Franchising is one of the biggest industries in the United States. According to Statista, it provides over 7 million jobs and generates at least $750 billion. In 2018, nearly 800,000 businesses were franchises.
Franchising allows Americans to start a business right away. They can capitalize on the name, brand, trademark, and even marketing and training to reduce the learning curve and attract customers more quickly.
However, not all franchises work. To avoid costly mistakes, anyone who’s interested in doing it needs to know the basics.
1. What Is Franchising?
Franchising comes in different forms:
- Product distributor or traditional
The business-type format is the most popular and is usually the definition of franchising. Here, a person subscribes not only to the products or services but also, and more importantly, to the system and the brand.
For example, in a Southern dining franchise cost, the franchise fee can already cover for the trademark, brand name, and other intellectual property rights. The price can also include training for the staff, marketing, and assistance during the first few weeks or months of operations. The purpose is to provide the same level of service regardless of which branch the customers visit.
The product-distributor is the traditional form of franchise. In this setup, the franchisee pays for the chance to use the product and its brand, while they can have more freedom in the other aspects of running the business. Think of auto dealerships that can use trademarked names of auto manufacturers.
Management franchises usually involve service-oriented B2B businesses. These include commercial cleaning, recruitment, and home care services. The owner oversees the operation but is not directly part of the day-to-day operations.
Social franchising is perhaps the newest of all four formats. It capitalizes on the concepts and approaches of commercial franchising with social benefits as the goal.
2. What Are the Common Costs Associated with Franchising?
Getting a franchise means paying different kinds of costs:
- Royalty – It is an ongoing payment the franchisee pays for using intellectual property rights or trademarks owned by the franchisor.
- Franchise fee – It is a cost that covers training, marketing, and other types of support the franchisor provides to the business.
- Working capital – This is the amount the potential business owner needs to run the franchise day to day.
- Inventory – It is the cost associated with the supplies the franchisee might need to buy directly from the franchise owner.
The franchise costs can differ from the overall investment of the business owner since some expenses are arbitrary or paid by the franchisee out of pocket. These include rent, utilities, and wages.
To reduce the initial costs of running a franchise, many franchise owners now extend financing options. Others waive some of these expenses, such as franchise fees.
3. Does Location Matter in a Franchise?
The answer is yes since franchises also want to keep their reputation and brand integrity. The best companies also like their franchisees to succeed.
For them, location matters for two reasons: viability and competition. The area must be where the target market is. With competition, the location must not have the same franchise existing nearby, or there are fewer similar franchises or businesses around.
When trying to apply for a franchise, potential owners may need to ask if the owner has a preferred location. They can also help look for the best spot.
Franchising can still be challenging, but with some know-how, franchisees will feel more confident to explore and do it.