FREQUENTLY ASKED QUESTIONS
It is likely there is a compelling reason you are interested in franchise ownership. Something has pulled you to shift your thinking from your current situation, career or business and consider franchise ownership. Or you are just curious about franchising, which is everywhere around us but yet holds mystery for many people. Here are answers to some of the most frequently asked questions.
What Exactly is a Franchise?
According to the International Franchise Association (IFA), franchising is a method for expanding a business and distributing goods and services through a licensing relationship. A franchisor is a company that grants a license to a franchisee for conducting business under their brand, marks, trade dress, policies and procedures. The franchisor will not only specify the products and services that are offered by the franchisee but will also provide them with an operating system and support in addition to the brand. In exchange for the licensing, training, support and other system benefits, a royalty is paid to the franchisor and is nearly always a percentage of revenue although there are a few variations.
Is Franchising Right for Me?
Are you frustrated in your current career or looking to build a sustainable and valuable future for you and your family? Do you love the thought of running your own business but have no idea what type of business you should consider?
Starting a franchise can be an ideal way to launch a business because of the benefit of building on a proven concept while much of the marketing and routine, operational and back office processes are already set up and streamlined. This reduces significant risk, research, and trial and error. In return, the franchisor receives a royalty, typically structured as a percentage of sales. All good franchises will offer a suite of services and support in return for the royalty. All good franchise systems have a partnership mindset.
You should feel comfortable with following someone else’s system before starting a franchise. One reason franchising is successful is consistency. The franchisee must follow established policies and processes to ensure a consistent product or service. If you want to be creative and make your own way, franchising might not be the solution for you.
What Kind of Franchise Businesses are Available?
While we most often think of restaurants, that is only part of the franchise range of over 3,000 brands. In the modern economy, franchising is perfectly suited to service franchises where there is a repeatable process, often recurring revenue or repeat customers. Examples of industries where franchising is strong and growing include health and wellness, beauty services, fitness, residential services, commercial services, automotive, child enrichment, home health care, retail, pets, restaurants and many more. There is no real limit to the businesses that can have a franchise business model.
What is the Franchisee Role in a Franchise?
Like many things in franchising, the answer is it depends. This is the most important criteria for a potential franchisee to decide. While there is a continuum of franchisee involvement levels and a wide range of franchisee roles, the industry broadly categorizes franchisee roles into three:
- Owner-operator – Daily, Direct Involvement
- As an owner-operator, you are the heart and soul of the business. Everything that happens really revolves around you – if you have employees, they see you as their direct supervisor, customers call on you personally and all business activities are within your direct control. You may not have employees but rather rely on technology and the franchise corporate team to help deliver your product or service.
- Many owner-operator style businesses revolve around personal or home services as these businesses lend themselves to this style easily. This category is sometimes also called the self-employment option.
- Executive owner – Daily, Indirect Involvement
- Executive owners take a different approach. They are still involved in their businesses daily and are the primary decision maker, but are driving the activities of the business through a manager or team of employees. It is the managers who are on the front line of employee oversight and customer interaction.
- The executive owners focus their attention on monitoring Key Performance Indicators (KPIs), financial management, team building and strategic planning. Though involved every day, they have a more executive type of role and work day.
- Semi-absentee owner – Weekly, Indirect Involvement
- A completely different approach to franchise ownership takes the form of semi-absentee ownership. In these franchises, the model is setup so that the business owner is removed from the day to day operational details. Instead, all of the daily tasks are handled by a manager.
- The owner’s role is part-time and from a distance. The owner is physically present in the store on only a limited time basis each week – time for drop-ins and management meetings. The majority of the owner’s time is spent remotely on performance monitoring, telephone and email communication with managers and back office tasks.
How Much Does it Cost to Buy a Franchise?
This is a huge range and many items go into the cost of a franchise which can vary wildly depending on the industry and business. Item 7 in the Franchise Disclosure Document (FDD) outlines the estimated cost for every franchise and is your best source to answer this. However, there are some broad guidelines that can help understand the scope of typical franchising investment levels.
On the lowest end, self-employment franchises may allow you to get started with as little as $50,000. For the cost of the franchise fee, computer equipment, marketing collateral and software, you can get started. On the other end of the scale, a newly built hotel franchise may cost $20 million to get open and operating.
A large majority of service franchise brands fall into a few categories—amounts here are simply broad guidelines—check Item 7 of the FDD for a brand to understand estimate costs:
- Owner-Operator: $50,000 – $250,000 per unit or territory
- Executive: $100,000 – $350,000 per unit or territory
- Semi-Absentee: $250,000 – $1.0 million per unit or territory
The above ranges cover a wide swath of industries and brands, but exclude restaurants, hotels and other franchises that require standalone real estate, raising investor capital or generally are larger than $1.0 million for a single unit or territory.
How do I Choose a Location for my Business?
Where to locate your business will be one of the most important decisions you make. Some franchises are sensitive to location and some are not—many don’t even require real estate and are home based.
Most franchisors provide real estate expertise to franchises to help with this decision, including demographic analysis, psychographics, site selection criteria and real estate brokerage service and referrals. There may also be territory restrictions to protect franchises of the same business from internal competition.