Franchising 101

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While people typically think of McDonald’s, Subway, Dunkin Donuts, or Baskin Robbins when they think of franchises, the fact is that franchises come in almost every industry.

But maybe I am getting ahead of myself a bit. Just what is a franchise?

With a franchise, the franchisor (the company selling the franchise) offers its brand, trademark, and business system to the buyer (the franchisee) who pays a fee for the right to do business under the franchisor’s name using the franchisor’s methods. The franchisee is given detailed directions on how to run the business and the franchisor supports the franchisee with expertise, training, advertising, and a proven system.

That last point, a proven system, is important. Do what they did, and you should get the results that they got; that’s the idea. As franchisors are wont to say – when you buy a franchise, you are in business for yourself, but not by yourself.

The reason then that a franchise can be a smart business decision is that in the right franchise system, the franchisor has already made the mistakes, mistakes you do not have to make. This is especially good for a new entrepreneur since buying into a franchise system reduces, not only the learning curve, but the inherent risk of entrepreneurship as well. With franchising, you need not start from scratch or reinvent the wheel.

The downside is that in exchange for buying the franchisor’s expertise, training, brand, system, and help, you will be required to give up some independence and do things the franchisor’s way. As a franchisee, you will not be an entrepreneur in the true sense of the word since you will have a boss of sorts – the franchisor. You may think that the signature special deluxe sandwich should cost customers $4.99, but if the franchisor says that it sells for $7.49, then it sells for $7.49.

The other thing to consider from the outset is the cost. Franchises, as indicated, come in all shapes and sizes; some are inexpensive and many are very expensive. It costs money to buy the system, license the brand, build-out the store to the franchisor’s specifications, and do all of the other things any new small business person needs to do: Hire a lawyer, hire staff, advertise, get insurance, etc.

Bottom line: Franchising is a double-edged sword. On one hand, it definitely gives you a leg up and a path towards small business success, but on the other, you pay for that head start, both in terms of independence as well as good, old-fashioned greenbacks.

Weigh your options carefully.