The Basics of Franchising: What You Need to Know

Franchising is when a franchisor grants a franchisee the rights to sell their products and/or services. The two enter an agreement that allows the franchisee to use the franchisor’s methods, operations, systems, brand name and other intellectual property to grow their business. Franchisors often provide ongoing training to support the success of the proposed business model.

Franchising allows you to be your own boss; it’s an industry built to provide support that nurtures your success. Although profits are not guaranteed, it’s a streamlined version of starting your own business that already has brand recognition and uses a model proven to be profitable.

Even though many franchisors provide franchisees with a ready-made business model, it’s important to understand the fate of your business is ultimately in your hands. You have to put in the work for your business to succeed.

Choosing a Franchise Opportunity

In the United States, there are thousands of franchises spanning hundreds of industries. How do you know which franchise is right for you? Doing your research is the best (and smartest) place to start.

When researching franchising opportunities, it’s easy to gravitate toward big-brand franchises like Dunkin’, McDonald’s and Pizza Hut, but there are so many other options out there. You may find a lesser-known franchise fits your goals better than well-known opportunities.

Gary Cryder, a veteran, wanted to fulfill his dream of entrepreneurship after transitioning into civilian life. He chose mobile franchise, Maui Wowi^®, and hasn’t looked back ever since, “It’s not a prestigious job. It’s labor-intensive work, but at the same time, what you put in is what you get back,” Cryder continued, “my business has grown every year, and I’m considering opening more units.”

The most important thing is to have a good understanding of your wants and needs. Choose a franchise that complements your strengths and interests and matches your goals and values. You can find out more about how to do this here.

David Omholt, president of franchise consulting firm The Entrepreneur Authority, told Inc.com, “It takes a good two to three months of pretty focused energy for a franchisee to do adequate due diligence and come to some point of clarity.”

Consider the Capital Required to Invest

Starting your franchised business is similar to starting a small business; there are initial costs required to get it off the ground. Franchise opportunity investment levels can range from $10,000 to upwards of $1 million or more.

Taking inventory of your capital and knowing your investment budget gives you a better sense of what opportunities are available to you. Although you may already have an idea of what industry you want to franchise in, you may not be aware of the capital required to support the concept.

In franchising, two significant expenses to consider are the franchise fee and ongoing royalties. Keep in mind; you also need the capital to cover equipment, supplies, employee salaries and real estate (if applicable). Most franchise websites list the total investment costs to get started.

Measuring Up to Franchisor Requirements

Franchising isn’t as simple as a transaction though. You have to meet the franchisor’s requirements—including net worth, liquid assets, the ability to finance up to a certain amount, and sometimes industry experience—to qualify as a franchisee; the financial requirements we mentioned are separate from the amount of cash necessary to invest.

The object is to make sure the potential franchisee isn’t just scraping together every penny to invest but will have the financial resources to get the doors open and survive the lean times while the franchise is growing.

Franchisors want their franchisees to succeed, and insufficient capital is one of the top reasons new businesses fail. Financial requirements like net worth increase the chances of success.

If you want more information about how to get your finances in order, we wrote a blog about it: Franchise Funding: Preparing to Finance Your Franchise.

Understanding the Franchise Disclosure Document

Franchisors are required by law to provide prospective franchisees with a Franchise Disclosure Document, also known as the FDD. This 100- to 200-page document is meant to protect potential franchisees from being duped and the franchisor against potential allegations of misleading claims.

The FDD states vetted and validated information for you to make an educated buying decision. The information you find can mean the difference between your success or failure as a franchise business owner.

We broke down each item included in an FDD to help you navigate this hefty document here.

Tying Up Odds and Ends

If you meet all the franchisor requirements, the next step is signing the franchise agreement. By signing this document, you agree to the franchisor’s outlined terms and conditions. The contract also details the obligations of both parties. We recommend hiring a franchise lawyer to get a full understanding of the terms you are agreeing to abide by.

From there, the franchisor will provide extensive training, teaching you how to run the business using their proven methods and systems. They often also offer marketing guidance, as well as help you choose an optimized location for your business (unless it’s a home-based opportunity).

If you need help searching for the right franchise opportunity for you, there’s no better place to start than America’s Best Franchises. You can search by industry, investment, location and popularity. Click here to begin your entrepreneurial journey.