Franchising 101: What You Need to Know as an Entrepreneur

Franchises play a big role in the U.S. economy, making a huge splash with $827 billion in economic output. With about 790,500 franchise spots across the country, from big names like McDonald's to 80% being local or regional brands, they're everywhere. What's even more interesting is that over half, about 53%, are run by owners who have more than one franchise. This shows they're doing well, often better than starting a business from scratch.

Franchises are a big deal, offering lots of chances for success. But, many aspiring entrepreneurs don't realize that franchises are an option for them. In this resource, we'll answer the question, of what is a franchise, and explore the ins and outs of this tried and true approach to business.

Franchising 101: What You Need to Know as an Entrepreneur

What is a Franchise?

A franchise is a special way for a business to grow. It's like a team effort. On one side, you have the franchisor, the person or company with the business idea, the brand, and the way of doing things. They're the ones who started it all.

On the other side is the franchisee, the entrepreneur who wants to open a new store or business under the franchisor's name. The franchisee pays money to the franchisor for the right to use the brand and follow the business plan. This payment usually includes a one-time fee and ongoing payments based on how much the franchisee sells. Think of it as a partnership.

There are two main types of franchises. The first type is Business Format Franchising. This is what most people think of when they hear the word "franchise." The franchisor gives the franchisee not just the name and products, but also a complete plan on how to run the business. This includes help in choosing a location, how to set everything up, personnel training, quality control, marketing strategies, and ongoing advice. Some well-known examples of this type include fast-food giants like McDonald's and sandwich shops like Subway.

The second type is Traditional or Product Distribution Franchising. This is more about selling specific products and is common in industries like beverages, gasoline, and cars. Coca-Cola and Ford are examples of this type. They focus on distributing products through their franchisees.

Both types have been very successful and have helped brands grow worldwide, offering entrepreneurs many opportunities to start their businesses with a well-known brand behind them.

What are the Benefits of Running a Franchise?

There are an estimated 33.3 million small businesses across the U.S., and most owners agree that the entrepreneurship journey can both exciting, and a bit intimidating. Since 2021, 16 million new business applications have been submitted, which shows the ever-growing spirit of American enterprise.

However, the path is not without its challenges; about one in five U.S. businesses close their doors within their first year, as the U.S. Bureau of Labor Statistics (BLS) reported. This stark reality shows the risks inherent in starting a business from scratch.

Yet, amidst these statistics, franchise ownership can be a golden opportunity. A significant body of research supports the idea that joining a franchise network markedly increases a business owner's chances of success. Impressively, 91.2% of franchises remain operational after two years, and 85% continue to thrive after five years. These numbers look far more promising than the average survival rates for independent startups, pointing to the inherent strengths of the franchise model.

The benefits of running a franchise include:

  • Established Brand Recognition: Joining a franchise means aligning with a brand that's already recognized and trusted by consumers, which can bypass the challenge of building a reputation from scratch.

  • Corporate Marketing Support: Franchisees benefit from the franchisor's national marketing campaigns and promotions, helping to attract customers without the sole responsibility of advertising efforts.

  • Proven Business Playbook: Franchisees follow an established and successful business model, including operational procedures, training, and support, reducing the risk of common startup mistakes.

  • Streamlined Startup Process: The franchise system simplifies the process of starting and managing a business, providing a clear path from opening day to daily operations.

  • Lower Failure Rate: With a framework that's been tested over time, franchisees face a significantly lower risk of business failure compared to independent startups.

Am I Qualified to Be a Franchisee?

Becoming a franchisee is a promising opportunity, but it's not for everyone. The best candidates possess a mix of qualities that ensure they can thrive in this unique business model. Firstly, having business and financial acumen is crucial. Understanding the basics of running a business, managing finances, and making informed decisions sets a solid foundation for success.

Time commitment is another critical factor. Franchisees must be ready to dedicate the necessary hours to manage their franchise effectively. This venture is more than a full-time job, especially in the early stages, requiring your full attention and energy.

Franchises also thrive on personal interactions, making them very much a people business. Excellent communication skills and a customer-focused mindset are essential for building customer and employee relationships.

Lastly, the financial aspect cannot be overlooked. Prospective franchisees should have the capital to invest in starting their franchise. This includes the initial fee and ongoing operational costs until the business becomes profitable. Investing wisely and managing finances efficiently is key to a franchisee's success.

Browse Franchise Panda for the Franchise Opportunity Best for You

Franchising presents a lucrative path for aspiring entrepreneurs, offering a blend of established brand recognition, marketing support, and a proven business model, which significantly lowers the risk of failure compared to starting a business from scratch. The right candidates for franchise ownership are those with solid business acumen, the ability to dedicate time, excel in people management, and have the necessary financial resources.

If you're ready to get started down the path of becoming a successful franchisee, explore the many open opportunities available through Franchise Panda. With options to sort by investment, state, and industry, finding the perfect franchise that matches your ambition and skill set has never been easier.

If you are within a tight budget, we recommend browsing by investment, for example, franchises that require between $100k-$250k of liquid capital. Or, if investment amount is a secondary concern, you might consider browsing franchise opportunities by industry, such as food and beverage. If you're really keen on reviewing the details, download a a Franchise Disclosure Documnt from a handleful of franchises to read all the fine print before jumping in. However you choose to start your journey, Franchise Panda is here to be your informational tour guide in the world of Franchising.

Frequently Asked Questions

Does owning a franchise mean you own a business?

Yes, owning a franchise means you own a business. However, it's a unique kind of ownership where you run your store or service under a larger company's brand and follow its rules. You're the boss of your location, but you work within the guidelines set by the franchisor, benefiting from their brand, support, and system to help your business succeed.

How do I purchase a franchise?

To purchase a franchise, start by researching opportunities to see what franchise is a good fit for you. Once you find a match, submit the "Request Free Information" form, where you will be connected to the franchisor or an appointed franchise consultant to discuss the opportunity. You'll typically go through an application process, review the Franchise Disclosure Document, and discuss terms. If both parties agree, you'll pay the initial fee to secure your franchise and start the training process.

How many franchises can I own?

There's no set limit to how many franchises you can own. It largely depends on your financial resources, ability to manage multiple locations, and the franchisor's policies. Some entrepreneurs own multiple units of the same franchise or diversify by owning different brands. Success in running one franchise can open opportunities to expand, with many franchisors favoring existing franchisees for new locations.

Can I own a franchise and let someone else run it?

Yes, you can own a franchise and have someone else manage the day-to-day operations for some franchise businesses. However, most franchises require the franchisee to be deeply involved in running the business. Being hands-on is often crucial for success, as it ensures quality control, staff management, and adherence to the franchisor's standards. Each franchisor has specific requirements, so it's important to understand their expectations before investing.

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