“For though I be free from all men, yet have I made myself a servant unto all, that I may gain the more.” 1 Corinthians 9:19
What is franchising:
From International Franchising Association – “A franchise (or franchising) is a method of distributing products or services involving a franchisor, who establishes the brand’s trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.”
Franchising is one of 3 paths to business ownership. The IFA definition seems straightforward enough. Now, let’s dig deeper into the details.
Investment needed to start:
For 70% of franchise brands, the total cost to get started, including working capital is between $75,000 and $150,000.
Approximately 10% of franchises cost $50,000 or less, and the remaining, roughly 20% of franchises require an initial investment of $250,000 and up. Typically the higher cost is because of leasing a storefront and necessary equipment.
Territory rights:
Franchisors define the market available to their franchisees and include one or more of the following criteria:
Physical geographical boundaries or population count.
Residential / Commercial differentiation: For example, CertaPro Painters establishes residential boundaries based on population and no boundaries for commercial customers. They reason that residential customers are more transactional, while commercial customers are typically long-term partners.
Client exclusivity: Typically for online franchising presence; however, some business-to-business franchise models use this boundary.
Franchisee management models:
Owner-operator: The owner performs tasks and interacts directly with their customers. They may or may not have a team, depending on the type of franchise. Owner-operators make up approximately 46% of franchise units.
Executive (semi-absentee/absentee): Usually a multi-unit situation or the franchise is a complementary business to one or more enterprises the executive franchisee owns. A general manager manages day-to-day operations. It’s recommended that the GM have skin in the game either through significant incentive bonuses and/or an equity stake.
According to Forbes, 53.9% of franchise units are owned by multi-unit franchisees.
Area developers agree to open a specific number of units in a set time frame. Area developers do not recruit additional franchisees.
Master franchisee: The franchisor sells the rights for a designated area or state where the master franchisee becomes the franchisor for that area. They may or may not open units. The main objective for a master franchisee is recruiting and training unit franchisees in their area. Master franchisees register an FDD for the state in which they operate.
Message me for information about a current Master Franchisee opportunity with PresoTea.
Roles and definitions in franchising:
Franchisor: Creates the business model and operations manual and owns the brand trademark. Revenue comes from franchise fees, royalties, and, in some cases, ancillary services and product sales (lead generation, call centers, accounting).
The franchisor trains its franchisees how to be successful with their brand, and, once a franchisee is in operation, assure adherence to brand requirements.
Franchisee: Independent business owner who owns the rights to do business as the franchise brand, using the operations manual created by the franchisor. The franchisee is independent and usually in control of hiring their team, customer service, licensing, and finding their business location.
Some franchisors have a team to help with real estate negotiations and location finding for storefront brands. Services for marketing and lead generation by the franchisor vary from brand to brand.
Franchise broker/consultant: Finds potential franchise owners, works with the client to find the right fit (if the franchise candidate needs it), and helps clients through the franchise due diligence process.
Franchise developer: The franchisor’s employee or 3d party agency (emerging brands) that develops the franchisor’s lead generation strategy and works with prospective franchisees through due diligence.
Franchise Disclosure Document: A template the federal government and some states require for all franchisors and master franchisees. The franchisor determines the template content.
This document favors the franchisor for brand protection, and is non-negotiable.
Discovery day: A day, or days, the franchisor invites prospective franchisees to learn more about managing and operating the franchise business. Some franchisors execute discovery day virtually. Others have discovery day in person.
Signing day: The day the prospective franchisee signs their negotiated franchise agreement with the franchisor and becomes a franchisee. In-depth sales/marketing, operations, and management training follow. The majority of agreements are 10 year terms and resales vary by franchisor.
Emerging brand: New brand to market, usually less than 50 units (depends on the brand and why they franchise). There is a greater risk to franchisees and, consequently, greater rewards. The first franchisees help develop the brand to maturity and have their choice of territory, and build respect capital with the franchisor.
Why franchisors franchise their business:
Fixed time frame for franchising: A mechanism for a small-medium business to expand its market reach with less risk than self-funded expansion. At the end of a set term, the franchisor purchases the franchises. ImageFIRST is an example.
Indefinite time-frame for franchising: A business owner with a proven successful business model rich with defined systems expands their market reach without intending to consolidate.
Franchising is one of three paths to business ownership. The complexity in franchising comes from the nuanced differences in business models. At Franchise Building Expert, we help you uncover and understand the differences between models, and help you find the best fit for you. Our mission is ensuring the best opportunity for entrepreneurial success through franchising for each client.
Take the first step with the entrepreneur’s assessment link.
#94XMovement #FranchisingBasics #CEO
