If you’ve ever wanted to own a business, but are worried about the risks associated with starting your own, you may want to consider a business franchise.
Business franchises let you own and operate your own business without having to do any of the heavy lifting yourself. They usually come pre-made with all of the trademarks, models, and marketing you’ll need to turn a long-term profit, and they have significantly less risk than other traditional business options.
Let’s dive into what exactly a business franchise is, the differences between a franchise and a start-up, and some basic rules and regulations associated with franchising before wrapping up with a few pros and cons.
What Is A Franchise?
A franchise is a kind of license that allows an individual–known as the franchisee–to access the proprietary business knowledge, processes, and trademarks of their franchisor. The license grants the franchisee permission to sell products and services under their franchisor’s official business name. Essentially, it grants franchisees the reputation, marketing, and reach of the original business along with the best practices for its extended success.
Typically, franchisees must pay an initial start-up fee to their respective franchisors as well as annual licensing fees to upkeep their franchise rights.
The Difference Between a Franchise and a Startup
The main difference between a franchise and a start-up is that franchises have a significantly higher long-term success rate. Franchises are run based on established company business practices that are designed to ensure a branch’s profitability. Start-ups, on the other hand, have no real model to follow as they are based entirely on an individual’s personal research and experience rather than the decades of success franchise owners have seen with their brands.
In fact, only 50% of start-up companies last more than five years, and only 30% are still in business after a decade. To make a start-up successful requires a significant amount of work and dedication in the face of less-than-great odds.
Franchise Rules and Regulations
Franchising contracts are different for every partnership, but they typically follow the same basic structure as they are regulated by the Federal Trade Commission (FTC). This forces franchisors to fully communicate and risks, benefits, or limitations associated with the franchisee’s investment in their business model. Beyond the FTC, individual states are allowed to govern franchises how they best see fit.
The Basic Structure of a Franchise
Typically, the franchisee will buy the controlled rights, known as the trademark, from their franchisor in an upfront payment. Then, the franchisor will collect payments for any training, equipment, and business advice they provide to help establish the new business. Finally, the franchisor will begin collecting royalties or a percentage of the new business’s sales in the form of either monthly or yearly payments.
Note that all franchise contracts are temporary in nature and most closely parallel common rental contracts where the franchisee rents the business’s trademarks, marketing, and model. Most often, these contracts last between five and thirty years. Serious penalties may be issued if the contract is violated or prematurely terminated by the franchisee.
Pros and Cons of Franchises
As with anything, there are both pros and cons to using franchises. Let’s take a look at a few noteworthy examples of each.
Advantages of Franchising
Using a franchise to start your new business can grant you many unique advantages. Primarily, it gives you the formula you need to follow to become successful. You are able to follow proven best business practices established by your franchisor instead of stumbling around and attempting to figure it out on your own.
Additionally, in most cases, you don’t have to work very hard to establish your brand or market your business because your franchisor has done the heavy lifting for you. Many brands who franchise their model have solid brand recognition across the board, so new franchisees don’t have to worry about it at all.
Disadvantages of Franchising
While franchises are commonly successful, their success is not guaranteed. In fact, there are many risks associated with franchises that may cause you to second-guess your potential investment.
Franchises require hefty start-up fees and annual royalty costs that come out of your sales or revenue. And this percentage can range from 4.6% to 12.5% depending on which industry you’re franchising in. This can make franchises extremely difficult to finance and sustain.
Additionally, you have little to no creative freedom with your franchised business. Because you’ve taken on another company’s business model, trademark, and brand, you have to stick to their standards. If you’ve franchised a restaurant or retail store, you can’t change employee uniforms or create new, off-brand advertisements. You have to abide by the stylistic choices of your franchisor.
Are You Considering a Business Franchise?
Business franchises can be a great low-risk business option for many potential business owners. You just need to make sure you have the capital to make it work and the insurance in place to protect you if anything goes wrong.
If you want to learn more about business franchises or the insurance you might need to protect one, reach out to our all-star team at Schumacher Insurance today!