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Starting the journey to entrepreneurship often leads individuals to explore various paths, and one increasingly popular avenue is franchise ownership. This guide delves into the world of franchising, offering insights into its dynamics, challenges, and opportunities.
From understanding the diverse franchise structures to evaluating ROI, exploring scaling strategies, and balancing autonomy within a structured model, we aim to shed light on the multifaceted nature of franchise ownership.
When it comes to starting a business, the model options available are diverse, with franchising only increasing in popularity over recent years. However, each business model offers its own advantages and challenges, and it is up to you to decide which might best suit your work ethic and future goals.
Here is a simple breakdown of the different business models you might want to consider, giving you an insight into the pros and cons of each.
Franchising offers a symbiotic relationship between a brand and an individual or entity. It provides a structured framework where franchisees benefit from an established brand, standardised processes, and ongoing support from the franchisor. It also offers a much quicker path to owning a business, as outlined in our Subway case study. While franchisees enjoy brand recognition and operational guidance, they operate within the parameters set by the franchisor, requiring initial fees and adhering to ongoing royalties. This model minimises certain risks associated with starting from scratch but comes with some limitations on autonomy.
Launching an independent business allows entrepreneurs full creative control and decision-making authority. Entrepreneurs build their brand identity and operational strategies from the ground up, offering flexibility but bearing the brunt of higher risk and resource requirements. With the freedom to innovate and adapt, independent startups require significant investment in establishing a brand presence and customer base.
Sole proprietorships or partnerships offer complete control to owners, allowing them to make all business decisions independently. However, this model carries the full weight of risk and responsibility, as owners bear all financial liabilities and resource limitations. Direct profits accrue to the owner, but accessing resources available in larger franchising systems poses challenges.
Franchising isn't a one-size-fits-all concept; it encompasses various structures that cater to different business needs and expansion strategies. As a franchisee, embracing a proven business model and established brand plays a pivotal role in your entrepreneurial journey. Understanding the various structures helps align your ambitions with the essence of the business, whether it's product-oriented, brand-centric, or service-driven.
The direct-unit franchise, also known as the single-unit model, grants you the right to operate in a specific location or within a singular branded business. This arrangement typically involves a direct agreement between you, as the franchisee, and the primary franchisor. It's an optimal choice when seeking affiliation with a specific business in a particular area. As the franchisee, you invest your own capital and oversee day-to-day operations, albeit with some support from the franchisor or a master franchisee.
Opting for a multiple-unit franchise allows you to manage several units within the same franchise, typically within a designated area. This model offers the advantage of diversification, where the success of your franchise isn't solely dependent on one unit. Operating multiple franchises enables better risk management, allowing you to balance any potential losses.
The master franchise relationship, akin to the multiple-unit model, involves a franchisee assuming the role of a 'master franchisee' within a specific region. In this arrangement, the franchisee not only invests but also takes on added responsibilities, acting as a representative of the franchisor. As a master franchisee, you recruit prospective franchisees, provide training, and offer ongoing support. This managerial role allows you to leverage industry experience while potentially receiving a percentage of royalties from the franchisees, making it a mutually beneficial arrangement.
When considering a franchise opportunity, understanding the support system provided by the franchisor is critical. This support can significantly impact the success and sustainability of your franchise venture. Here are key questions to ask the franchisor to gauge the level of support they offer:
Asking these questions allows potential franchisees to assess the depth and quality of support offered by the franchisor. A robust support system is integral to the success of a franchise, ensuring that franchisees have the resources and assistance necessary to navigate challenges and thrive within the system.
Understanding the potential return on investment (ROI) is fundamental for any prospective franchisee. It gives insights into the financial viability and profitability of the franchise opportunity. While ROI varies across different franchises and industries, it's crucial to evaluate the potential gains and factors influencing returns.
Several factors, including initial investment, operational costs, brand strength, market conditions, and ongoing fees, influence franchise ROI. The promised ROI often varies, and it's essential to delve into the details provided by the franchisor.
McDonald's, a global franchise giant, often presents a compelling ROI for potential franchisees. In the UK, McDonald's franchises have been modelled to potentially generate a return of 20% to 25% over a 10-year term. However, it's important to note that this projection doesn't account for any additional future investments made into the business during the 20-year term.
The success of a franchise in achieving the projected ROI depends on various factors. These include location, brand reputation, local market dynamics, operational efficiency, and the franchisee's management skills.
Prospective franchisees should carefully review the franchisor's disclosures and financial projections to grasp the ROI realistically. It's vital to consider all costs, ongoing fees, and potential risks that could impact the projected returns. Some franchises, like Subway, helpfully break these down for potential franchisees to give you an idea of how much a franchise costs. You can also look for more information on how to fund your franchise with business finance from our Burger King case study.
ROI projections can offer a glimpse into the potential profitability of a franchise. However, thorough due diligence, understanding the business model, market analysis, and seeking professional advice are crucial steps in making an informed decision regarding franchise investment. Find advice on
For many franchisees, the allure of scaling their business by opening multiple franchises holds significant appeal. This expansion strategy allows entrepreneurs to leverage the success of their initial franchise and replicate it across multiple locations. Here are key points to consider when contemplating the growth potential through multiple franchises:
Opening multiple franchises diversifies a franchisee's portfolio, spreading the risk across different locations. With multiple units, a downturn in one area can be balanced by success in others, enhancing overall stability.
Operating multiple franchises often leads to economies of scale. Bulk purchasing, shared resources, and streamlined operations can reduce costs and increase profitability. Additionally, having multiple revenue streams contributes to higher overall income.
Managing multiple franchises requires effective delegation, strong managerial skills, and operational efficiency. It's crucial to build a competent team and establish standardised processes to ensure consistency across all locations.
Expanding strategically into new markets or areas with high demand can lead to market dominance. Establishing a strong presence can make it challenging for competitors to enter the market, solidifying your brand's position.
Maintaining a strong relationship with the franchisor becomes even more critical when managing multiple franchises. Ensure the franchisor's support extends to multiple units, providing adequate assistance and resources for each location.
Scaling up through multiple franchises offers immense potential for growth and profitability. However, it requires careful planning, efficient management, and a long-term vision to ensure sustained success across all units. Assessing market demand, maintaining quality standards, and fostering a strong organisational culture become essential for achieving scalable growth.
The allure of entrepreneurship often lies in the prospect of being your own boss and dictating the course of your business journey. In a franchise, this appeal blends with the security of a proven business model and established brand. As a franchisee, you have the autonomy to run your business within the confines of the franchisor's guidelines. This hybrid model offers the freedom to make operational decisions, drive growth, and immerse yourself in the entrepreneurial spirit while benefiting from the support and credibility of a recognisable brand.
While the appeal of 'being your own boss' beckons, the reality within a franchise setting involves a delicate balance. Franchisees must navigate the fine line between autonomy and adherence to the franchisor's regulations. While the operational decisions are within the franchisee's purview, they must comply with the established brand standards, operational procedures, and guidelines set by the franchisor. This balance ensures consistency across the franchise network, leveraging the brand's strength while allowing room for localised strategies.
As you explore the dynamic world of franchise ownership, consider the tailored financing solutions offered by Portman Finance Group. Our specialised franchise finance service is designed to cater to the unique needs of franchisees, providing flexible and competitive funding options to support your venture's setup, expansion, and ongoing success.
At Portman Finance Group, we offer tailored business finance solutions, including start-up loans, that can help turn your franchise dreams into reality. Whether it's funding for setting up your franchise, expansion, or asset finance for acquiring new equipment and any other business needs, explore our range of financing options at Portman Finance Group. Our dedicated team is here to support your entrepreneurial journey and facilitate the growth of your franchise business.
For more advice, find out how we have helped our customers unlock their franchise goals with our Heavenly Desserts Liverpool case study.
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Franchising is an appealing option for entrepreneurs who want to start a business without spending years building a new concept from the ground up. But the idea of franchising is divisive. 'Some people say, 'Oh no, that's a terrible concept,' and other people love it,' says franchise consultant Teri Villanueva. To find the right franchise for her clients, Teri asks: 'What's the end result? What do they want the business to do for them?'
The International Franchise Association (IFA) recognizes more than 300 franchise business concepts in industries ranging from roofing to dog grooming. Some require a brick-and-mortar location and a large upfront investment, while others can operate out of a home office or truck. Choosing the right franchise business opportunity depends on your priorities and resources.
A franchise is a business model that allows you (the franchisee) to operate a business under the established brand of a larger company (the franchisor). Franchising empowers franchisors to broaden their reach by enabling independent operators to oversee locations, while franchisees gain the advantage of managing a business under a recognized brand with a tested operational blueprint.
'It's really a license to use the trademark, systems, and the name of the franchise in exchange for an initial franchise fee and then ongoing royalties,' Teri explains. 'But with those royalties, you're getting a ton of support and a ton of training from the franchisor.'
If you want to start your own business but don't want to develop a business idea from scratch, franchising could be a good fit. Some of the benefits include:
One of the biggest benefits of opening a franchise is the brand recognition. It can take decades to become as well known as, say, Taco Bell or H&R Block. But because these businesses are franchises, you can open your own and leverage their established customer base'provided you're ready to cover the franchise fees.
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When you join a franchise, you bypass the need to develop and test a profitable business model because part of your franchise agreement includes following the franchisor's proven operating system. 'I hear good things from people who follow the system,' Teri says. On the other hand, 'Some people may not like that restriction.'
Franchisors provide training to all new franchisees to ensure consistency across franchise units. This can be especially helpful if you're entering a new field or are new to business ownership. 'A common misconception is that you have to have prior experience in whatever industry you're entering,' Teri says. 'The franchisor is going to train you on whatever the specific industry is and how the model works.'
Being a founder can be lonely. When you open a franchise, you become part of a community of franchisees. 'You can see what other owners are doing and then relate,' Teri says. 'People are willing to help each other.'
How do you choose the franchise opportunity that's right for you? Teri asks prospective franchisees many questions: 'Do they want a brick-and-mortar? Do they want a home base? How much do they want to spend? Where do they like to be? How many employees would they like?' Here are the key considerations to keep in mind:
If you're unsure which industry to invest in, the International Franchise Association (IFA) releases a report each year with its predictions for franchise establishments across industries. According to the IFA's projections, franchises that provide personal services'anything in the beauty, health, pets, and education industries, Teri explains'will see the most growth in .
'All of that is predicted to do very well because of the pent-up demand during COVID,' Teri says. 'Now, people want to have experiences and they really want to pamper themselves, so we're seeing some growth in areas like eyelashes, waxing, and things like that.' Other growth areas include quick-service restaurants, retail, maintenance, and business services.
Most franchisors have net worth and liquidity requirements for their franchisees, so your finances partly determine which businesses you're eligible for. (For example, you need $500,000 to open a McDonald's.)
Teri says prospective franchisees need at least $300,000 if they're planning to open a brick-and-mortar business. But there are many home-based or small-office-type franchises that you can open with $100,000 to $150,000. 'It really depends on the type of franchise that you're getting into,' she says.
While the franchisor's profit doesn't necessarily indicate the profitability of any individual franchise unit, it's a good place to start when assessing profitability. You can find the franchisor's financial performance information in item 19 of the Franchise Disclosure Document (FDD), a legal document franchisors must give prospective franchisees at least 14 days ahead of signing a franchise agreement, per Federal Trade Commission (FTC) rules.
'The franchisor by law cannot go into more detail than what's in the Disclosure Document,' Teri explains, 'but you can use the numbers in item 19 to create your own projections.' Franchisors aren't required to provide financial performance information in the FDD, but if they don't, they won't be able to share their financials elsewhere. If they do, franchisors cannot share numbers that differ from what is in item 19.
Franchisors can decide what financial information they share, such as franchisees' average income or gross sales. The FTC warns these numbers can be misleading: a few high-performing units could skew the average income upward, and gross sales don't mean much without corresponding information on expenditures.
According to the FTC, most franchisors don't have access to their franchisees' net profits, so if you see net profits in item 19, ask if they are from the franchisor's own units'units the company owns may have lower operating costs and higher profits.
Since franchisors legally cannot share financial information beyond what's in the Franchise Disclosure Document, Teri recommends speaking with current franchise owners to get a better sense of their potential earnings. 'Talk to other owners and ask, 'Hey, is this realistic? How many customers did you need to break even?'' Teri suggests. 'So you get to verify [what's possible] from the people who are living and breathing it.'
There are hundreds of different franchise opportunities to choose from. The right one depends on your budget and goals. Start your research with some of the best franchises for :
As life expectancies increase and birth rates decrease, the IFA expects growing demand for senior services such as in-home care. Because these types of businesses involve visiting clients in their homes, start-up costs can be lower.
For example, the initial investment for a franchisee of Visiting Angels, which provides non-medical in-home care for seniors, is about $125,460 to $171,150. According to Visiting Angels, franchisees' average annual gross sales are nearly $1 million, with 15% to 18% net profit.
Other options with similar start-up costs include Home Instead, Senior Helpers, and Interim HealthCare, which also provides medical services and has a net worth requirement of $300,000.
The IFA expects growth in child-related services, from day care to education and enrichment activities. For example, The Learning Experience, which provides dayc are and early education services, increased its units by 45.7% from to . (Current owners also rate it well, with 97% of franchisees likely to recommend it to others.)
To open a Learning Experience, you need a net worth of $350,000 and $150,00 in cash. After an initial franchise fee of $60,000, you can spend anywhere from about $600,000 to more than $5 million in your first year, and must pay a 7% royalty fee and 1% advertising fee for the 15-year term of the agreement.
You don't necessarily need to open a pricy brick-and-mortar to get into child services. A mobile swim school was the answer for one of Teri's clients. The start-up costs are relatively low because instead of building out a facility, you rent pools either at a gym or homeowner association, or through parks and recreation groups.
British Swim School follows this model and grew by 71.2% from to . Franchise Business Review named it one of the top low-cost franchises in . To get started, you need a net worth of $150,000 and $100,000 in cash.
After the initial franchise fee of $55,000, British Swim School estimates you'll spend $29,080 on marketing, $9,000 on pool fees and labor, and $17,160 on other business expenses to bring your first-year costs to about $110,000. You'll also pay an ongoing 10% royalty fee and 2% advertising fee.
The IFA predicts specialty beauty services like waxing and eyelash extensions will see continued growth. For example, the number of European Wax Centers in the US increased by 30.1% from to .
European Wax Center is the largest operator of waxing services in the United States. Opening one requires investing in a physical location. You'll need a net worth of $1 million, half of which must be liquid. Expect start-up costs of $396,600 to $554,950, making this one of the more expensive franchise opportunities.
Deka Lash, which provides lash extensions, has expanded by 52.9% from to . Deka Lash has slightly lower start-up costs than European Wax Center ($222,800 to $476,850) and more modest net worth requirements ($100,000 liquid and $500,000 total).
In , Americans spent $147 billion on pets, and the American Pet Products Association (APPA) predicts the pet industry will continue to grow year after year through . The IFA attributes this boom to a growing pet population and increased per-pet spending. There are many different types of pet businesses, from dog training to mobile pet grooming to retail stores like Pet Supplies Plus.
In , Pet Supplies Plus stores averaged $2.6 million average unit volume annually and Franchise Business Review named the franchise one of the most profitable. Opening a Pet Supplies Plus isn't cheap. You need a net worth of $600,000 and at least $200,00 liquid assets. After a $49,900 initial franchise fee, you'll pay an ongoing royalty fee of 3%.
Quick-service restaurants (QSRs) have long been the backbone of the franchise industry. According to the IFA, they're also growing: In , 21% of new franchise concepts were QSRs, and the IFA predicts there will be 2.2% more QSR franchise units in than in .
As real estate costs increase, the IFA has seen an increase in the number of QSRs compared with full-service restaurants, which require a larger physical footprint.
If you want to move into the restaurant industry but don't have the cash to open a brick-and-mortar restaurant, consider opening a food truck. Kona Ice is the largest food truck company in the world and ranked eighth in Entrepreneur magazine's list of the fastest-growing franchises. Expect start-up costs of $149,995 to $189,300.
The IFA predicts the growth of QSRs with more plant-based and health-focused options. This turned out to be a good fit for one of Teri's clients, who purchased a QSR with healthy grab-and-go meals. A former pilot, 'his passion for health, and making good choices drew him in,' Teri says.
In , the IFA expects consumers to gravitate toward low-cost retail, particularly resale stores, which offer both affordability and sustainability. Clothing reseller Uptown Cheapskate, for example, has increased its number of units by 43.5% since .
Opening an Uptown Cheapskate requires an initial investment of $376,936 to $610,986 and a net worth of $200,000, about half of which should be liquid. Other popular second-hand clothing franchises include teen-focused Plato's Closet and children's retailer Once Upon a Child, both owned by Winmark. (Winmark also owns Play It Again Sports, which sells used sporting goods, and Music Go Round, which does the same for instruments.)
Start-up costs and royalty fees are similar for Uptown Cheapskate, Plato's Closet, and Once Upon a Child, but the two Winmark brands have a higher net worth requirement ($400,000) and slightly lower liquidity requirement ($75,000).
The National Association of Realtors predicts existing home sales will be up 13.5% in , which means home services'like fencing, roofing, gutters, flooring, painting, and garage renovations'will be in demand.
Teri considers this sector a staple in the franchising world. 'It continues to be strong because people are home, they're keeping their homes longer, they want to make them better.'
These types of franchises typically do not require a physical location, making them a more affordable option than, say, a quick-service restaurant. Mighty Dog Roofing, named Entrepreneur's top new and emerging franchise in , has start-up costs of about $200,000 to $300,000 (including the $59,500 initial franchise fee) and requires franchisees to have a net worth of $500,000 ($150,000 of which must be cash).
Budget Blinds has experienced steady growth since . Listed as one of the fastest-growing franchises in by Entrepreneur, it has a lower net worth requirement ($250,000), and start-up costs range from about $100,000 to $200,000. Instead of charging royalties as a percentage of your business's earnings, Budget Blinds charges a flat $2,500 monthly royalty fee on top of its $19,950 initial franchise fee.
While individual franchisees' experiences vary, you can check item 19 of the Franchise Disclosure Document to determine a franchisor's profitability. According to Franchise Business Review, some of the most profitable franchises with low start-up costs are Visiting Angels, Molly Maid, Wetzel's Pretzels, and Orkin. Entrepreneur magazine's list of top franchises of includes Taco Bell, Jersey Mike's, Popeyes, and the UPS Store.
According to Franchise Business Review, franchise owners make an average annual salary of $102,910, more than the US average of $63,795. How much money you can make as a franchisee depends on how much you have to invest, which franchise you choose, how many units you open, your location, and more.
Owning a franchise requires an initial franchise fee plus ongoing royalties (and often marketing fees) in addition to your business's operating expenses. As a franchisee, you have less control over which goods or services you sell and how you sell them.
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