Franchising is the license purchased by an individual (franchisee) from a company (franchisor) to sell products or services in specific locations under the company’s trademark, name, and logo. After a brand grants the right to market goods, the franchisee complies with the strict rules, pays an initial fee and regular royalties, and maintains brand consistency and reputation.
In this article, we’ll reveal the advantages and disadvantages of franchising. We’ll also cover the types and examples.
Advantages and Disadvantages of Franchising
Franchising is a business model that contributes to the economy's success and brings new working places to people. Entrepreneurs often choose between two options: establish an independent startup or buy a franchise. When starting a new brand, the challenge is no one knows about its existence, so brand owners should pay a lot of attention to its promotion. Yet, purchasing a franchise means that an individual can operate under the name, trademark, and brand reputation of a famous brand. This company has a certain level of recognition so a franchisee doesn’t need to invest much money. Let’s explore even more advantages of franchising for a franchisee:
- business assistance from the franchisor;
- the low failure rate of a brand;
- brand recognition;
- brand awareness;
- good reputation;
- trusting relationships with customers;
- high revenues;
- a base of loyal customers;
- high level of success;
- established brand image;
- good relationships with vendors;
- ready-to-use trademark, name, brand personality;
- opportunity to buy products at a big discount.
If compared with a standalone business, franchising has many pros. However, like any business model, the franchise also carries cons. It’s time to make you aware of them. The drawbacks include the following ones:
- the high initial investment that depends on the profitability of a franchise;
- royalty fees and a charge for training services;
- strict guidelines, rules, and regulations;
- a franchisor has total control of a company and makes decisions;
- revenues shared with a franchisor;
- lack of privacy.
Now that you know the advantages and disadvantages of franchising, it’s time to dive into the next section. We’ll unveil what to do and how to act to attain a franchise of a famous brand.
How does franchising work
The process starts when an individual called a franchisee wants to purchase a franchise. Before selling it, a franchisor conducts market research to ensure that there’s a demand in the region for the product. If there’s a demand, a company owner and an individual sign an agreement covering the rules and regulations a franchisee must follow. An individual pays an initial fee later supported by royalty fees. A franchisee pays money to get a license and the right to sell products or services under the name of a well-known brand and use its trademark. In turn, a franchisor provides an individual with training to do business under its franchise.
Now that you know how franchising works, it’s time to walk you through the types. It will help you find out the differences between them.
5 Types of Franchising
We can divide franchising into five main types based on factors like strategy, marketing model, and relationships between a franchisor and a franchisee. We’ve listed different franchises for your to consider if you want to implement such a business model.
- Product franchising. It is a business relationship in which a franchisor grants a franchisee the right to sell the franchisor’s product under its brand name, logo, and trademark. Although a franchisee has the right to sell the product, this individual isn’t provided with an entire system to run a business. This type of franchising is associated with large products. Examples include cars, computers, appliances, etc. Brands like Ford, Chrysler, and Exxon distribute product franchises.
- Business franchising. Unline product franchise, the business franchise provides the franchisee with the entire system to maintain the company and distribute products. A franchisor assists a franchisee in every aspect of a business. This person also ensures training to teach a franchisee how to operate the company. There’s also an agreement between the two parties in which a franchisee should comply with a business’s guidelines, rules, and regulations and pay initial and royalty fees. Since this type is the most common, you can find examples in every industry: hotel business, restaurants, fast food companies, fitness, etc. Famous companies include McDonald’s, Hilton, Burger King, Hyatt, and more.
- Manufacturing franchising. This type of franchising authorizes the franchisee to produce a brand’s product and sell it under the brand name, logo, and trademark. The franchisor allows a franchisee to manufacture and distribute the product in a specific area. The franchise is popular among big producers of soft drinks like Coca-Cola and Pepsi.
- Investment franchising. This type of franchising requires a franchisee to invest big sums of money into large-scale projects like hotels and restaurants. A franchisee assigns a management team or a franchisor to take of the business. A franchisee receive ROI and capital gain on exit.
- Conversion franchising. It is a modified representation of unusual franchise relationships. In this type, independent companies convert into franchise units. The franchisee uses the trademark, implements the brand’s marketing and advertising strategy, and participates in training. The franchisor has a high chance of unit growth and revenue. Examples include florists, electricians, and real estate.
Now that you know the types, it’ll be easier for you to identify them. In the next section, we’ll review several amazing examples of franchising from well-known businesses.
Examples of Franchising
Since franchising brings great profits to the owners of world-known brands, you can find examples everywhere. McDonald’s, 7-Eleven, and Starbucks grant their franchises to scale their businesses without spending money while the quality and reputation stay the same. The companies we took as examples also strive to reach new locations without much effort. Let’s review them to grab some inspiration.
Planet Fitness
Planet Fitness is a famous American franchisor that owns 2,039 clubs in different locations. It’s one of the largest fitness club franchises in terms of locations and club members. The company is friendly to every person starting their journey in the gym. So it has many visitors. If you consider buying a fitness franchise, Planet Fitness is an excellent option. The initial fee of the franchise starts from $968,100 and brings an average annual operating income of $567,000 to its owner.
Circle K
Circle K is a chain of convenience stores and gas stations you can see worldwide. The brand’s stores offer everything people need on the go. Circle K’s franchise provides entrepreneurs with a loyal customer base, business assistance, established vendor relationships, and more. The fee for Circle K amounts to $25,000. You’ll need to invest from $171,000 to $1.9 million to open a store in your location.
Kumon Math & Reading Centers
Kumon is an educational network established in Japan that focuses on teaching mathematics and reading to young learners. The franchise fee is $1,000 and initial investment amounts to $74,428 - $156,590. It’s an excellent idea for investment during a time when remote learning is in demand. Moreover, the initial fee is low, and the opportunity for great profits is high.
Congrats, now you know what franchising is and why it’s beneficial for entrepreneurs. Hope that our classification and examples helped you decide whether it’s worth purchasing a franchise and which one.
References:
- This article defines the term and uncovers the benefits of franchising.
- This article provides readers with types of franchises.
Last Updated: 22.03.2023
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