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Franchising is simply a business process of distributing products or services to consumers and/or businesses. There are two types of agents involved in the distribution network; the franchisor and the franchisee. The franchisor lends his trademark or trade name and business system to the franchisee. In exchange, the franchisee pays a royalty and an initial fee for the right to capitalize on the franchisor's brand and proven system.
You may ask, why would I want to own a franchise? The answer is quite simple; franchises are less risky investments. According to the Small Business Administration, most businesses fail because of weak management. With a franchise, you are also leasing the management expertise of the firm.
What is Franchising?
Running a business is considered the pinnacle of American entrepreneurship; the end result where profit flow and becoming your own boss becomes reality. There are a variety of reasons why someone would want to franchise. First of all, does franchising mean starting a business with its first penny? What about purchasing an already up-and-running business from owners who want to pursue other ventures or retire? Is total control of business operations a given when buying a franchise? Let’s review the intricacies of business franchising and see if it is right for you.
Talk to Me about Franchising!
Let’s say you’re opening the doors to your own Chili’s restaurant. This Tex-Mex oriented restaurant is hoping to service a legion of loyal patrons in the future, and you’re jumping ship waiting in the wings for this. To own your own Chili’s, you have to buy a franchise. Qualifications for buying a franchise vary, including the amount of upfront money. For starters, you must have $150,000 or more of non-borrowed money to qualify, with coverage for total opening costs that can range from $430,000 to $750,000. These funds go towards maintenance fees, rent, deep fryers, bathroom supplies – everything associated with the functioning of a Chili’s. Franchise rules say that 40% of the total cost of opening a franchise must come from your own funds not borrowed from a bank.
For starters, an initial franchise fee of (say, $45,000) must be given directly to Chili’s. This is the only fee you pay towards the company, with the other costs going to suppliers. Franchises will throw you into a strict nine-month training program where you’ll be introduced to the in and out’s of the business – service, protocol, inventory control methods, quality mechanisms, etc. A company will ask that you run the franchise from one location for a designated number of years, in addition to following décor protocol for the restaurant through using their insignias, labels, symbols, logos, and colors.
After the training program, Chili’s will present you with a store location that’s finished on the exterior but leave you to provide for interior work. A franchise owner will add any kitchen equipment, seating arrangement, and be responsible for the layout of the restaurant. Field consultants will be on-call to assist you with everything dealing with the details and make regular visits to check up on you. You will be expected to pay a percentage of your monthly sales plus a flat base rent or an additional percentage rent of your sales. The opportunities for creating lots of money comes with how well you deal with operating costs, its location (obviously, a Chili’s in Herald’s Square in Manhattan will fare a lot better than one in Harlem), and your own talents in maneuvering and handling the franchise.
In essence, franchising means paying a business for its overall strategy, plus the use of the brand. It means joining forces with a business by using its brand and marketing/operational philosophy to make your investment pay off. By operating it through its time-tested rules, you can increase the likelihood of success because the business has already established itself in the market. Do you become your own boss when running a franchise? The answer is a partial no – you only own the assets you used to jump start the business
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