How Do Franchises Work?
By: Sara Wykes
Whether or not you can define franchising, it’s a business whose decades-long history proves its opportunities are plentiful, robust, and continuously evolving. More than half a million people now own franchises selected from almost 4,000 individual brands available for purchase. That’s a landscape vastly larger and more varied than ever before. About one in seven businesses in the U.S. is a franchise — and opportunities in the international market are booming.
The basics and the benefits of franchises, however, are the same. A buyer can purchase either the right to use a name or trademark or invest in a business relationship that comes with support services and an agreement to operate by rules set out by the franchisor.
In its earliest days, franchising was a way for an independent-minded person to buy a job — at a sandwich shop or a home repair service, for example — and to be that business’s hands-on operator.
Franchises today
Now, owning franchises has expanded to include other ownership opportunities. Some people buy several units at once. Some may buy the rights to develop a certain number of units within a specified time frame in a certain geographical area. These multi-unit owners represent a growing segment of franchising. They account for more than half of all franchised units in the U.S. today. Other owners invest in multiple types of franchises that are complementary to each other, sometimes at the same location.
How much do franchises cost? Franchising fees range from a few thousand dollars to tens of thousands. Royalties generally run 5 to 8 percent. A marketing/advertising fund adds 1 to 3 percent. First-time buyers will likely ask the same question: Why should I pay tens of thousands of dollars for a franchise before I even start, and then 8 or 10 percent off the top every month for 10 or 15 years?
Ups and downs of franchises
People considering franchises should know that they may have fewer choices in some aspects of this business model — a franchisor may require, for example, a certain color of wall paint or mandate a company-wide promotion that may not work in a particular market. As with any business opportunity, there is no guarantee of success and sometimes trade-offs must be made.
What experienced owners of franchises have found is that they can make more money faster and improve their long-term returns in franchising than on their own. Benefits also include a shorter time to opening, initial training and ongoing support, and help in finding an optimal site. Buying a franchise also harnesses the selling power of a known brand and lowers costs through group purchasing.
Franchises with established histories have built established business models and offer national and regional advertising campaigns. Franchises may also offer customer lead generation through websites and centralized call centers, along with access, through company intranets, to a network of franchisees who will share advice and moral support. Franchises and franchisees also participate in annual conferences. Franchisee associations have also grown in size and influence. Assistance with securing funding is now more readily available.
Learn more about Franchising in Franchising.com’s extensive Guide to Franchising.
