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Guide to Owning a Franchise
October 2, 2020
Today’s economic climate has many people questioning if now is the right time to pursue their dreams of business ownership. With good prospects and many benefits, it’s no wonder many entrepreneurs like you are wondering how to start a franchise. The economic output of independent franchises is projected to increase to over $819 billion in 2020, and experts predict the total number of franchise businesses in the U.S. to grow by 1.5% to 785,316 total companies.
When it comes to franchise ownership, being a branch of a larger company is both rewarding and challenging. We’ve put together this comprehensive guide to owning a franchise to address some of the most common questions from budding entrepreneurs. Think of it as your Buying a Franchise 101 handbook to help you get started.
Understanding the Franchise Business Model
How does franchising actually work? If you want to earn your living owning a franchise, you need to know the ins and outs of the franchise setup. Usually, the franchisee pays a startup fee and ongoing royalties to operate a business under the franchisor’s brand. The corporate HQ usually offers a business model, marketing strategies and other resources. Some franchisors, like HomeWell, provide support and training to set the franchisee up for success.
Essentially, the franchisee gets to use a big-name brand and a business model fine-tuned for success. In exchange, the franchisor earns a share of the profits through royalties. As the franchisee, you must agree to operate within the franchise agreement. These rules give the brand its reputation and staying power. Customers can work with any branch and expect the same service.
The franchising model offers many advantages that can quickly turn a seedling business into a flourishing operation. First, there’s a lower barrier to entry than starting a business from scratch. You operate from a popular brand and may already have a customer base from the name recognition alone. In the used car industry, for example, only 3% of businesses are franchises. In comparison, they earn 24% of the total sales in their market, which shows just how much your business could boom.
Further, the franchisor does extensive research that lets you understand your local market like only a national corporation can. A lot of the pre-planning that goes into creating a business, like developing a product or service, setting prices and creating an ongoing strategy, is already done. Through operational support, you can quickly become an expert in your business, which could otherwise take years of practice.
You also join a network of independent business owners, united under a single brand. You gain support from colleagues in your industry who have been where you are. As a collective, you can benefit from pooled advertising and volume discounts. Franchisors will often grant exclusivity to the area or region where you operate, meaning you’re not competing against other franchises in your location. The parent company will usually provide you with competitor research and differentiation techniques.
Note that every franchise model is different. Not every big brand provides their locations with extensive training and ongoing support. Investigate the specific business model and franchise program of any company you want to work with. Be sure their team will be able to support your business and help you thrive.
Cost Requirements Associated With Owning a Franchise
In many ways, starting a franchise is like investing. You invest capital and also contribute your labor and expertise. Instead of bankrolling an untested company, you’re paying for a proven business model. Because of this, franchising often has lower startup costs than starting a business from the beginning. Depending on the franchise, you’ll pay three types of fees to your affiliate:
- Initial franchising fee: The franchising fee depends on what type of business you’re working with and what’s included in this cost. For example, the payment will be a bit higher for companies that train their franchise owners. It may also cover site selection and other support. Make sure you know what you get in exchange for the initial fee.
- Continuing royalty payments: Royalties come as a percentage of your gross weekly or monthly income. They cover the cost of your ongoing right to use a household name and benefit from your affiliation with the brand.
- Advertising: Marketing is something you’ll invest in for any business. Independent businesses dedicate resources and time to marketing and often have to run campaigns through trial and error. Many franchise brands will offer guidance and tools to help owners avoid common marketing pitfalls. This ensures owners are able to leverage the brand they’ve invested in. HomeWell offers marketing assets, strategies and vendor discounts to their franchisees.
After you have been in talks with a franchisor and both parties are serious about the relationship, you’ll receive a Franchise Disclosure Document (FDD). The FDD reveals the secret recipe to running the franchise and will include the full schedule of fees associated with opening your branch.
Other Costs to Consider
Besides the fees you’ll pay to the franchisor, you’ll also shoulder many of the general costs of business ownership. Many franchisors offer financing options or will help serious candidates obtain loans. Here are some items to include in your budget:
- Legal and accounting fees: It’s always good to have an attorney look over your FDD and contract. Likewise, financial recordkeeping is often new territory for first-time business owners. While you may receive some accounting support from your franchisor, you’ll probably need to work with an accountant.
- Build-out cost: Many franchises need a physical location. If the company is customer-facing, you may have to design a space that meets brand guidelines. Quick service restaurants (QSRs) and other retailers usually have decor and architecture requirements, and you’ll front the costs associated with design and construction. If the franchise is service-based, you might purchase or lease office space.
- Supplies and inventory: Supply costs vary significantly by the type of business. Restaurant franchises need food, utensils and commercial kitchen equipment. Auto repair franchises need specialized parts and tools. Service-based companies will go through office supplies. Your franchisor will provide you with a list and set of cost estimates for the tools of your trade.
- Working capital: After all the initial investments, you’ll need funds to cover ongoing business expenses until you hit a revenue stride. Every industry is different, and most franchisors can provide an estimate based on established branches. Consult your accountant on this matter, too.
- Personal expenses: Like with most businesses, you need to be prepared to support yourself during the startup phase. It may take time before you earn enough to profit, and you’ll need to have cash set aside for yourself in the meantime. With a franchise, the good news is that it often takes less time to start earning a living and turning a profit.
Requirements for Starting a Franchise
What do franchisors look for in a franchise partner? The selection process will depend on the company. As a franchisee, your performance reflects on the entire business. Of course, the best organizations want their affiliates to be successful, so you both can profit.
The approach to finding the right candidates might look like a hiring process. It often starts with an application or a set of materials to educate the candidate on the business model. Next, you’ll have formal or informal meetings with current franchise owners and corporate leadership, followed by a final decision. Franchisors hunt for business skills, personality, entrepreneurial spirit and sometimes industry expertise. Many franchisees have management experience and are ready to own their first business.
Franchise Requirements From Your Parent Company
A franchisor will impose many controls on your business. These requirements are part of the winning formula you’ll use to drive success. Expect some limitations on:
- Site approval: Franchise brands do careful market research when they set up new branches and want to approve the locations.
- Design or appearance standards: Customer-facing establishments need signage and decor that meets the brand’s aesthetic. Every franchise will need to use marketing materials that follow visual guidelines. Many also have pre-approved uniforms.
- Restrictions on goods and services: If you have an exclusive relationship with your affiliate, you can’t sell other products or services. You may also need to buy from approved suppliers.
- Operations: Franchisors provide their partners with a manual that describes how to do business. These operations can include your hours, marketing strategies and even accounting procedures.
- Territory: Many franchisees earn the right to a protected service area. If that’s the case, you won’t be competing with other branch owners in your area. That also means you can’t expand into your fellow franchisees’ service areas.
Is Franchising Right for You?
You might’ve realized by now — there’s a certain kind of person who’ll thrive as a franchise owner. On the one hand, you need to have drive and passion, just like any other entrepreneur. On the other, you need to be willing to cede some control for the benefits of the tried-and-true formula. Before you move into the details of how to buy a franchise, ask yourself if you’re ready. Here are some questions to guide your decision.
Are You Able to Manage Your Own Business?
Owning a franchise is a full-time job, and it comes with many of the skills required of independent business owners. You’ll manage your team, solve problems and deal with customers yourself. Franchise owners are usually hands-on and willing to put in the elbow grease. While your parent brand provides overarching plans, you’re in charge of the day-to-day.
Are You Passionate About Your Chosen Industry?
While many people associate franchises with retailers and fast-food restaurants, nearly every industry has franchises. Personal services represent 15.8% of all franchises, while commercial and residential services make up another 8.7%. A franchise opportunity is more than a chance to make profits, and you should love what you do. While serial entrepreneurs might start itching for a new opportunity, franchisees are in it for the long haul. Are you willing to spend 10 to 15 years or even longer living and breathing your field?
Can You Follow the System?
Many people seek to be business owners for independence and the chance to be their own bosses. Although you can indeed find those in a franchise, you’ll have to follow some guidance, too. The business model you’re buying into is what makes franchising so successful. Those who do well see the turnkey system as a treasure trove of proven methods rather than a stifling set of rules.
Are You a People Person?
When 10 successful franchisors were asked what they want in a franchisee, five mentioned characteristics of sociable, friendly individuals. As a business owner, you need to like people and develop a human connection with your customers. You also need to have skill as a team leader. Expect to be involved in your community and feel a true enthusiasm for working with and helping people.
Do You Have the Funds?
When entering the hunt for a franchise, you should know what it costs to start one in your market. Be realistic about your budget and be prepared to prove you have the financial stability to start a business. A good credit score and some investment capital are two must-haves.
Are You Getting Involved With the Right Company?
Considering who you’re doing business with is just as crucial as having the right stuff. Every company has a unique franchise program, and you should look for the one that fits your needs and will give you the support you are looking for. Feel free to directly ask your potential partners what they’ll do for you. Consider how other franchisees feel about their experiences and if you like the people who run the company.
How to Own a Franchise Successfully
If you’re ready to start this new journey, you can get your franchise business ready for launch in eight steps:
1. Choose a Franchise
The first step is to find a franchise in an industry that you’re excited about and fits your unique skills. Once you have a defined list of a few options that meet your preferences and budget, reach out to them. Some have an application process. Others will provide some introductory content about the business. If you pass through initial screenings, you can ask for an FDD that includes relevant decision-making information. You’ll learn about the franchisor’s leadership team, market presence in your area and offered support.
From there, you can meet with the franchisor team and other franchisees. After you get to know each other and everyone agrees you’re the right fit, you can receive and sign the franchise agreement.
2. Do Your Research
Franchisors carefully consider the local markets, and so should you. Your decision process should include some data and insights into your industry. Consider what small business resources have to say about the prospects within your chosen area. Government agencies and universities are both excellent sources to turn to.
Beyond market research, you should also take a deep dive into the franchise contract. Before signing anything, make sure you read and understand the document. You might want to have your attorney or a franchise consultant review it, too. Make sure all the promises your partner has made are written in the agreement. You may be able to negotiate terms before signing, or they might be set in stone.
3. Create a Business Plan
While your FDD should have a good deal of information about running your business, you need your own plan, too. Most banks and other investors look for a formal proposal before financing a new venture. It’s also helpful to create a plan of attack for your specific location, including hiring strategies. Your local customer base affects your earning potential, and you should account for it in your business plan. As you develop your playbook, set realistic milestones and goals to ensure you’re running your business right.
4. Get Financing
There are many accessible sources for obtaining business loans, and your franchisor may have financing options available. You can pitch to private investors or seek a loan from local banks. You may also qualify for a Small Business Administration (SBA) loan.
5. Find a Location
Unless you have a work-from-home franchise, you’ll need a physical location.
Sometimes it makes sense to buy, and other times it’s better to lease. If you have a customer-facing retail location, a site near your target customers and competitors is crucial. These types of franchises do best along main roads and within large shopping plazas. Office space offers more flexibility. As long as you are central to your service radius, you can find a less prominent location, often with cheaper rent. As usual, have a lawyer review your lease or other legal documents.
6. Hire Your Team
As a franchise owner, much of your job revolves around leading and inspiring others. These responsibilities are a lot easier when your dream team is by your side. Your employees are also the connection between you and your customers and the wheels that keep your business turning. Smiling faces and capable hands are crucial.
7. Start Your Training
Many franchises have an extensive training program to help you get up and running. There may also be separate training courses for your staff. In general, you’ll receive your training at the corporate headquarters or your location. Soak up all the skills and knowledge you can during this period.
8. Open for Business
Once you’ve done all the prep work, the biggest hurdle to overcome is promotion. Your franchisor will have many resources to help you announce your new business to the public and may even have suggestions to make your grand opening a can’t-miss event. Customer retention is critical from the get-go. You’ll want to be personally involved with keeping your customers happy, offering loyalty programs and gaining referrals as your business takes off.
Start Your Franchise With HomeWell Care Services
Do you want to start a business that will make a difference? A HomeWell home care agency might be what you’re looking for. We offer many advantages to the prospective entrepreneur, including training, launching and operational assistance. Health care is a unique market, and we provide many resources to help our partners drive referrals from local doctors and hospitals. Start your rewarding journey as a HomeWell franchisee, and assist your customers in living longer, healthier lives at home.