Aspiring entrepreneurs have two choices when deciding how to launch a new business. Either you can start a new brand from scratch, or you can buy into an established brand through franchising. In many ways, franchising offers a compelling entrepreneurial middle path. You have the independence of business ownership backed by the proven systems of a recognized brand.
From the golden arches dotting highways worldwide to boutique fitness studios reshaping neighborhood corners, franchises offer proven investible models of entrepreneurship. Understanding how franchising actually works will help determine if it’s the right path for you.
What is a franchise? Definition and examples
A franchise is a business model where an established brand licenses the rights to a brand name, systems, and support to aspiring entrepreneurs. Newly launched operators leverage established processes, products, and brand recognition to run their respective businesses. In turn, the franchisor receives annual licensing fees or percentages of the new operation’s revenue.
Franchisor
The franchisor is the individual or parent company that owns the trademark, business model, and operating systems of the franchise. Franchisors provide initial training, ongoing support, marketing materials, and operational guidelines to help franchisees succeed.
Franchise owners look for entrepreneurial traits within budding franchisees, betting on the new operators’ interpersonal salesmanship to expand the franchise brand. Franchisors gain more localized brand footprint in new target markets without directly incurring capital costs to open new locations.
Franchisee
The franchisee is the individual or entity that purchases the right to operate a franchise business. As a franchisee, you invest personal capital into the business and manage day-to-day operations. You assume responsibility for hiring employees, while assuming the financial risks and rewards that come from running the business.
Franchisees follow the franchisor’s established systems, but you’re free to operate as an independent business owner. Many franchisees leave lifelong careers to pursue entrepreneurial ventures, investing in established franchise brands to mitigate some of the risk that comes from starting a new business.
Popular franchise examples
Several globally recognized brands have achieved worldwide awareness through franchising. A prime example of a good franchise to buy is McDonald’s, which operates over 44,000 locations across more than 100 countries.
Beyond fast food, fitness businesses are other popular examples of growing franchises. Brands like Anytime Fitness and Orangetheory maintain thousands of worldwide locations, demonstrating the massive expansion of wellness and lifestyle categories.
Franchise ownership vs. independent business
When you purchase a franchise, you’re buying the rights to operate under an established brand. You maintain independent ownership of your local business, but you have access to support from a larger organization.
Conversely, as an entrepreneur starting a business from scratch, you must seek support from communities and external organizations. A small business startup brand has less recognition and authority than a licensed franchise business.
The fundamentals of franchising
What you need to know about franchise fees
Franchise fees are the foundational basis of any franchising relationship. Most franchisors require franchisees to pay an initial startup fee for controlled trademark rights, equipment and training fees, as well as ongoing annual licensing fees. These ongoing fees fund corporate support, national advertising, and system-wide improvements.
The cost of initial startup fees ranges depending on the business. In the case of McDonald’s, the corporation continuously seeks new franchisees to whom they can license. Aspiring entrepreneurs will require a minimum of $750,000 in non-borrowed personal resources for a franchise fee, according to the company’s franchising overview guidelines. As a prominent worldwide business, McDonald’s has higher premium franchise investment costs, though many other franchises have more affordable startup requirements.
The Franchise Agreement: What It Includes and How It Works
The franchise agreement is a binding legal contract between franchisor and franchisee. It is a comprehensive document that outlines each party’s rights, responsibilities, and obligations. Key information included in a franchise agreement includes the length of the franchise term (typically 10 to 20 years), renewal options, territorial rights, and conditions under which either party can terminate the relationship. The agreement also specifies performance standards, reporting requirements, and restrictions on competing businesses.
The terms of a franchise agreement include established rules and operational standards to maintain brand consistency across all franchise locations. These rules cover everything from product specifications and service protocols to employee uniforms and store design. Franchisees must adhere to these guidelines to protect the brand’s reputation and leverage proven success factors that made the franchise attractive in the first place.
The Franchise Disclosure Document: What It Is and Why It Matters
The franchise disclosure document is a detailed legal document that franchisors must provide to prospective franchisees at least 14 days before any agreement is signed or any fees are paid. It contains 23 specific items that must be disclosed, such as the franchisor’s history, litigation record, bankruptcy information, training protocols, obligations of both parties, and financial performance records.
What is the difference between a corporation and a franchise?
A corporation is an independent legal entity beholden to shareholders that own percentages of the company. In contrast, a franchise is a more transactional relationship, in which the franchisee owns their individual business under the franchisor’s operating brand guidelines.
Many franchisees choose to incorporate their franchise, protecting personal assets from business-associated risks. In these cases, franchisees can be both a franchise owner, and a corporation, simultaneously.
Franchise advantages and disadvantages
Advantages of buying a franchise
Franchising offers several compelling benefits for aspiring business owners. A franchise comes with tested products, an established brand, and a ready-made business model with proven results. It drastically reduces the risks associated with starting a business from scratch.
Comprehensive training, marketing materials, and operational guidance are included in any franchise agreement. Franchise agreements also include supplies and equipment, saving valuable capital in the early stages of the new business. Established brand recognition typically gives franchises higher success rates than independent startups, and support from a recognized brand creates better financing options for future expansion.
Disadvantages of buying a franchise
While there are many advantages, there are notable disadvantages as well. Substantial liquid capital is required from aspiring franchisees to license the franchise brand, creating financial strain as the business gets off its feet. Mandatory annual licensing fees, royalties, and advertising expenses also eat away at franchisee profit margins.
Franchisees have limited control over creative business decisions. Terms of the franchise agreement require franchisees to follow the franchisor’s rules, procedures, and branding guidelines.
Franchisors will place strict territorial restrictions on franchisees that may limit growth opportunities. Finally, your success as a franchisee is partially tied to the franchisor’s performance and reputation. If the parent brand declines, all franchisees feel the impact.
The most popular franchise sectors
Franchise opportunities are available in traditional strongholds and emerging industries. Some of the most popular sectors for franchising include:
- Food and beverage, particularly fast-casual dining.
- Specialized concept stores like smoothie bars.
- Health and wellness franchises appeal to devoted preventive care consumers.
- Fitness centers and healthy nutrition stores are exploding in popularity.
- Service-based franchises in home improvement, cleaning, and automotive repair offer low overhead and scalability.
- Pet care grooming, daycare, and mobile services meet the needs of devoted pet owners.
- Education franchises, particularly tutoring and enrichment programs for children.
Selecting a good franchise to buy
Your passions, personal capital, and the local appetite for a franchise business will influence how you define a good franchise. However, there are many recognized brands that should make for smart investments.
Kona Ice is one of the largest food truck companies to emerge in the United States. Their packaged branding injects fun, growth, and community impact into a franchise built around a mobile shaved ice business franchise that can be yours for a $167,000 investment.
Visiting Angels provides high-quality care to seniors and people with disabilities, allowing franchise owners to make a transformational impact on local communities. You can add a new profitable franchise in your community for a $125,000 investment.
Fitness businesses like Orangetheory and Anytime Fitness are thriving franchise models. Orangetheory offers flexible membership rates, while Anytime Fitness provides 24/7 access—both models appealing to an explosive fitness fanatic market. Pet service franchises including Dogtopia and Zoom Room capitalize on a booming multi-billion dollar premium pet care industry.
Evaluating the brand’s popularity, the level of support provided, and the strength of the established business model helps determine the right franchise to buy. Most importantly, the franchise concept must align with the needs of your local audience and your personal goals as an aspiring entrepreneur.
This content is provided for informational purposes only and does not constitute legal, tax, financial, or professional advice. Laws and regulations vary by state and individual circumstances and may change over time. Readers should consult a qualified attorney, tax professional, or other licensed professional regarding their specific situation. Nothing herein creates an attorney-client relationship.
