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How Does a Franchise Work?


April 14, 2022


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Franchising is a popular way for many people to start their own business, offering many benefits over starting their own business outright. But how does a franchise work? Here we’ll take a look at the whole process of how a franchise works and what any potential franchisee needs to know before they start out.

How a Franchise Works

1. An established business (franchisor) is willing to allow others to operate under its name and use its systems.

2. The prospective franchisee is looking to open a business, particularly the franchisor’s business location.

3. The franchisor shares information under the franchise rule including the franchise disclosure document.

4. If franchisor and franchisee both agree to proceed, they sign a franchise agreement.

5. The franchisee pays all applicable start up fees, including the franchise fee.

6. In return they get to use the franchisor’s system, trademarks and are authorized to sell their products or services.

7. The franchise agreement lasts for a set number of years, at the end of which, it may be renewed.

Ultimately, a franchise system works because the franchisee pays to use the brand name and business model of a successful, established business. For the initial franchise fee and ongoing royalty payments, the franchisee also gets access to the franchisor’s suppliers as well as their operational support, expertise and experience in the field.

How Does a Franchise Work: The Costs

There are a number of costs involved in becoming a franchisee; some of these will be the same as when an entrepreneur starts their own new business, while others are specific to the franchise system. We’ll break these down into standard costs and franchise costs.

– Standard Costs

No matter what kind of business you are starting there will be initial costs you have to pay to get started. The most basic is the inventory you will sell and the equipment you will need to provide the services in the first place. There are also phone and internet packages to communicate with customers as well as the work clothes or uniforms you’re going to wear. Depending on the type of business, you may also have to rent a location or a vehicle that will function as your work premises.

– Franchise Costs

There are certain costs that you will only encounter when starting a franchise. These include the initial franchise fee or the cost of buying a franchise if you are taking over an already established operation. Most franchisors charge a royalty fee for ongoing use of their business name, which may be a set fee or, more commonly, a percentage of your profits. Depending on the franchise, you may also have to pay a territory fee, which generally means that you will have exclusive operational rights in that area, and the same franchise won’t open up across the street. There may also be training fees for you and your staff to learn how the franchisor’s system works.

How Does a Franchise Work: Benefits

The return for these costs is what you gain from being part of a franchise system over starting out completely on your own. When people are wondering how does a franchise work this is often the most important subject, i.e. “What’s the benefit from opening a franchise rather than my own business which does the same thing?”. There are a number of benefits to franchises which may also be industry-specific or come down to how they suit an individual. Here we’ll look at some of the biggest advantages in general.

Ready-to-Go Business – One of the biggest benefits of opening a franchise is that a lot of the heavy lifting has already been taken out of the setup. You already know what your products or services will be, you have a price list that guarantees profit per sale, the marketing material and graphics are already decided, and uniforms are set. These all take a huge amount of time out of the initial setup for a new business, leaving you to focus on other areas.

Most importantly, you learn the work processes that have been perfected over years of experience, resulting in even more time savings and removing the frustration of trying to learn the best way to do something through your own trial-and-error.

Recognized Brand Name: Building a name for yourself can take years and lots of spending on marketing, but with a franchise, you get big-brand recognition straight away. A local name can only get so far but being part of a nationally recognized franchise means that no matter where you go or who’s passing through the area, they will know who you are and what they can expect from you.

Supplier Relationships: Inventory costs are the biggest outflow of cash for most businesses so getting a handle on them and finding the right supplier at the right price is one of the biggest tasks for business owners. For franchisees, they don’t have to worry about that as they immediately get to use their franchisor’s existing supplier relationships and take advantage of the lower prices that they gain by being a bulk buyer.

How Does a Franchise Work: Things to Know

There are also other features of running a franchise operation that prospective franchisees should know about. Operating a franchise means that you will have an extremely close relationship with your franchisor and will be bound by certain rules laid out in the contract.

– Owner Control: The franchisor will be in charge of many aspects of the franchisee’s business, such as the processes, appearance of your operation and specifically where you can operate your business

Contractual Obligations: Contained within your contract are system standardard that detail how you will operate your business using the franchisor’s name. These include situations around ongoing fees, contract terminations, and renewals.

Franchise Restrictions: A franchise system relies on replicating a very specific business model, which means it leaves little room for deviation. If you run a Dunkin’ Donuts, you can’t start selling Starbucks brand coffee beans for example. You may also not be allowed to expand within your area or into neighboring markets where someone else already has the rights to operate.

Conclusion

For anyone wondering how does a franchise work? It is essentially paying an established business to create a copy of their business. Within this there are many variations depending on the particular franchisor. There are unique costs that apply to opening a franchise, including an initial franchise fee and ongoing royalties. However, there are also considerable benefits that a business owner gets from being part of a franchise system.

If you are interested in starting your own business and want to find out how does a franchise work in practice, get in touch with us to find out. Screenmobile has an excellent relationship with our franchisees across 28 states and we offer potential franchisees the opportunity to build their own success story, with a short lead-in time and no storefront needed. To find out how our franchise system works, you can read more about it here or get in touch with our team.







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    • Ranked #100 in 2023
      Top Home-Based & Mobile Franchises

    • Ranked #23 in 2023
      Top Franchises for Diversity, Equity, & Inclusion

    • Ranked #64 in 2023
      Top Franchises for Less Than $150,000

    Image
    • Ranked #100 in 2023
      Top Home-Based & Mobile Franchises

    • Ranked #23 in 2023
      Top Franchises for Diversity, Equity, & Inclusion

    • Ranked #64 in 2023
      Top Franchises for Less Than $150,000

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