The franchise business model has been around in its present form since the 1850s, when Isaac Singer sold his first sewing machine franchise. Since that landmark event in the world of capitalism, entrepreneurs have consistently picked the franchise business model over almost every other.
As of 2019, the number of franchises in the United States was estimated to be over 750,000, of which many have grown into multinational corporations with brand recognition that span across every continent not named Antarctica. Just how important is the franchise business model to the American economy? According to a government report from 2018, American franchises employ over 21 million people and contributed $2.3 trillion in economic activity for the fiscal year 2018 alone!
In this article, we will explore what makes the franchise business model an incredible option for hungry entrepreneurs. We will discuss what exactly the franchise business model entails as well as the multiple ways to finance the franchise of your dreams. Furthermore, this in-depth article will cover the training you can expect to receive as a franchisee and what the future of franchising looks to become in the decade.
What is the Franchise Business Model?
The franchise business model is a relationship in which an entrepreneur pays for the right to sell a product, good, or service under the franchise’s name. The franchise relationship exists around between the franchisor and the franchisee. The franchisor is the person who owns the rights to a brand trademark. This owner can oversee each of his locations through a team of managers.
Some corporations like Starbucks do in fact employ a corporate store ownership structure in order to ensure strict uniformity within all locations. But as the statistics prove, many businesses choose the franchise approach. Rather than operate each location in a corporate ownership model, franchisors sell the rights to qualified entrepreneurs to operate under their brand.
While franchisees gain easy access to an established customer base and excellent brand-recognition, the franchisors profit as well. When a franchisor sells a franchise outlet, they receive an initial franchise fee as well as various startup fees that go into establishing the outlet. Franchisors also receive a monthly or annual royalty that is typically a percentage of average revenue or gross sales. Finally, franchisors benefit from growing their customer base by opening more locations across the nation.
What are the Advantages of the Franchise Business Model?
Franchisees take advantage of quality brand-recognition, expert support/training, access to proprietary technology… the list goes on. When entrepreneurs are at the crossroads of whether to franchise or not franchise, it’s clear why they often choose the former. Franchisees can immediately hit the ground running by tapping into an established customer base rather than spending years building one from the ground up.
Franchisees also take advantage of expert support and training that is otherwise cultivated through years of trial and error. In return, franchisors tap into a stable revenue stream that includes various franchise fees and a royalty fee. Franchisors also save on operational costs as franchisees provide the heavy lifting.
The Franchise Definition: How to Finance a Franchise Business Model
Franchises come in all shapes, sizes, and prices. Some low-cost franchises may cost under $10,000 while well-established franchises with international brand recognition can run upward of $2 million when the deal is finalized. Fortunately, there are numerous ways to finance a franchise, with a few ideas being:
Small Business Administration (SBA) Loans:
The Small Business Administration guarantees bank loans up to $5 million. Qualified entrepreneurs can apply for an SBA loan and, provided everything checks out, receive their loan to start a business. The SBA also contains a developed franchise registry in order to make securing a loan easy and fast.
Did you know that 100% of your retirement funds can be invested into a franchise without facing taxes or penalties? This is all thanks to a program known as Rollovers as Business Startup (ROBS), entrepreneurs with at least $50k in an IRA, 401(k), or 403(b). Your retirement funds can also be combined with a spouse or partner’s traditional business loans.
Investment Portfolio Loans:
Another option is a security-backed margin-type loan offered by brokerage forms. Margin loans can be taken against a portfolio of stocks, bonds, mutual funds, and investments held within brokerage accounts. Note, however, that there is significant risk to margin loans, because if the market or asset value declines, then the assets may be forced to be sold at low prices.
Training and Support For the Franchise Business Model:
One of the most important aspects of the franchise business model is the training and support team. Typically, prospective franchisees must first pass a comprehensive training program before they are clear to begin operation of their own franchise. There are generally three parts to the franchisee training program: the training manual, hands-on training, and staff training.
The training manual is often the key to molding a successful franchisee. From time-to-time, the franchisee will harken back to the training manual for clarification in order to ensure his or her store remains true to the brand.
The franchisor should add easy-to-read visuals and simple language in order to make the manual as intuitive as possible. The franchisor must also outline the process of developing a new franchise location and how to handle issues like sexual harassment and labor relations.
In addition to a training manual, many franchises also provide valuable hands-on training. At McDonald’s Hamburger University, franchisees get to go inside the kitchen of a replica McDonald’s, take critical management courses, and meet with top franchise experts.
This hands-on training is one of the many reasons why the franchise business model is so successful – entrepreneurs do not have to spend years learning and refining their own business model, they can essentially just hit the ground running.
Although proper management training is critical to molding a successful franchisee, a well trained and motivated staff is equally as important. Employees must be provided with the proper training, tools, and support in order to succeed as valued team members. Staff may need to be trained on various pieces of technology, equipment, or even customer relations.
What is the Future of the Franchise Business Model?
The franchise business model as we know it has been around for over a century. In that time, franchising went from selling the license to use sewing machines to establishing multi-billion dollar corporations with thousands of franchise locations.
So, what will the future of franchising hold? As technology continues to expand in capability, experts expect artificial intelligence to play a much greater role. At many fast food franchises, customers can now place their orders remotely or on a tablet at the actual franchise. Technology will likely also take over many of the mundane tasks at franchises that do not require skilled labor.
You can also expect the number of franchises to grow around the world as our global community becomes closer. In many nations that have finally broken free from authoritarian leadership or have received massive foreign investment, franchises have rapidly expanded. Countries like China, Vietnam, and Qatar are flooded with American franchises that were virtually non-existent within their borders only a few years ago.
When fledgling brands begin to gain more recognition, there is an excellent chance that they will choose the franchise route as well. The food franchise Dickey’s Barbeque Pit was established in 1941 but did not enact the franchise business model until 1994!
Furthermore, remote franchises have become popular and viable franchise opportunities for entrepreneurs in recent years. Due to a rapid advance of technology in just the last decade and spurred on by the coronavirus epidemic, many Americans now prefer to work from home. Some franchise industries like the travel industry already contain numerous remote franchises like Cruise Planners.
Similarly, senior care franchises will grow as the Baby Boomers, the second largest contingent of Americans grow older. Experts estimate that the senior care industry will double in revenue by 2024! Entrepreneurs will likely take advantage of the need for senior care franchises and prosper greatly.
Now You Know the Franchise Business Model
As you can see, the franchise business model is often a win-win for all parties involved. Franchisors can grow their business in a much faster way while franchisees can tap into an existing customer base, receive expert training, and take advantage of excellent brand-recognition.
It’s not surprising that franchising employs millions of Americans and accounts for a huge portion of American GDP. For many, the franchise business model still exists as a viable alternative to the long and rough road of independent ownership that plagues many entrepreneurs.