreements will take different shapes according to the company’s franchising model.

The three main types of franchising

Within the franchising model itself are three different types:

  • 1 – Traditional franchising 

In traditional franchising, the franchisee sells products manufactured by the franchisor.

This arrangement appears at first glance to be rather similar to a supplier-dealer relationship. However, this is not the case.

The traditional franchise is more closely associated with the franchisor’s brand and generally receives more services than a dealer would from its supplier.

For example, The Coca-Cola Company manufactures and bottles soft drinks before selling them to franchisees.

The Ford Motor Company offers regular maintenance and servicing for Ford vehicles bought at franchise dealerships.

  • 2 – Business-format franchising

The franchisee under this second model receives a complete system for delivering the product or service of the franchisor.

The role of the franchisor is to define the business system and establish the brand standards, while the role of the franchisee is to manage its day-to-day activities within those systems and standards.

Domino’s doesn’t franchise pizza any more than McDonald’s franchises hamburgers.

Both companies use business-format franchising to streamline the systems for delivering their branded products and services amongst franchisees.

  • 3 – Social franchising

Social franchising is the newest franchising type and is the application of business-format franchising techniques in the delivery of products and services to disadvantaged people.

Companies that engage in social franchising provide basic items such as drinking water, pharmaceutical drugs, and other items related to healthcare, education, sanitation, and energy.

The franchising arrangement itself is often with a not-for-profit organization, religious institution, or government body.

Other types of franchising based on the FourWeekMBA research

Beyond the classic configuration and categorization of franchising business models, the FourWeekMBA research identified three main types of franchising models, mainly swinging between a model where most restaurants are owned (skewed toward a chain model) or a model where most restaurants are franchised or a hybrid model.

  • Heavy-franchised business model

McDonald’s follows what can be defined as a heavy-franchised business model .

mcdonalds-business-model

Many have argued over the years that McDonald’s is more of a real estate company than a restaurant company.

Why is it the case?

While McDonald’s does use a heavy-franchise model, where most restaurants are franchised (McDonald’s keeps a low ratio of chain restaurants where it can also do product development and discovery, which then gets extended to its franchised restaurants), there is a twist.

McDonald’s secures the land or the rental contract of the land; therefore, the franchisee, even if an “independent restaurateur,” is locked into McDonald’s growth plan.

Indeed, one of the risks of a franchising strategy is the loss of standards, especially related to product quality.

To prevent that, McDonald’s controls the land, thus making sure that the franchisee is aligned with the product’s standards.

In addition, starting a McDonald’s franchising operation might be quite expensive, and it might require substantial experience.

Therefore, this works as friction at the onset, which should motivate to open McDonald’s restaurants only those who really have solid growth plans.

In fact, as McDonald’s highlights , an initial investment to open up a restaurant might range from $1,008,000 to $2,214,080 (including a $45,000 franchise fee), and at least half a million of liquidity available to be invested into the business.

Franchisee can’t go on and open a McDonald’s on its own, instead, the land lease agreement has to go always thourhg the company.

In fact, McDonald’s keeps them separated.

On the one side, the land development process; on the other side, the franchisee selection and operations.

On the one hand, the company has a real estate arm dedicated to the selection of lands for developing new restaurants. As the company highlights :

McDonald’s looks for the best locations within the marketplace to provide our customers with convenience. We build quality restaurants in neighborhoods as well as airports, malls, tollways and colleges at a value to our customers.

Some of the key criteria for restaurant development are:

  • 50,000+/- sq. ft.
  • Corner or corner wrap with signage on two major streets.
  • Signalized intersection.
  • Ability to build up to 4,000 sq. ft.
  • Parking to meet all applicable codes.
  • Ability to build to a minimum height of 23′ 4″.

mcdonald's-land-development

When it comes instead to the franchisees, McDonald’s offers a proven playbook and process to create a money-making restaurant machine.

  • McDonald’s does use a heavy-franchised model. However, the company has tweaked the model to quickly expand its operations through franchising, while at the same time keeping control over standards followed by the franchisees, as McDonald’s operates as the landowner/operator.
  • This tweak is extremely important as it helps balance out the otherwise too-aggressive franchising strategy , which is great for growth, but it might result in a loss of control over process and product quality standards.
  • For that, McDonald’s has created two separate operations arms: one is a real estate development unit to develop the restaurant land; the other is the franchising operations to select franchisees and help them kick off operations.

That might also explain the high EV/Revenue Multiple of McDonald’s in the last years, as it rolled out a heavy franchised strategy.

mcdonalds-ev-revenue-multiple

  • Heavy-chained business model

McDonald’s has found a balance between quick expansion and opening of new franchising by owning the land where franchisees operate and locking them in through contractual agreements, thus making sure they respect the group’s best practices.

Other restaurant chains, like Chick-fil-A, use the opposite model.

While growth in opening new locations is much slower compared to the fast pace players like McDonald’s, the focus is on ensuring the store is successful.

In fact, the initial fee requested from franchisees is way lower compared to McDonald’s ($10,000 vs. $45,000):

chick-fil-a-franchising

While the entry fee is lower, operating Chick-fil-A franchisees will have to pay a 15% royalty fee.

As the company explains in the franchise disclosure document as 15% of franchised restaurant sales, fewer amounts charged to franchisees for equipment rentals and business services fees, and 50% of net profits.

In short, the Chick-fil-A franchising model has the following features:

  • It doesn’t require a net worth, compared to other franchising operations such as McDonald’s, as it’s the company that undertakes the expenses to open up a new restaurant.
  • The franchising fee (entry fee) is just $10,000, compared to, for instance, McDonald’s $45,000 fee.
  • However, the franchisee has to pay 15% of the net sales and 50% of the net sales.
  • This makes sense as the franchisor and not the franchisee is the owner of the business, where the franchisee primarily operates the business.
  • Therefore, the Chick-fil-A franchising operations look more like a chain model, while it skews its playbook in finding the right people to operate the business. In fact, of the applicants, only a tiny percentage of those make it up to become franchisees.
  • Hybrid or franchained business model

The Coca-Cola Company has mastered a franchising model, which also works as a go-to-market strategy, which we defined franchained :

franchained-business-model

As we highlighted in the Coca-Cola business model analysis :

Coca-Cola follows a  business strategy  (implemented since 2006) where through its operating arm – the Bottling Investment Group – it invests initially in bottling partners’ operations. As they take off, Coca-Cola divests its equity stakes, and it establishes a franchising  model , as long-term  growth  and  distribution   strategy .

More precisely:

https://author-prod-go-aem6-4.coke.com/assetdetails.html/content/dam/journey/us/en/testimages/sustainability-story-desktop-703x450.jpg

While in the directly owned bottling facilities, Coca-Cola sells directly, in the concentrate operations, independent bottling partners manage  distribution .

Therefore,  Coca-Cola  makes money by selling its concentrate to bottling partners ( they must place a full order for the concentrate available in that territory as part of the bottling agreement ).

As exemplified below, this is how the whole system works:

coca-cola-business-strategy

An opposite scenario might be that of using the franchising model in the short-term to test whether new markets are profitable by reducing the operational costs required to open new units and by speeding up the growth while internalizing them in the long run, if they turn out to be successful and strategic for the company.

This will work as a reverse franchained model.

reverse-franchained

The key differences between franchising and licensing

Franchising and licensing are similar in that they are both types of business agreements where one party pays another for the use of brands, trademarks, technology, and other business systems.

Most of the differences between the two approaches relate to the level of control and underlying intent of the transaction itself.

These differences can be summarised in the following points:

Level of control

In a franchise agreement, the franchisor has broader control over how the franchisee uses its brand and operates.

In a license agreement, the licensee has access to the licensor’s intellectual property and has more control over how that property may be used.

Business objectives

Franchise agreements exist primarily for the franchisor to grow its brand in a relatively passive way using established systems.

License agreements, on the other hand, are favored by independently run businesses that simply want to monetize certain technology or trademarks.

In the United States, franchise agreements are governed by state and franchise law.

However, it is general contract law that governs license agreements.

Key takeaways

  • Franchising is a business model where the owner (franchisor) of a product, service, or method utilizes the distribution services of an affiliated dealer (franchisee). While most associate franchising with fast-food chains, the model can be traced back to the Singer sewing machine company.
  • Franchising as a business model can be split into three types: traditional, business-format, and social. Most franchising agreements in place today are business-format agreements.
  • Franchising is only successful if both parties act professionally and behave appropriately. This means following guidelines set out in a formal code of conduct or any applicable legislation.

Franchising models recap

Heavy-franchising models like mcdonald’s.

In a heavy-franchising model like McDonald’s, the initial fee, the investment to open up a restaurant, and the net worth required to operate the business is quite high.

To keep the standards high, McDonald’s has a dedicated arm that is in charge of land development and controls the rental agreement with the franchisees.

The franchisees, in turn, own the business and they will pay royalties to the company.

In a heavy-chained model, like Chick-fil-A

The initial fee to open up a restaurant, the net worth required to operate, and the overall investment required are much smaller.

Indeed, the company owns the whole operation, and it accepts applications from thousands of potential franchisees each year.

In this franchising model, therefore, the growth of opening new restaurants is much slower compared to the heavy-franchised model.

However, the company makes much more money from the franchising operations, as it gets high royalties as a percentage of sales, and it also splits profits with franchisees.

De facto, in this model, the franchisee is more like a high-profile manager than the business owner.

And in part, this is justified by the fact that Chick-fil-A bears the costs of opening these restaurants.

In a hybrid model

Or what we define franchained, a company can leverage a chain model in the short term and unleash the franchising model, once the operations have been established.

The Coca-Cola Company leverages this model to establish new operations.

An opposite scenario might be that of using the franchising model in the short term to test whether new markets are profitable by reducing the operational costs required to open new units and by speeding up the growth while internalizing them in the long run, if they turn out to be successful and strategic for the company.

50 Franchise Businesses

  • McDonald’s: As previously mentioned, McDonald’s is one of the world’s most iconic franchised fast-food chains, known for its burgers, fries, and signature offerings.
  • Subway: Subway is a global sandwich chain where franchisees operate restaurants and serve made-to-order sandwiches, salads, and more.
  • KFC (Kentucky Fried Chicken): KFC specializes in fried chicken and has a vast network of franchisees worldwide.
  • 7-Eleven: This convenience store giant offers franchise opportunities to individuals interested in running their own 7-Eleven stores, providing various products and services.
  • H&R Block: H&R Block franchises allow individuals to offer tax preparation and financial services to clients, especially during tax season.
  • The UPS Store: Offering shipping, printing, and mailbox services, The UPS Store is a franchised retail network.
  • Pizza Hut: A popular pizza chain with franchise locations worldwide, serving a variety of pizzas, pasta, and sides.
  • Dunkin’ Donuts: Known for coffee and baked goods, Dunkin’ Donuts has franchise opportunities in the food and beverage industry.
  • Jiffy Lube: Jiffy Lube franchises provide quick and convenient oil changes and automotive maintenance services.
  • Snap-on Tools: Snap-on offers franchisees the opportunity to sell high-quality tools and equipment through mobile tool stores.
  • The Learning Experience: This early education and childcare franchise focuses on providing quality educational services for young children.
  • Anytime Fitness: As a 24-hour gym franchise, Anytime Fitness allows members to access fitness facilities at any time, managed by local franchisees.
  • RE/MAX: RE/MAX is a global real estate brokerage franchise, enabling agents to operate under the brand’s banner and access its network.
  • Great Clips: A hair salon franchise, Great Clips provides affordable haircuts, styling, and grooming services at local franchisee-owned salons.
  • Coca-Cola: While Coca-Cola primarily focuses on beverages, it operates through a franchised distribution system, with bottling partners handling production and distribution .
  • Ace Hardware: Ace Hardware is a cooperative of independently owned and operated hardware stores, offering a wide range of products and services.
  • Denny’s: A well-known diner franchise, Denny’s serves breakfast, lunch, and dinner at its franchisee-owned restaurants.
  • Supercuts: Supercuts is a hair salon franchise specializing in affordable haircuts, styling, and haircare services.
  • Midas: Midas franchises provide automotive services and repairs, including brakes, tires, and exhaust systems.
  • MaidPro: MaidPro offers residential cleaning services through franchise locations, allowing entrepreneurs to enter the cleaning industry.
  • The Maids: The Maids is another franchise in the residential cleaning sector, providing professional cleaning services to households.
  • GNC (General Nutrition Centers): GNC franchises are health and wellness stores that sell supplements, vitamins, and nutritional products.
  • Orangetheory Fitness: This fitness franchise offers high-intensity interval training classes, often through studio locations owned by franchisees.
  • Cold Stone Creamery: Known for its customizable ice cream creations, Cold Stone Creamery is a popular dessert franchise.
  • Jani-King: Jani-King is a commercial cleaning franchise, specializing in janitorial services for businesses and facilities.
  • Home Instead Senior Care: This franchise provides in-home care and assistance to seniors, helping them maintain their independence.
  • FASTSIGNS: FASTSIGNS franchisees offer custom signage and visual graphics solutions for businesses.
  • Taco Bell: Taco Bell is a global fast-food franchise known for its Mexican-inspired menu items.
  • Planet Fitness: As a gym franchise, Planet Fitness offers a judgment-free environment for members looking to improve their fitness.
  • Supercuts: Supercuts is a hair salon franchise known for its affordable haircuts and styling services.
  • Kumon: Kumon is an educational franchise that provides math and reading enrichment programs for students.
  • Liberty Tax: Liberty Tax franchises offer tax preparation services and financial solutions.
  • Jersey Mike’s Subs: Known for its fresh sub sandwiches, Jersey Mike’s is a popular sandwich franchise.
  • Curves: Curves is a fitness franchise specifically designed for women, offering circuit-based workouts.
  • Handyman Connection: This franchise connects homeowners with professional handymen for various home repair and improvement services.
  • Edible Arrangements: Edible Arrangements specializes in fresh fruit bouquets and gourmet chocolate-dipped fruit arrangements.
  • Smoothie King: Smoothie King is a franchise that serves a variety of blended fruit smoothies, often marketed as healthy alternatives.
  • Budget Blinds: Budget Blinds franchises provide custom window treatments, including blinds, shades, and shutters.
  • Sonic Drive-In: Sonic is a drive-in fast-food franchise with a unique carhop service and a diverse menu of burgers, hot dogs, and drinks.
  • Chem-Dry: Chem-Dry franchises offer carpet and upholstery cleaning services using a proprietary cleaning process.
  • Firehouse Subs: Firehouse Subs is a sandwich franchise known for its hearty sub sandwiches and commitment to community service.
  • Sport Clips: Sport Clips is a men’s and boys’ hair salon franchise that focuses on providing haircuts and grooming services in a sports-themed environment.
  • Moe’s Southwest Grill: Moe’s is a fast-casual restaurant franchise serving Tex-Mex cuisine, including burritos, tacos, and nachos.
  • Supercuts: This hair salon franchise provides affordable haircuts and styling services for men, women, and children.
  • Tropical Smoothie Cafe: A fast-casual franchise specializing in smoothies, wraps, sandwiches, and salads with a tropical twist.
  • Paul Davis Restoration: Paul Davis franchises offer property damage restoration and remodeling services.
  • Sylvan Learning: Sylvan Learning is an educational franchise that provides tutoring and academic enrichment programs for students.
  • Pet Supplies Plus: This retail franchise offers pet supplies, including pet food, grooming, and other pet-related products and services.
  • Famous Dave’s: Famous Dave’s is a barbecue restaurant franchise known for its smoked meats and savory barbecue sauces.
  • Papa Murphy’s: Papa Murphy’s is a take-and-bake pizza franchise, allowing customers to take home fresh pizza and bake it themselves.

Key Highlights

  • Franchising is a business model where the owner (franchisor) of a product, service, or method grants the rights to use their brand, process, and products to an affiliated dealer (franchisee).
  • The franchisee pays a royalty to the franchisor in exchange for the use of these rights and receives support in starting and operating the business.
  • Franchising can be both a business model and a growth strategy .
  • It is a strategy for expanding a business by leveraging the resources and entrepreneurial spirit of franchisees while maintaining brand standards and control.
  • Modern franchising evolved during the expansion of restaurant chains in the United States, facilitated by the growth of infrastructure like the Interstate Highway System.
  • Franchising models have diversified and adapted to different industries and business philosophies.
  • There are three main types of franchising models: traditional franchising, business-format franchising, and social franchising.
  • Traditional franchising involves the sale of products manufactured by the franchisor.
  • Business-format franchising provides a complete system for delivering the franchisor’s product or service.
  • Social franchising applies business-format franchising techniques to provide products and services to disadvantaged populations.
  • Growth: Franchising can accelerate growth by reducing capital requirements, operational costs, and time to market.
  • Control: Maintaining brand and quality standards while franchising can be a challenge.
  • Speed: Franchising allows for rapid market expansion and adaptation to market trends.
  • Product Development: Over-reliance on franchising may impact innovation in product development.
  • Branding: Successful franchising hinges on franchisees adhering to the company’s standards and mission.
  • Franchise agreements should include a code of conduct, compliance with relevant laws and regulations, and mechanisms for dispute resolution.
  • The specific terms of franchising agreements can vary depending on the business model and strategy .
  • Franchising involves more control and is primarily used for brand expansion.
  • Licensing grants rights to intellectual property and provides more control to the licensee.
  • Franchising is governed by state and franchise law, while licensing operates under general contract law.
  • Heavy-Franchised Model (e.g., McDonald’s): Franchisees pay a significant fee to operate under strict brand standards. The franchisor often controls the land and rental agreements.
  • Heavy-Chained Model (e.g., Chick-fil-A): Franchisees pay a lower fee but give a percentage of sales and profits to the franchisor, who bears the costs of opening new locations.
  • Hybrid or Franchained Model (e.g., The Coca-Cola Company): Companies may switch between a chain model and a franchising model based on the establishment and success of operations.

Case Studies

Case studies of franchising types, what are the 3 types of franchises.

The three main types of franchising comprise:

According to the FourWeekMBA’s research, three other types of franchising models were identified:

What are the risks of franchising?

One of the major risks of a franchising strategy is the loss of standards, especially related to product quality. For instance, McDonald’s has figured out how to keep standards higher for its franchisees by controlling the land, thus making sure that the franchisee is aligned with the product’s standards.

What makes a good franchise model?

A good franchise model combines amplified distribution and growth by outsourcing expansion to franchisees while making sure these franchisees follow the core standards that the franchisor sets. Not everyone can run a franchising business model at scale. One of the companies that managed to run such a model is McDonald’s .

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3 Tips for Building an Investor-Ready Franchise Business

F ranchises offer entrepreneurs a proven business model, product or service and marketing strategy. However, they also come with a price tag ― sometimes a hefty one. In addition to a franchise fee, which typically ranges from $25,000 to $50,000, franchisees often have to pony up contractor and professional fees as well as costs associated with signage and inventory. As with any other business, they must also raise sufficient working capital to pay to get launched and running. 

As a result, franchisees must always be on the lookout for funding opportunities to help with some of these costs. Because of the highly competitive nature of business funding, it pays to build a business that will not only get loan approvals from banks and other traditional lenders but also attract independent investors, including private equity firms with more favorable lending terms.

Did you know? One way to get started with limited funding is to open a franchise with low startup costs . However, keep in mind that a cheap cost to entry doesn't necessarily guarantee affordable operating costs. 

How to build an investor-ready franchise

Here are a few tips to help you build an investor-friendly franchise business.

1. Cover all your legal bases.

When you're looking to bring investors into your franchise business, remember that you'll be adding another independent party, the investor, into an already complex web of interactions. To ensure things run smoothly, it's crucial to take up the services of a franchise attorney from the get-go, who will help with things like the franchise agreement, the franchise disclosure document and issues of liability that often carry severe implications for franchise businesses.

Liability issues can weigh heavily on any business, making potential investors shy away from a partnership. Some companies have lost millions of dollars in product liability settlements. This happens even when the business in the suit did not develop the product in question. For franchisees with several units, such liability issues can create a loss-making, highly flammable business environment that potential investors won't want to touch.

In addition to addressing any liability issues and helping with the necessary franchising documentation, a franchise attorney can be helpful when it comes to selecting a business entity, such as a limited liability company or C corporation, which in itself is a critical step that determines taxation regimes and legal rights associated with your business. 

2. Create a solid business and marketing plan.

One common misconception among entrepreneurs venturing into a franchise business is that their role as franchisees will be limited to cashing checks and lounging behind an executive office desk. While the franchisor will often require the franchisee to stick by the original business model, an investor will only come on board if you have a business plan detailing your franchise business's strategic vision and goals, financial projections and comprehensive business background.

Plus, despite the fact the franchisor will also have a marketing strategy in place ― usually complete with logos, banner designs and ad campaigns ― it is vital you develop and integrate your own marketing strategy with the franchisor's marketing plan. Potential investors will often need to see how your establishment plans to interact with potential customers , something that will significantly influence how they assess the profitability of your venture.

To that end, invest in every practical marketing tool a typical business uses to find and close leads. Marketing strategies, such as email and social media marketing , can be quite effective for franchisee operators just starting out, thanks to the 58 percent of potential leads who check their emails every morning. To add to this pool of potential leads, you can use localized ad campaigns and promotion programs that target customers around your area of operation, ensuring your franchisor approves each element of your marketing strategy to avoid branding and trademark issues later on.

FYI: Creating a marketing plan that appeals to your investors is essential. Here are four marketing hacks to help you attract the right investors .

3. Streamline your franchisee's finances.

One of the biggest turnoffs for investors is a franchisee ― or any business, for that matter ― whose finances don't make sense, even when the franchisor is a well-known, profit-making brand. While it is standard for single franchisee units to employ basic accounting systems around the office, franchisees with multiple business units might have difficulty managing finances via simple financial software. This situation often makes the business look bad in the eyes of potential investors.

To remedy this problem, utilize a top accounting system that links up with all your business units, ensuring that any new software or hardware you introduce meets the standards set by the franchisor, if any. Your system should be able to produce comprehensive financial and accounting reports at a moment's notice in any of the locations under your franchise business.

Additionally, be highly selective with the bank you partner with, making sure it understands your business as a franchisee and your intentions to bring an investor on board . A good bank will grow with you by dishing out financial advice and support without interfering in the relationship between your franchisee and your investors.

Investors vs. bank loans for franchises

Generally speaking, the most significant difference between an investor and a lender is that investors tend to lend money to startup businesses, whereas banks prefer to lend money to proven, existing businesses. Here are a few things investors and bank lenders evaluate before working with your business: 

What investors look for in startups

Investors often look for startup features like a product pitch, return on investment potential and equity offer:

  • Your pitch: First and foremost, investors want to know what your big-picture pitch is. Rather than diving right into your financials, investors want to understand your market analysis and how your product or services solve a problem. In other words, an investor wants to see a thorough plan to bring your idea to fruition.
  • Your potential: Investors, more than anything, are looking for a significant return on their investments. Therefore, they want to invest in startups they believe have the potential to be the next big, publicly traded company. One of the primary indicators of a startup's potential is its ability to scale and grow as the market demand increases.
  • Your equity offer: Finally, investors don't charge interest on the money they invest in a company. Instead, they look for a share of the startup's equity. [Related article: How to Know an Investor Is Offering You a Good Deal ]

What banks look for in small businesses

Banks tend to look for proof of concept features like reliable cash flow, collateral and business experience:

  • Cash flow: Banks like lending money to established businesses with a steady, reliable income to minimize risk. To assess this, banks and other lenders will evaluate your revenue streams, profit and loss statements and credit history to ensure you have enough money left over after expenses to repay the loan.
  • Collateral: Additionally, lenders often look for a secondary source to repay a loan if a business cannot generate enough capital. Banks will consider real estate, vehicles, business equipment or other valuable assets to offset their risk. 
  • Experience: Finally, banks and lenders want to know what your business is and if you have enough experience to ensure your venture is successful. They will also review your business plan and financial projections to see how well you know the market and if your past projections have proven accurate.

Where to find investors

Today, finding investors is relatively easy. The trick is making your startup or small business attractive to investors. Here are a few places where you can find investors for your business :

  • Online fundraising platforms: Over the past decade, online fundraising platforms have grown in popularity and many accredited individual investors use them to find promising companies. A few popular equity crowdfunding platforms include Wellfound (previously AngelList Talent), StartEngine (which now also owns SeedInvest ), MicroVentures and Wefunder .
  • Social media: Social media platforms are a great channel to connect with your audience, establish your brand and market your product or services, but it is also an excellent resource to find potential investors. LinkedIn, in particular, is a great place to cold pitch or make strong connections, but you can also use platforms, such as Facebook and Twitter, to foster relationships and have thoughtful conversations.
  • Blogging: One of the best long-term strategies to develop an inbound audience is to start a blog that shares your story, states your goals and illustrates your progress. You can also track down potential investors and read their blogs for insights into what they look for before investing in a young company.

Additional reporting by Skye Schooley and Sean Peek.

Franchises offer entrepreneurs a proven business model, product or service and marketing strategy. However, they also co

ProfitableVenture

Franchise Business Model – Everything You Need to Know

By: Author Tony Martins Ajaero

Do you want to start a franchise business? If YES, here is everything you must know about the franchise business model plus examples of successful companies. The franchise business model has been applauded by some as one of the greatest business models ever developed. It has proven time and time again to be successful when run properly and in addition, it is usually easy to become a franchise owner.

What is a Franchise?

A franchise basically involves a party (known as the franchisor) granting another individual (known as a franchisee) the permission to make use of its name and trade mark, according to an identified system, usually within a territory or at a location, for an agreed upon term. The franchisee is granted a franchise license to use the franchise company’s trademarks, systems, signage, software, and other proprietary tools and systems in accordance with the guidelines in the franchise contract.

Going for a franchise business model allows business owners to grow their businesses without having to spend substantial amounts of their own money to build new units. In this vein, the risk that is associated with establishing and running a new business will be transferred to the franchisee who is responsible for coming up with the initial capital.

For new entrepreneurs who have very little business experience, franchising gives them a successful business model to follow, which can relieve some of the uncertainty associated with starting a business venture from scratch. The franchisee will have to not only abide by the franchise contract and run their business according to the operations manuals, but they will also have to pay an upfront franchise fee (license fee), and ongoing royalties.

A franchise license can range from $25,000 -$35,000, even though some businesses have been known to fix the price for their franchise license at $100,000 or more, as in the case of what’s called a Master Franchise. In a Master Franchise, like Jan-Pro Cleaning Systems, the franchisee buys the rights to an entire area, and it’s usually based on population.

The franchisee will also have to pay royalties to the franchisor. The royalties are usually based on a percentage of gross sales. Royalties range anywhere from 4 percent to 9 percent. Some franchisors on the other hand charge a flat monthly royalty fee. In addition to royalties, franchisees usually pay into a national monthly advertising/marketing fund, which amounts to 1-2% of gross sales.

How Big is Franchising, as an Industry?

Reports that were gathered by the IFA (International Franchise Association), has shown that the franchise business model is quite popular. As of 2005, there were 909,253 franchised business establishments in the United States of America alone. About 11 million jobs or 8.1 percent of national private work force is in the employ of a franchised business.

Franchised businesses supplied an annual payroll of $278.6 billion, or 5.3 percent of all private-sector payrolls in the United States. In addition, franchised businesses produce goods and services worth $880.9 billion per year, or 4.4 percent of private-sector output in the United States of America.

Cost of a Franchise Business Model

A well structured franchise business should be able to provide you with a chart that shows exactly what costs you should incur to start and run your franchise during the first year or two. If the franchise’s UFOC (Uniform Franchise Offering Circular) does not clearly spell this out, ask them to do so.

You should beware of hidden costs that are not expressly spelt out in the UFOC, such as:

  • Utility deposits to your landlord.
  • Legal and accounting fees (between $1,000 and $2,000 for an attorney to review your franchise agreements, plus an additional $500 to $1,000 to set up a corporation, LLC or other legal entity for your franchise business).

Other costs include;

  • The cost of debt service: if you have to borrow money to buy into the franchise.
  • Travel, lodging and meal expenses when attending the franchises required training programs.
  • Life and disability insurance, employee benefits and payments you will make to retirement plans such as an individual 401(k) or SEP-IRA.

Types of Franchising Relationships

There are two different types of franchising relationships.

1. Business Format Franchising

This is the most common type that comes to the mind of most people when they hear the word “franchising”. Here, the franchisor provides to the franchisee not just its trade name, products and services, but an entire system for operating the business.

The franchisee generally receives site selection and development support, operating manuals, training, brand standards, quality control, a marketing strategy and business advisory support from the franchisor. There are hundreds of different industries that make use of this type of franchising including:

  • Business Services
  • Children’s Services
  • Cleaning, Maid, and Janitorial
  • Health & Fitness
  • Home Services
  • Retail Products and Services
  • Medical Services
  • Senior care
  • Travel and Tourism

2. Traditional or Product Distribution

Even though this is less identified with franchising, traditional or product distribution franchising is actually larger in total sales than business format franchising. Here, less emphasis is placed on the system of doing business, with products manufactured or supplied by the franchisor to the franchisee taking center stage.

In most, but not in all situations, the manufactured products generally need pre- and post-sale service as found in the automobile industry. Examples of traditional or product distribution franchising can be found in the bottling, gasoline, automotive and other manufacturers

Other Important Details About the Franchise Business Model

A. relationships in the franchise building business model.

When a lot of people think about the franchise business model, they tend to place a major emphasis on the law. Even though the law is very important, it is not the most important thing in the franchise business model.

At its core, franchising is about the franchisor’s brand value, how the franchisor supports its franchisees, how the franchisee meets its obligations to deliver the products and services to the system’s brand standards and most importantly – franchising is about the relationship that the franchisor has with its franchisees.

According to a survey that was carried out in the year 2014 by Franchise Business Review on franchisees’ relationship with their franchisors, they found out that:

  • 90 percent enjoy operating their business,
  • 88 percent of franchisees enjoy being part of their organization,
  • 85 percent feel positive about their affiliation with their franchisor,
  • 83 percent respect their franchisor,
  • 80 percent feel their franchisor operates with a high level of honesty,
  • 78 percent would recommend their franchise brand to others, and
  • 73 percent would “Do it all over again” if they had the option.

b. The franchise business model is About Brands

A franchisor’s brand is one of its most valuable assets and clients will decide which business to patronize and how often to frequent that business based on what they know, or think they know, about the brand. More often than not, customer do not really put much thought into who owns the business so long as their brand expectations are met.

If you buy into the franchise business model, you will certainly be developing a relationship with your customers to maintain their loyalty, and most certainly customers will choose to purchase from you because of the quality of your services and the personal relationship you establish with them. But first and foremost, they have trust in the brand to meet their expectations, and the franchisor and the other franchisees in the system rely upon you to meet those expectations.

c. Systems and Support provided by the franchise business model

Great franchisors provide systems, tools and support so that their franchisees have the ability to live up to the system’s brand standards and ensure customer satisfaction. In return, the franchisor expects that the franchisee will run his business in a way that will be in line with their expectation and also enhance the reputation of the company in the market area.

If you want to select a franchise system to invest in, you should do well to evaluate the types of support you will be provided and how well the franchisor is managing the evolution of the products and services so that it keeps up with changing consumer expectations. Some of the more common services that franchisors provide to franchisees include:

  • A recognized brand name,
  • Site selection and site development assistance,
  • Training for you and your management team,
  • Research and development of new products and services,
  • Headquarters and field support,
  • Initial and continuing marketing and advertising.

An ideal franchisor should be one who enforces system standards from time to time. This is very crucial because enforcement of brand standards by the franchisor is meant to protect franchisees from the possible bad acts of other franchisees that share the brand with them. To customers, franchises systems are branded chains of operations, and as such, they may attribute the same quality of product or service with all franchise systems.

d. Contractual Relationship in a franchise business model

From the untrained view point of the average public, a franchise business is just like any other chain of branded business, however, the truth remains that they are quite different. In a franchise system, the owner of the brand does not manage and operate the locations that serve consumers their products and services on a day-to-day basis. Serving the consumer is the role and responsibility of the franchisee.

The franchise business model involves a contractual relationship between a licensor (franchisor) and a licensee (franchisee) that allows the business owner to use the licensor’s brand and method of doing business to distribute products or services to consumers.

While every franchise is a license, not every license is a franchise under the law. Sometimes that can be very confusing. In the United States of America, a franchise is a specific type of licensing arrangement defined by the Federal Trade Commission and also by several states. In the United States a franchise generally exists when:

  • The franchisor licenses a franchisee the right to use its trade or service mark; To identify the franchisee’s business in marketing a product or service using the franchisor’s operating methods;
  • The franchisor provides the franchisee with support and exercises certain controls; and,
  • The franchisee pays the franchisor a fee.

Every state in America does not have the same definition of what a franchise is. For instance, some states may also include a marketing plan or community of interest provision in the definition. The definition of what a franchise is can vary significantly under the laws in some states and it is important that you don’t simply rely on the federal definition of a franchise in understanding any particular state’s requirements.

e. Franchisors are in a way culpable if things go wrong

Just because franchisors do not own the individual franchises doesn’t mean that they’re necessarily “off the hook” if something goes wrong with a unit. If a franchise unit develops a bad reputation for quality or service, it affects the reputation of the franchise as a whole. If a unit underperforms, it also means less in royalties for the franchisor.

50 Examples of Companies That Operate the Franchise Business Model

Edible arrangements international.

Edible Arrangements is a staple in the gift department. The global company is trendy, easy to order online, and has numerous personalization options to customize gifts. Before opening an Edible Arrangements franchise, owners are trained and offered instructional guides on all sectors of the business. They have over a thousand franchises under them. The cost to open a franchise with them ranges from $156,990 to $276,980.

2. Great Clips

Great Clips is one of the world’s largest salon brands. This business is well known for its high quality and cheap prices. They make sure that all stylists and employees receive training to work at the salons. They have 3,518 franchises and the cost to open a franchise with them is from $114,200 to $216,000.

Ramada is part of the Wyndham Hotel Group, one of the largest in the world. The hotel group has the largest loyalty program because of the number of participating hotels; this loyalty program encourages visitors to come again and rack up points and rewards. Ramada has over 800 franchises scattered all over the globe. The cost of starting a franchise with them ranges from $195,700 to $13.1 million.

4. Hampton Hotels

Hampton Hotels is owned by Hilton Worldwide. Hilton offers tremendous assistance to its franchises, including training, ongoing support with launches and evaluations, and marketing support. They have 1,963 franchises in the world today and the cost of opening a franchise with them ranges from $3.7 million to $13.5 million.

5. Menchie’s

Menchie’s philosophy is built around customer satisfaction. The frozen yogurt company prides itself on focusing on making the customer experience great. Menchies has 478 franchises. The cost of opening a franchise with them ranges from $218,300 to $385,200.

6. Yogen Fruz

Yogen Fruz has a large global presence with more than 1400 locations in over 46 countries. The healthy frozen yogurt is growing fast because of the company’s respected reputation. Yogen Fruz has 1,121 franchises under it and in order to get started with them, you will need to have from $135,700 to $472,200.

7. Church’s Chicken

Church’s Chicken is one of the largest chicken chains recognized around the world. The company is aiming for rapid growth, so they really support their franchisees. Church’s Chicken encourages those with an entrepreneurial spirit to join. It has over a thousand franchises under it. It cost $413,300 to $1.3 million to open a franchise with them.

8. Sign-A-Rama

Sign-A-Rama is more than just a sign company; it works with its customers to build and shape a customer’s brand. The company personalizes signs and promotional material to accommodate the strategy and direction of the brand it’s working with. It has close to a thousand franchises under it and the cost of opening a franchise with them is about $91,100 to $234,200.

9. Jazzercise: Jazzercise revolutionized the workout industry

In the 80s, making it one of the most popular, trusted forms of exercise. It’s gained a cult-like following over the years, and its dance parties are still increasingly popular. Opening a Jazzercise is relatively inexpensive ($3500 to $75,800), which draws in many entrepreneurs. Jazzercise has 8,370 franchises under them.

10. Carl’s Jr. Restaurants

Carl’s Jr. is known for its provocative advertising campaigns. These ads attract a lot of attention to the company and bring in franchisees. The cost of opening a franchise with them is about $1.3 million to $1.9 million and they have 998 franchises under them.

11. Home Instead Senior Care

A big selling point for Home Instead Senior Care franchises is the idea that one is purchasing a stake in a gratifying, rewarding business that will give back to others. Entrepreneurs that invest in this franchise are sometimes looking to give back and help others. It costs from $99,000 to $114,900 to open a franchise with them and currently they have 1,011 franchises.

12. Pita Pit

Pita Pit is a healthier spin on fast-casual. The company has experienced tremendous growth in recent years due to its abundance of nutritious options. The investment required to open a Pita Pit is relatively inexpensive ($187,500 to $314,980) when compared to other fast food restaurants which draws franchisees in, according to Franchise Chatter. This business has 489 franchises.

13. Nutty Scientists

Nutty Scientists is an educational program founded in 1996 that teaches children science education through interactive activities. The company brings fun into learning topics that some children struggle with. The cost of opening a franchise with them cost about $40,300 to $54,600. Currently, there are 229 franchises under them.

14. Budget Blinds

This business deals in an assortment of binds, shutters, drapes, and more at a cheap price. Their selling point is that they make the process of finding installations and fixtures for homes a lot easier and less stressful. The blinds company offers at-home service and free consultations and estimates. Opening a franchise with budget binds will set you back to the tune of $89,200 to $187,100. Currently, there are 971 franchises under Budget Binds.

15. Interim Healthcare

Interim is the oldest healthcare franchise company in the United States with 523 franchises. The company provides home care services, like nursing, hospice, and non-medical assistance, and it’s widely spread across the country, with franchises in 43 states. The cost of opening a franchise with interim healthcare ranges from $115,500 to $188,500.

16. InXpress

The franchise works with its customers to fit their individualized shipping needs. The worldwide package and freight delivery company is known for its customer service and affordable shipping costs. They have 263 franchises. Cost of setting up a franchise with InXpress ranges from $55,300 to $160,200.

17. My Gym Children’s Fitness Center

This business has developed a structured fitness program to combine development and exercise. The company helps children 6 weeks to 10-years-old to remain fit and active and grow cognitively as well. The company is also huge; it has different locations in more than 30 countries where it has 329 franchises. The cost of opening a franchise with them is from $34,300 to $247,200.

18. JEI Learning Centers

This business is known for the Self-Learning Method it takes with its students. Upon entering the program, each student takes a diagnostics test, which is designed to highlight the areas the student struggles and excels in. These results outline the trajectory of his or her coursework with the learning center. This business has close to 290 franchises in the United States. The Cost to open a franchise with JEI learning center ranges from $54,300 to $93,300.

RE/MAX is a well known and trusted business that deals in real estate which is why so many people chose to invest in this franchise opportunity. Its worldwide recognition, massive network of resources, and advertising have made it a leader in the industry for the past 40 years. RE/MAX has a 6,665 franchises scattered all over the world today. A franchise from them will cost about $37,500 to $259,000.

20. Jiffy Lube International

Jiffy Lube franchisees speak highly about the support they receive from the company in building out their businesses. Owners can participate in training at Jiffy Lube University, an online program designed to educate owners on all aspects of the business. Jiffy Lube International has 2,079 franchises affiliated with it and its cost around $221,000 to $400,000 to get a franchise from them.

21. Vanguard Cleaning Systems

Vanguard Cleaning Systems is independently owned, and absentee franchise ownership is not allowed. However, the franchises can be run from home and usually only requires 1-2 employees. Janitorial services are essential to large corporations, which is one of the things that make this franchise successful. The cost of opening a franchise with them is around $9,900 to $35,800. Currently they have 2,946 franchises.

22. Dairy Queen

Dairy Queen has strong global brand recognition, which is what makes the restaurant such an enticing franchise opportunity. Dairy Queen has 6,385 franchises scattered all over the world. The cost of opening a franchise with them ranges from $362,400 to $1.8 million.

23. Cold Stone Creamery

Cold Stone Creamery also has strong brand recognition. Customers of the chain tend to be very loyal to the eatery, and the company offers its franchisees plenty of training and support in constructing and running their individual stores. Cold stone creamery has 1,401 franchises and the cost of opening a franchise can cost between $277,400 and $464,300.

24. Snap Fitness

With people leaning towards clean eating and healthier lifestyles, fitness franchising is a profitable market. Snap Fitness is a 24-hour gym with a sleek look that entices franchisees. The company also helps owners increase sales quickly with its instructional program. Snap Fitness has 1,310 franchises and the cost of opening one for yourself ranges from $107,300 to $258,100.

25. Taco Bell

Like many of the other top franchises, Taco Bell has incredible brand awareness that attracts customers nationally. The Mexican chain also has a large peer network of 350 franchisees, and 35% of them have more than 25 years’ experience. This support system is helpful when building a business. The cost of opening a Taco Bell franchise ranges from $1.2 million to $2.6 million.

26. ServiceMaster Clean

The ServiceMaster parent brand is an established name in the service industry. ServiceMaster Clean has a unique business plan that allows for residential cleaning daily and commercial cleaning by night. It also offers a wide variety of other cleaning services, like disaster restoration and floor care. ServiceMaster Clean has 4,983 franchises and the cost of setting up one is about $49,600 and $180,600.

27. Papa John’s International Pizza

Papa John’s International Pizza has 3,924 franchises worldwide. The cost of opening a franchise with them ranges from $129,900 to $844,200.

28. Denny’s

Denny’s is a company that focuses on growth, so it puts a lot of its efforts into building strong relationships with its franchisees. Around 90% (1,536) of Denny’s are franchise-operated, and the company offers its franchises support across all levels of the business. The cost of setting up a franchise with them ranges from $1.3 million to $2.6 million.

29. Hardee’s

Like Carl’s Jr., Hardee’s is owned by CKE. It cost from $1.3 million-$1.6 million to open a franchise with them and there are 1,538 of them.

30. H&R Block

H&R Block is one of the leading companies in the tax services industry. As a 50-year-old company with an impressive track record, H&R Block attracts franchisees with its dependency and brand recognition in the financial industry. Currently, it has 4,846 franchises affiliated with it. The Cost of opening a franchise with them is around $31,500 and $148,700.

31. Cinnabon

Cinnabon makes one of the best cinnamon rolls. The company markets its product as an ‘escape’ from reality and it really focuses on the customer experience, which encourages brand loyalty and growth. Cinnabon has 1,245 franchises and the cost of opening a Cinnabon franchise can range anywhere from $180,100 to $385,500.

32. IHG (InterContinental Hotels Group)

IHG owns 10 successful hotel brands that include InterContinental Hotels & Resorts, Crown Plaza Hotels & Resorts, Holiday Inn Hotels and Resorts and Candlewood Suites among others. It’s one of the most recognized hotel brands in the world, and it is continuing to grow. IHG has 4,831 franchises spread across the whole world. To get in on the action, you will need to have from about $7.2 million to $94 million.

33. Ace Hardware

With stores in seven countries, Ace is one of the leading forces in the home improvement market. Along with the chance to be a part of a recognized, respected company, investors are also drawn to some of the franchisee perks, like no royalty fees. Ace Hardware has 4,802 franchises and it cost about $750,000 to $1.3 million open one.

34. The UPS Store

The UPS Store has a variety of different franchise options for entrepreneurs. Franchisees recommend the company for its forward thinking, ethical code of business, and increase in popularity in recent years. This business has 4,793 franchises under it and the cost of opening one is about $150,200 to $420,300.

35. Snap-on Tools

Snap-on tools is an innovative business that requires no real estate investment. The mobile tool store gives the franchise owners complete control of the direction of the business and the clients which they cater to. It costs from $152,700 to $318,980 to open one and there are 4,581 of them.

36. Days Inn Hotels

Days Inn Hotels is owned by the Wyndham Hotel Group, a frontrunner in the hotel industry. It includes Days Inn and Days Inn & Suites, Days Hotel, and Days Suites. This hotel offers a free complimentary breakfast in most of its locations and this is one thing that customers like about the business. There are 1,784 Days Inn Hotels and the cost of setting a franchise with them is about $198,900 to $7.3 million.

37. Super 8 Hotels

Like Days Inn Hotels, Super 8 Hotels is also owned by Wyndham Worldwide. Super 8 is successful because it’s economical and simple. Super 8 Hotels has 2,519 franchises under them and the cost of opening one is around $176,200 to $3.96 million.

38. Krispy Kreme Doughnut

Krispy Kreme offers people the opportunity to franchise within the United States or internationally. The brand is identifiable worldwide, and the company provides its franchisees with extensive training before opening up shop. Krispy Kreme Doughnuts has 890 franchises all over the world. The cost of opening a franchise with them can range from $275,000 to $1.9 million.

39. Dunkin’ Donuts

Dunkin’ Donuts is another company that’s distinguishable worldwide. With coffee being such a large commodity in the world, these franchises succeed in most cases. Brand loyalty is at its peak with the chain’s customers as well. Dunkin’ Donuts has a staggering 11,310 franchises under them and the cost of opening a franchise with them is from $216,100 to $1.5 million.

40. Jan-Pro Franchising International

Jan-Pro is a cleaning service company with clients in 13 countries and more than 10,000 franchises. The company offers both international and home-based franchising opportunities. Using the Jan-Pro Tracker System, the company ensures that it provides clients with the best customer service possible. The cost of opening a franchise with them is around $3,100 to $50,900.

41. Baskin-Robbins

Baskin-Robbins has around 7,300 locations worldwide. It places its efforts into fostering stable relationships with its franchisees. The cost of opening a franchise with them will range from $102,900 to $388,600.

42. Circle K

Circle K is an international convenience store chain that allows its franchise owners to customize their individual quick service restaurants. The company stocks many popular brands and offers its franchisees support in business and marketing systems among other services. There are 5,093 franchises that are associated with Circle K and to be one of them, you will need to have from $211,500 to $1.6 million.

43. GNC Franchising

The health and nutrition industry is booming, and GNC is one of its leaders. The vitamin and supplement chain has outlets worldwide, and franchisees are attracted to the company for its name, solid service reputation, and support system for individual stores. GNC has 3,188 franchises to its name and the cost of starting one can range from $167,900 to $294,500.

44. Anytime Fitness

With over 2 million members in 2,885 sites across the globe, customers have 24 hour access, 365 days a year. With the secure access key and Anytime Fitness state of the art security systems, customers can feel comfortable visiting thousands of locations at no extra cost.

The chain credits its top ranking to, “financial strength and stability, growth rate, and size of the system,” according to its website. Anytime Fitness has 2,796 franchises associated with it and the cost of opening one is around $78,700 to $371,000.

45. 7-Eleven

The international convenience store chain is well-known and simple. Customers know what to expect when shopping at 7-Eleven, and that business model has always worked for the store. It also has a unique sales method that attracts investors. Most franchise systems require royalty payments based on a percentage of sales.

With the 7‑Eleven system, you can pay royalties based upon the store’s gross profit, that is, net sales receipts minus the wholesale cost of the merchandise you sell. There is a total of 53,027 franchises associated with this brand and the cost of setting up one can range from $37,200 to $1.6 million.

46. McDonald’s

This fast food juggernaut is undoubtedly one of the most popular fast food chains in the world today. They provide their franchisees with extensive training and support. McDonalds has 29,544 franchises and opening each of them costs about $1 million-$2.3 million.

Like McDonald’s, KFC is a world-renowned company. Recently the chain been shaking up its menu and expanding, helping it to gain plenty of media attention. This brings in entrepreneurs looking to take part in the innovative time for the company. There are 13,846 franchises associated with this business and to open up a franchise with them, you will need to have from $1.3 million to $2.5 million.

48. Auntie Anne’s Hand-Rolled Soft Pretzels

This global pretzel chain is beloved and unique in the sense that no other chains produces product like it. It has such a large number of franchises (1,598). The cost of opening an Auntie Anne’s Hand-Rolled Soft Pretzels franchise is around $194,900 to $367,600.

49. Pizza Hut

The pizza industry is lucrative, and investors can trust respected companies like Pizza Hut to succeed. The recognizable chain has a trusted reputation and a strong support structure for franchises to help its owners successfully run their stores. Currently there are 12,959 Pizza Hut franchises spread across different locations. The cost of opening a franchise with them is around $297,000 to $2.1 million.

This is one of the most popular sandwich chains in the world today. The company started making its menu healthier in recent years, which is also helping to attract customers. It’s expanding globally, and many look to be a part of this expansion. Subway has a staggering 42,227 different franchises. The cost of setting up one is around $116,600 to $263,200.

Going for the franchise business model can be a great opportunity. But before you select any franchise, investment in or sign any franchise agreement, do your homework, understand what the franchise system is offering and get the support of a qualified franchise lawyer.

Related Posts:

  • Why Franchises Have Better Success Rates Than Non-Franchised Businesses
  • Disadvantages of Franchising as a Mode of Entry into Foreign Markets
  • How to Open and Operate a Franchise in a Different Country
  • What is a Franchising Letter of Intent for Franchise Business?
  • 20 Important Questions to Ask a Franchise Consultant
  • Can You Get Business Grants to Start a Franchise?
  • Do You Need a Business Degree to Own a Franchise?

2024 Franchising Economic Outlook

2024 economic report cover

Key highlights from the report include:

  • The overall number of franchise establishments will increase by more than 15,000 units in 2024, or 1.9%, to 821,000 units in the U.S.
  • Franchising will add approximately 221,000 jobs in 2024 . Growing at 3.0%, total franchise employment is forecasted to reach 8.9 million.
  • The total output of franchised businesses — the measure of total economic activity in nominal dollars — will increase by 4.1% to $893.9 billion in 2024, up from $858.5 billion in 2023.
  • Franchises’ GDP will continue to grow , increasing at a pace of 4.3% to $545.8 billion.
  • Personal services and quick service restaurants (QSRs) will experience the strongest growth of any industry.
  • Growth in the Southeast and Southwest will outpace the rest of the U.S. franchise market in 2024. The top ten states for franchise growth include: Texas, Florida, Georgia, North Carolina, South Carolina, Tennessee, Maryland, Arizona, Colorado, and Virginia. California and Washington are forecast to be the slowest-growing states for franchising at - 4.2% and -2.3%, respectively.

 Thank you to Benetrends Financial  for sponsoring this year's report.

Benetrends

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  1. The Franchise Business Model 101

    A franchise is a type of business that is operated by an individual (s) known as a franchisee using the trademark, branding and business model of a franchisor. In this business model, there is a legal and commercial relationship between the owner of the company (the franchisor) and the individual (the franchisee).

  2. Which Franchise Model Is Right for You? Here's How to Choose

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  3. Franchise Business Model

    The franchise business model is usually the business model chosen by those who want to start a new business, but do not have much idea how to begin it. That is because the franchising system allows you to acquire a ready-made business, with a consolidated brand and know-how already tested. Virtually, you buy a brand and all the processes.

  4. The Franchising Business Model Explained: A Comprehensive Guide

    November 14, 2023 The Franchising Business Model Explained: A Comprehensive Guide Unlock the secrets of the franchising business model with our comprehensive guide! Discover the ins and outs of this popular business model, from the benefits and challenges to the key steps in getting started. by Roald Larsen

  5. How To Start A Franchise In 8 Steps (2024 Guide)

    What Is a Franchise Business? Common Types of Franchises Franchise Pros and Cons How To Start a Franchise in 8 Steps Frequently Asked Questions Starting a franchise business is...

  6. Franchise Fundamentals: A Comprehensive Guide to the Franchise Model

    The franchise business model is a dynamic approach to business expansion, combining the entrepreneurial drive of a franchisee with the established system and brand of the franchisor.

  7. The Franchise Business Model: Everything You Need to Know

    Franchising, or a business franchise model, is a contractual business model or relationship whereby an established brand, known as the 'franchisor,' allows an independent business owner, or franchisee, to use its branding, business model, and other intellectual property.

  8. What Is a Franchise, and How Does It Work?

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  9. Understanding the Franchise Model: Benefits, Business Model, and How It

    Key Takeaways Franchise model provides reduced risk and access to established brand & support system. Initial investment includes franchise fee, rent, inventory etc., with ongoing fees for royalties & marketing.

  10. The Franchise Business Model: Understanding Franchising 101

    The franchise business model creates an interesting partnership between the franchisor and the franchisee. Some people liken the relationship to that of a parent (the franchisor) with a child (the franchisee). While the franchisor certainly offers support and guidance and wants the franchisee to succeed, the parent/child analogy doesn't hold ...

  11. How to Franchise a Business: The Definitive Guide

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  12. How to Choose a Franchise Business Model

    Choosing the Best Business Model for Your Goals with Freeway Franchise As you get started, know that Freeway Insurance is a highly compelling opportunity to partner with a reputable brand. We have a business model that helps you reach your specific goals, comprehensive training to get you there, and a diverse product portfolio - all of which ...

  13. Franchise

    The franchise business model is popular in highly competitive industries such as the fast-food industry, video rentals, and automotive services. The model first appeared in the US after the Civil War, and it gained popularity in the 1950s and 1960s through to the 1990s.

  14. Understanding the Franchise Business Model: From Fast Food to Home Services

    The fast food franchise business model has historically been the most well-known, as food franchises account for an estimated 30% of the total franchise establishments in the U.S. Like the franchise model in other industries, fast-food franchises enable entrepreneurs to operate their restaurants under the franchisor's name, business processes ...

  15. Best tips on How To Master Franchise Business Model

    A franchise business model means creating a business prototype for a company you want to franchise or that you currently have. It's similar to a business canvas with the tools you'll need to be a successful franchisor, including pre-and post-sales materials. It's also about the brand owner's relationship with the local operator.

  16. How to Write a Franchise Business Plan + Template

    How to write a business plan for your franchise. 1. Understand your franchise business model. Since the franchisor has already established the company's business model, your business plan should focus on how you can adapt it to be successful in your chosen location. Imagine you're planning to open a fast food restaurant, chain hotel, or ...

  17. Types of Franchise Models Explained

    Adam Heitzman September 14, 2023 Seasoned business owners and budding entrepreneurs have been attracted to the franchise business model for centuries. As a franchisor, the model lets you grow your business through partnerships with other entrepreneurs and extend your brand's reach to new locations.

  18. Different Types of Franchise Business Models

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  19. The Benefits of the Franchise Model

    For franchisees, benefits include: a higher chance of success than in a sole proprietorship; shorter time to opening; initial training and ongoing support; assistance in finding an optimal site;...

  20. The Franchise Business Model; a win-win relationship

    The franchise business model is one of the most amazing models used by business owners. They use it to expand their businesses using other people's money and efforts. But it doesn't only benefit the business owner. The beauty of the model is in making a win-win situation between the mother company (franchisor) and the individual investor ...

  21. How to Start a Franchise: A 12-Step Guide

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  22. Franchise Business Model and How It Works

    A franchise business model is where you pay an initial fee to an established business to use its brand name, strategies, and systems. You benefit from its recognized brand and operate your business by this company's rules and standards. This aspect guarantees you a quick return on your investment.

  23. What Is A Franchising Business Model?

    Franchising is a business model where the owner (franchisor) of a product, service, or method utilizes the distribution services of an affiliated dealer (franchisee). Usually, the franchisee pays a royalty to the franchisor to be using the brand, process, and product.

  24. 3 Tips for Building an Investor-Ready Franchise Business

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  25. Franchise Business Model

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  27. 2024 Franchising Economic Outlook

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