Over here at Franchise GrowthLab, one of our specialties is franchise sales. We build a lot of systems for our clients, and for a select few, we act as their Chief Development officer. In that role, we sell a lot of franchises! During the sales process, we do a lot of education on what a franchise actually is. I’ve been doing this for so long that I forget that to most people franchising is brand new to them.
What is a Franchise Business Model, Anyway?
The franchise business model is a mutually beneficial relationship between a company (the franchisor) and an individual (the franchisee) whereby the franchisee licenses and has rights to use the brand, trademarks and operating systems of the franchisor. In return, the franchisee will pay the franchisor fees in the form of a recurring royalty and a one time franchisee fee.
With a franchise, an individual can gain the benefits of business ownership without starting from scratch. They get the tools, the systems, and the training and coaching from the franchisor who is highly incented to see them succeed.
As we like to say in franchising, a franchisee is in business for themselves, but not by themselves.
When done right, the franchise business model is a powerful method that combines the franchisors vision and aspirations to build a National or Internationally known brand, and the capital, the will and the grit of the franchisee who is highly incented to execute on that vision and aspiration.
Why wouldn’t a franchisee just start their own business? Why would I be a franchisee?
While starting any business will take hard work, buying a franchise means that you don’t have to build everything from scratch yourself. On day one, you have a proven franchise business model and a system with a proven track record so you get to spend your time running the business vs building a brand new business. And that is essentially why a business owner decides to franchise vs going at it on their own.
A Few Key Reasons To Use The Franchise Business Model:
- Credibility – Established Brand Recognition: By joining a franchise, entrepreneurs tap into an existing brand with a loyal customer base. This recognition fosters trust and credibility, significantly reducing the time and effort required to build brand awareness from scratch. This can be more challenging with emerging brands, but even an emerging brand will have corporate locations with a proven concept and systems.
- A proven franchise business model: Franchisors provide franchisees with a framework that spans operational systems, training and coaching, marketing strategies and how to build and operate a profitable business. The franchisor has invested a huge amount of time into building a successful model that should make money if executed properly. You don’t have to do that. It’s done. Instead of building the systems and learning how to market to acquire customers, those are done for you. Instead of learning who to hire and how much to compensate them, those are done for you. Instead of building a known brand? Yup, done for you.
- Time and money. Piggy backing on the above point, you will save a lot of time and money by franchising. Sure, you pay a franchise fee and royalty (more on that later), but the time you will save by having the systems and the training completed for you typically will more than make up for it. In addition, brand recognition (in the case of proven franchise systems) can help boost the timeline of the start-up phase of your business, helping to bring in customers and revenue more quickly
- The mistakes have already been made. I used to tell our franchisees “your franchise fee, in essence,, will more than cover all of the mistakes you would make it if you did this on your own.” When you start a business, you will make SO many mistakes that will cost you a lot of money and time. A franchisor has already made those mistakes, so you don’t have to.
- Economies of Scale: By leveraging the collective buying power of the franchise network, franchisees gain access to favorable supplier agreements, which often translates into lower costs and greater profitability. I used to say to our franchisees that in the first few years of business, you will save more money than you will pay in royalty just by using our supplier network.
What does The Franchisor do? What does the franchisee do? And how does this relationship really work?
The franchisor is an experienced business owner who delivers a proven franchise business model that the franchisee invests into. In return for the investment, the franchisor provides the framework within which the franchisee can start and grow their own business. The franchisor ‘license’s’ the right to the franchisee to operate in its name and sell the services and/or products using the franchisors brand, marketing systems, operating systems, intellectual property and any other assets the franchisor might have.
The role of the franchisor will vary depending on the specific business model and the franchise agreement, but in general, the role of the franchisor includes:
- Allowing the franchisee to provide services under the business’ brand name
- Providing initial training on how to grow the business and perform day-to-day operations based on their proven business model
- Providing on-site training and support leading up to and after the grand opening day
- Offering an approved list of vendors and suppliers for supplies, equipment and materials
- Providing a software platform to operate the core functions of the business (point of sale, accounting, scheduling, customer relationship management, etc)
- Providing marketing programs, strategies and advertising materials
- Providing coaching in terms of developed business practices and relevant business metrics
- Ensuring that the franchisee receives ongoing support with operations, marketing, administration, and more
The franchisee is the engine driving the operation. They contribute their financial investment, their time and their energy to leverage the franchisors brand and systems to build a successful local business. A franchisee’s role really comes down to one thing: how to make their local business as successful as possible while following the standards that the franchisor sets out to follow. Part of this role includes:
- Developing the franchisor’s business in an established location and protecting the brand’s reputation
- Covering different types of costs to establish their business
- Investing time to learn about the business’ standards and operations
- Closely following business and operational practices and procedures
- Following the business marketing strategy using brand usage guidelines
And here is the most important part. Even though the franchisor/franchisee relationship is governed and formally laid out in the franchise agreement, the relationship really works when both parties understand that success depends upon a mutually beneficial relationship where the franchisor wont be successful unless the franchisee is successful, and the franchisee wont be successful unless the franchisor is successful. It is when this gets out of whack is when the relationship begins to break down.
And why does a franchisor do all do all of this? (and what do all of those fees go towards?)
One of the most misunderstood aspects of franchising is what all of those fees goes towards. I remember being asked the question when I first began franchising “so what does the franchise fee and the royalty go towards?”
The Franchise Fee: What Is Covered?
A franchisor always has a franchise fee. It covers a lot of things (below) but the best way to think about is this: it is the complete system, training and hand holding to get you up and running in your business, and getting customers as quickly as possible. Another way to think about the franchise fee is this: the money you save on equipment purchases , through time (the know-how, the operating strategies), the customer acquisition strategies and systems (to get customers faster) and the startup costs (develop brand and marketing material, store design plans for example) will be far more than if you were trying to do it on your own.
Franchise Royalty: How It Works
A franchisor also has an ongoing royalty. We have been in franchising a long time, and have one overarching philosophy when it comes to the way you treat your Franchise Partners: we know that to build a successful brand and system, we have to give so much support to our Partners that it will be all we think about and what we build for years to come. In fact, many franchise systems would say that we “over support” our partners, but our support formula works. Our x% royalty (calculated as a percentage of sales) will go towards guiding you to build a better business faster, and includes the following (trust us, this is a small list compared to what we actually do)
- The brand name and sales system to get customers
- The operating system to bring the customers back
- The operating system to grow the business
- Continuous innovations, new systems, programs, services and product offerings to continuously evolve and improve our business and unit economics
- The support services offered to help you build and operate your franchise. A sample of our support services include:
You may think: why do I need a technology system to operate a STORE? I guess the honest answer is, you don’t. But, then you would have to hire an awful lot of administrative support (and cost) to do things like member scheduling (a 24/7 always changing, dynamic function of the business); member health records and management; physician updates and referral management; and member communication (we could list this entire page with important administrative and marketing functions). Oh, and did we mention that tracking, measuring and monitoring clinical outcomes is a key part of our system?
The Brand Fund Fee
And finally, we come to the Brand fund fee. Again, another staple of franchising, this is typically the least understood part of franchise fees. And for good reason, it usually isn’t explained that well. But one thing we have learned in building a large, North American wide franchise system, it can become one of the most important fees for a franchise partner and a brand. Why? It provides a benefit that can never be matched if you were building just a single unit: scale. When there are multiple franchise partners and a head office contributing to a brand fund in a specific area, a competitor has a really difficult time competing because they can’t match the advertising spend of the collective group. There is power in numbers.
What are the steps to using the franchise business model?
It is important to touch on some of the considerations that potential franchisees need to take into account before they sign a franchise agreement. Just like any business venture, careful consideration with family, stakeholders and trusted advisors needs to take place and I would encourage any prospective franchisee to consider the following:
- Do Your Research and Due Diligence: Thoroughly research various franchise opportunities, evaluating their historical history, franchise disclosure documents, and talking to and gauging the happiness of existing franchisees. Visit an existing store in the network and observe: how many customers do they serve in a day? Seek professional advice from accountants and franchise lawyers to ensure a comprehensive understanding of the franchise before making a decision.
- Financial Planning and Investment: Develop a sound financial plan, considering the initial investment, ongoing operational costs, and potential revenue streams. Explore financing options to secure the necessary funds. And always make sure you have a little pre than enough. The worst thing you can do when you start a business is to be under capitalized.
- Select the Right Lawyer: Seeking the advice of a franchise lawyer and accountant with specialized experience is crucial for anyone conducting due diligence on a franchise opportunity. And I will emphasize franchise lawyer. A franchise lawyer will truly understand how the relationship will work, and clearly highlight the potential risks and contractual obligations associated with the franchise.
Really understand the Top 5 drivers of success in the franchise business model. The franchisor will have probably have a huge operations manual, full of every detailed system in the business. But what you really want to know before you buy the franchise? What are the 5 most important things that you will need to do to be successful in this business? And then make sure you have the ability and skill to do them! (and don’t accept “just follow the system” as an answer. What system?)