The franchise relationship is one of the strongest and most profitable relationships in all of business. A franchise industry report from 2019 estimated that there over 750,000 franchises in operation across the U.S. accounting for over $2 trillion of GDP. Since the inception of the first franchises in the 19th century, the franchise relationship has greatly evolved into the strong bond that’s powered multi-national corporations recognized across the globe.
But what are the differences when it comes to franchisee vs. franchisor? What makes their relationship so lucrative? Understanding franchisee vs. franchisor is critical to success in the franchising industry. In this article, we examine the difference between franchisee vs. franchisor and then discuss how to become either one. Finally, this article will detail the unique advantages of both parties in the franchise relationship. So buckle up – it’s time to explore the wonderful and lucrative world of the franchise relationship!
How Do I Become a Franchisee?
To become a franchisee, an entrepreneur must first perform the proper research. Find out what you’re most passionate about. Entrepreneurs who have a passion for cars and engineering may gravitate towards automotive franchises, while entrepreneurs who have experience as former athletes or in the fitness industry will likely gravitate towards fitness franchises.
Follow the steps below to ensure your franchise buying process runs smoothly!
Research, Research, Research!
It’s crucial to gather some basic information before pursuing a specific franchise. Franchisors are legally bound to provide key information about their franchise if requested. Franchisors will also take this time to gather information about the prospective franchisee by inviting them for a conversation over the phone or in person, or by requiring them to fill out a questionnaire. It’s also very important to make sure that you meet the minimum requirements of the franchisor to buy a franchise unit.
Read Through the Franchise Disclosure Document
After you have made the decision to indeed pursue a particular franchise, take the time to thoroughly read over the franchise’s Franchise Disclosure Document (FDD) – some prospective franchisees may even hire a lawyer to read over the FDD as well.
Reach Out to Franchisees
Take the opportunity to reach out to existing franchisees to gather their experience working for the parent company. Be sure to ask questions about aspects like training, corporate support, marketing, franchisor relations, earnings, and the like.
Attend a Franchise Discovery Day
Meet with the franchisor during a “discovery day” to dig even deeper about the merits of the specific franchise and make sure any outstanding questions are resolved. Leave no stone unturned!
Contact the Franchisor For Next Steps
If you finally feel confident purchasing a franchise, contact the franchisor for next steps. Next steps typically include a credit and background check to ensure you are an upstanding citizen and safe to lend to. Full franchise ownership may also be contingent upon completing various training courses.
How Do I Become a Franchisor?
To become a franchisor, an established business owner must first decide if their business is worth converting into a franchise. Just like the prospective franchisee, the prospective franchisor must heavily research whether franchising is the right path to take.
There are several steps complete before converting your business into a franchise, detailed below.
Evaluate Your Company
Is it worth the effort to franchise? Research the merits of franchising by performing a statistical analysis on consumer demand, revenue, and other key data to estimate how smooth your transition will be. First and foremost, only make the jump to franchising if your company is in good financial standing.
Learn All of the Legal Requirements
In order to legally sell a franchise in the U.S., a franchisor must file a Franchise Disclosure Document (FDD) with the Federal Trade Commission. An FDD consists of 23 important and unique items that make it easy for the prospective franchisee to gather information from. The FDD will list various fees, royalties, limitations, restrictions, leadership, corporate vision, and other key information.
Choose Your Business Model
It is equally important for the franchisor to choose the proper franchise model in order to succeed. Franchisors must decide what their training program will look like, how they will support their franchisees, their fee structure, and certain restrictions.
Register Your Trademarks
Be sure to register your trademarks with the United States Patent and Trademark Office (USPTO) if you’re starting a franchise from scratch. Registering trademarks protects the intellectual property of your company and ensures that you alone have the right to use said property.
Create an Operations Manual
Keep in mind that the operations manual may be the most valuable resource for new franchisees. Draft a detailed operations manual that instructs them exactly how to operate their franchise outlet on a daily basis. This operations manual should also lay out the company’s specific policies very clearly.
Register as a Franchisor
Franchise registration is a critical step in getting your franchise off the ground. Without the proper legal framework, you cannot sell franchises. Make sure to complete all legal paperwork in a timely manner, prepare your FDD for review by the FTC and submit your FDD as a “multi-state” FDD to ensure that your franchise can operate in all 50 states.
Established franchises have excellent brand-recognition and therefore don’t usually need to recruit franchisees – they will be interested regardless. New franchisors will need to invest a lot of time into recruiting prospective franchisees. You may need to hire a staff of recruiters or salespeople in order to attract qualified entrepreneurs. It’s important to look for entrepreneurs who are motivated, have the proper capital, are eager to learn, and have strong credit.
Even the most motivated franchisee is nothing without a strong training regimen. Many franchises require franchisees to spend several weeks at a training center so that they can be immersed in the company culture. Make sure your training regimen is as comprehensive as possible. It’s also best practices to host annual conferences or conventions for franchisees once you get to a certain size. These gatherings are an excellent way for franchisees to stay up-to-date on new technology, methods, and products or services.
Launch a Sales and Marketing Campaign
As stated above, new franchises usually have limited brand recognition. It’s often well worth the price to launch a marketing campaign via the internet, mail, or television. Make sure to also research where you want to expand first before selling franchises at random.
Support Your Franchisees
Remember: franchisee support should be ongoing to ensure success – not something that ends when the training program is completed. Take feedback into account, visit franchises at random to ensure the proper methods are in place, and constantly adapt your training manual to the current time.
Franchisee advantages are plentiful for entrepreneurs who opt for this route. Franchisees can take advantage of regional, national, or even international brand-recognition, giving them a built-in customer base right away.
By tapping into an established brand, franchisees do not need to spend years establishing a customer base, launching marketing campaigns, educating the customer on their product or service… the list goes on. This fast track to revenue ensures that franchisees can focus on training their staff, learning new techniques, and implementing the exciting ideas that corporate has to offer.
Franchisees can also take advantage of easier financing options as well. The Small Business Administration includes a dedicated franchise registry portal that makes it fairly easy to apply for franchise financing. Franchisors also work very closely with franchisees to find the proper financing. Franchisees are also expertly trained in all facets of operating a franchise to ensure they are given every route to succeed.
The main advantage of franchising for franchisors is the ability to rapidly expand. Franchisors can sell franchises in areas they deem a fit for a location. Rather than take on all of the risk of construction of a new location, franchisors receive a healthy initial franchise fee as well as many other fees.
By employing a franchise approach to expansion, franchisors do not need to stress about hiring a large staff to run every location. Management may stop in every so often to ensure best practices are being followed, but as long as an outlet produces a healthy revenue, everyone wins.
Franchisors also take advantage of a steady stream of passive income. Passive income refers to income that requires little to no effort to obtain. Passive income like royalties are agreed to when franchisees sign their contract and remain constant for the life of the franchise outlet. Franchisees must put up their own capital when opening their franchise location. This makes brand expansion much cheaper than opening each location as a corporate-owned locale.
So, Now You Know The Franchisee vs. Franchisor Differences!
When done correctly, franchising can be one of the most rewarding business models around for both the franchisee and the franchisor. Franchisees take advantage of an instant customer base, excellent brand-recognition, and expert support. Franchisors can take advantage of a stable revenue base, low operational costs, and rapid expansion. The mutually beneficial relationship between franchisee and franchisor has powered this revolutionary concept for decades and will certainly continue to well into the future!