Part 1 of 2: An Introduction to Franchising Concepts
When you witness the success of franchise businesses like a Starbucks store or Potbelly Sandwich Shop, it seems like a slam dunk way to make easy money. It’s low-risk. A big business has clearly done all the initial legwork; you just follow some easy instructions and rake in the cash.
Don’t be fooled. Buying a franchise can be a positive experience, but it definitely has potentially negative aspects, as well. Before you move forward with such a venture, you have to clearly understand how franchises work. The information in this STARTicle serves as a franchise primer that will introduce you to the basics, but you still have to do some serious homework and perform a detailed self-assessment to make sure that you’re the right person who chose the right business.
If this primer sparks your interests, then stay tuned. My next STARTicle will explore some pros and cons of entering the franchise world.
First, A Few Franchise Basics
In essence, a franchise is an agreement where a seller (the franchisor) permits a buyer (the franchisee) to run a business involving its products or entire business model. The franchisee pays an upfront fee to enter into such a contract. After that, it is usually customary for the franchisee to pay a periodic fee (generally based on profits or income) over the term of the deal.
While the restaurant industry is replete with franchise opportunities, they are only part of a wider breadth of business opportunities. For example, a quick online search of franchise opportunities for day care experts reveals plenty of preschool and day care franchises, along with at least one mobile business that provides classes to existing facilities. Automotive geeks can buy into virtually unlimited opportunities, including tire or auto parts stores, a variety of quick auto maintenance services, and painting and body repair.
But, these are just examples of one type of franchise. Three basic types meet a variety of franchisee needs and interests.
There are Actually Three Types of Franchises
You might equate fast-food restaurants with franchising, but they’re not the only type of opportunity. Remember that every franchisee’s objective is to become part of (and hopefully profit from) a successful business, and there are three separate and distinct ways to accomplish this goal.
Business Format franchises
This is where restaurants mainly come into play because franchisees generally follow a specific set of rules to open an existing business in a new location. Since franchisees buy into a specific business model, the new location typically looks like the original one and sells a pre-defined line of products. But, it isn’t limited to restaurants alone. It can involve anything from auto parts stores to daycare centers, based on your area of interest.
For example, maybe you admired a popular “old-tyme candy shoppe” while on vacation and want to introduce one just like it to your home state. With a business format franchise, you can open that store, as long as you follow potentially-strict guidelines on how your store will look and operate and maybe even how store employees dress. The franchisor probably wants to approve the store location, as well.
Product and Service franchises
Many customers know and respect certain brands. If you want to share that respect to gain customer loyalty, you might consider representing those brands through product franchising.
Also known as traditional franchising (since this is actually the most common type of franchise), this arrangement essentially allows you to license brands and trademarks for any type of product or service. In a nutshell, you purchase the right to sell a specific product or even service brand in exchange for the ability to use a manufacturer’s promotional materials and trademarks — and often a degree of exclusivity that reduces or eliminates local competition.
To clarify as much as possible, you might want to be the exclusive supplier of Widget-brand widgets in your regional area. Customers will come to you if they want this name brand product.
On the service side, let’s say that you are brilliant at repairing a specific brand of air conditioning units. As long as you are willing to specialize within that one brand of products, you can franchise the repair rights to that specific brand (probably with manufacturer training). Anyone in the area looking for repairs performed with brand-name parts, expertise, and company backing is more likely to come to the repair shop with the brand logo over its door.
When you buy a manufacturing franchise, you gain the right to produce another company’s products while using their brand name and trademark. Depending on the arrangement, you might have to use the franchisor’s equipment, supplies and methods. You may need to observe quotas, too.
While manufacturing franchises apply to a wide array of manufactured products, the soft drink industry probably provides the best-known example. Franchisors generally sell the brand-specific syrup and the rights to use the brand name and trademarks. Franchisees can range from hot dog stands to bottling companies that want to sell a known drink brand.
Even service business franchisees can potentially get into this deal. It’s somewhat rare but possible that a financial or other service business has a patented methodology. If you want to use patented methods to help sell your services, then perhaps a manufacturing franchise would make it possible.
At This Point, Your Investigation Has Barely Begun
I wish that I could tell you that you now have all the information needed to successfully buy a franchise. In reality, I’ve done my job if you now have a few ideas — and lots of questions.
My next STARTicle will provide you with a high-level perspective of the possible pros and cons of becoming a franchisee. After that, you’ll have to work hard to tackle plenty of detailed research. Talking to some experienced franchisees is a good way to start. Hiring a skilled franchise attorney might be even better.