Franchising is a viable opportunity for prospective entrepreneurs to make an entry into the big, intimidating world of business. However it would be best to first understand the franchise basics to increase the likelihood of your success.
To help you get started, we’ve compiled a helpful guide to all the terminology and basics of franchising that you need to know like the franchise business model, how it works, the franchisor-franchisee relationship, and more.
The Franchise Basics: What is Franchising?
Given the multi-fold benefits of franchising coupled with minimum investment and risk for the umbrella company, it’s hardly surprising that franchising is big business all over the world.
The franchising concept has been implemented on a wide scale and in almost every sector across the globe. In the United States, approximately 800,000 franchises provide employment to more than 9 million people and cover more than 120 industries.
The Franchise Business Model
Franchising is a strategic marketing concept that allows for business expansion. But how does a franchise work or what are the basics of a franchise business model? The franchisor (umbrella company) authorizes the franchisee to use its business model, procedures, intellectual property, and trademark to sell its products and services under the same brand. In return the franchisee pays an initial investment fee and ongoing royalty.
The franchising process is the only business growth strategy that allows the franchisor to enjoy great returns without investing huge capital or incurring any risk. Quite understandably, businesses have adopted the franchise system to acquire a larger share of the market and broaden their geographical bases worldwide.
The franchise business model is one of the core franchise basics you absolutely need to understand to be successful in franchising.
Franchisee vs. Franchisor
The basic premise of the franchise model is that the franchisee-franchisor relationship is a mutually beneficial association. It provides the franchisee a proven business model and established brand to align with and rewards the franchisor with an additional income stream and a widening customer base. The franchisee pays an initial franchise fee and royalty fees to the franchisor in return for the proprietary business information and trademark along with the license to buy and sell the franchisor’s products and services.
Besides the license to use its trademark and business model, other advantages to the franchisee include extensive training, guidance, and support provided by the franchisor. The focused assistance helps the franchisee get well-acquainted with the established processes and quality and service benchmarks.
Franchising was not considered an equal partnership previously, with the relationship being skewed towards the franchisor, given the obvious advantages of franchising for franchisors. However, abuse by franchisors has led to federal and state franchise laws to regulate franchising. At least 14 days before the purchase of a franchise, franchisors are required to issue the Franchise Disclosure Document (FDD), which must include all the information required to make an informed decision.
What are the Different Types of Franchises?
There are five different categories of basic franchises namely single-unit, multi-unit, master franchise, area representative, and existing franchises, based on territory coverage, number of units, time period, and other conditions.
Based on industry, there are different types of franchises available like
- Automotive franchises
- Business services franchises
- Child services franchises
- Education franchises
- Food & restaurant franchises
- Fitness, sports & recreation franchises
- Health & beauty franchises
- Home services franchises
- Real estate franchises
- Senior care franchises
- Shopping & retail franchises
- Travel franchises
Each type of franchise has its pros and cons, and you may gravitate toward specific franchise industries that match your interests or skills. Armed with the knowledge of some franchise basics, you can start comparing different franchises and opportunities to find a franchise that might work best for you.
The Franchise Basics: Key Franchising Terms
Just like with any industry, franchising comes with its own vocabulary and set of terms that you should probably know. Over time, we will continue to write additional articles about key franchise terms, and add them to the list below:
- What is a Royalty Fee?
- What is a Franchise Disclosure Document?
- What is a Franchise Agreement?
- What is a Franchise Discovery Day?
The Franchise Basics: Who Should Buy a Franchise?
There are multi-fold reasons to buy a franchise including the opportunity to partner with an established business. Most importantly, franchising allows budding entrepreneurs, with no prior industry experience, to create a flourishing enterprise. Although aligning with an established brand and business model offers distinct advantages, many successful franchisees tend to have certain attributes that help their businesses prosper.
Characteristics of Successful Franchisees
Some desirable traits for running a business franchise are high energy, ability to work at a fast pace, leadership abilities, a collaborative mindset, a customer-centric approach, communication skills, inclination for learning, adaptability, a spirit for teamwork, and financial aptitude.
To get a better grasp of whether or not the day-to-day responsibilities of a franchise owner match your expectations, you can read more here: What Does a Franchise Owner Do?
Out-of-the-ordinary Trending Franchises
The new millennium, with its technological leaps, increasing concerns for the environment and animal cruelty, changing health trends, and adoption of new exercise forms, has given way to new, unconventional business avenues that were previously unheard of.
Therefore prospective entrepreneurs looking to invest in the futuristic trend have plentiful options to choose from. We examine a couple avant-garde businesses that have proven to be immensely successful for entrepreneurs seeking to buy a franchise.
If you’re looking for help on how to buy a vegan restaurant, your money is on the right trend. The demand for vegan food is continuing to grow as many Americans are embracing a plant-based diet. Given the rising concerns about animal cruelty, health, and deforestation, the trend is unlikely to stop. So investing in a vegan franchise makes business sense.
Elite Gym and Fitness Franchises
Many fitness franchises are offering varying combinations of services and amenities like hi-tech facilities, organic meals, new dance and exercise forms, and co-working spaces, to name just a few. As clients focus on staying on top of health trends to achieve new fitness benchmarks, elite gym and fitness franchises are getting popular and will likely remain so.
Other Trending Franchise Industries
Along with these more up-and-coming industries, there are also plenty of traditional franchise industries that have been making a push in recent years, and growing at significant rates.
Here are some of the franchise industries that we’ve highlighted to provide an overview of the recent trends and examples to explore as you compare your franchise opportunities:
The Franchise Basics: The History of Franchising
The Franchising Landscape Prior to the 1900’s
Ever wonder who created an ingenious business model like franchising? The origins of franchising prior to 1900s can be credited to two visionary legends.
In the 1850s, Isaac Singer, the inventor of the sewing machine needed a better distribution model to increase sales, so he created an innovative licensing system that allowed people to sell his sewing machine in specific locations and teach consumers how to use it. It laid the foundation for future modern franchising.
Then in 1899, John Pemberton needed a better transportation and distribution model for his newly created drink, now known as Coca-Cola. Since the cost of transporting a bottled drink in glass bottles was prohibitive then, it limited his sales to sites near the manufacturing facility. To widen his consumer base, he provided franchises the concentrated syrup and required them to bottle the soda under strict formulas and processes in their respective territories.
Franchising in the 1900’s
The development of franchising in the post-1900 era can be attributed to the creation of automobiles. The popularity of automobiles led to mass production, which ultimately drove the need for an efficient sales and distribution system. In 1898, General Motors issued its first franchise, which then led to Henry Ford franchising to dealers in the early 1900s.
But that’s only part of the story. Ultimately, years later, guess who made their presence on freshly-paved roads? Restaurants. Independent restaurants then gave way to food franchising. The journey from automobiles to post World War I – food franchises is an interesting one.
After World War I, the increasing reach of automobiles inspired drive-in restaurants. And thus originated the basis for America’s eternal love story with fast food (we now know who to blame)! The first fast food restaurant opened in the United States with White Castle in 1921.
But the basic franchising boom years weren’t until the post-World War II period, with Dairy Queen emerging as the biggest contributor. Soon enough, Holiday Inn started its franchises, followed by KFC, Dunkin Donuts, Pizza Hut, Wendy’s, and others.
And the rest, they say, is history!