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Chapter 1: Breaking Down the Franchising Business Model by Bullets

Before you decide to invest in a franchise brand, it’s essential to know the ins and outs of this unique business model.

By Sharon Powills1851 Staff Writer
SPONSORED 8:08AM 06/01/17

Going into business for yourself is a daunting task. There’s a lot on the line for aspiring entrepreneurs looking to launch a new concept-- from financial burdens to establishing recurring revenue, there are a lot of tasks that need to be checked off in order to experience long-term success. That’s why people often turn to franchises to make their dreams of business ownership a reality. While the model still allows entrepreneurs to be in business for themselves, it comes with established programs that ensure they’re never truly by themselves.

But how do you know for sure if franchising is right for you? And where do you start on your journey to buy a franchise? First, you need to make sure you understand the ins and outs of the business model.

According to the fourth edition of Andrew J. Sherman’s Franchising & Licensing, common ways companies try to expand are by:

  • Forming new business ventures
  • Joint ventures
  • Co-branding
  • Entering new domestic or international markets
  • Developing new products and outsourcing
  • Franchising!

Brands turn to franchising in particular as one of many ways to continue their growth trajectory. When there’s just one business owner or corporate team trying to move forward with limited resources, it’s difficult for concepts to grow. However, franchising leverages the intellectual and financial resources of others to continue expanding even while others are stalled.

“When non-franchised businesses want to expand across the country or internationally, they have to save money for years in order to hire employees, create marketing campaigns and secure real estate,” said Rick Robinson, founder and president of Services4Franchising. “But when businesses decide to franchise, they’re able to leverage the time and efforts their local owners put in, enabling them to grow at a much faster rate. Franchising gives entrepreneurs the ability to open dozens of locations in one year, which can’t be done by businesses going it alone.”

Franchising brings together passionate people, established intellectual property and proven business concepts to create multiple revenue streams, ultimately allowing concepts to tap into more opportunities to grow and turn a profit. And Sherman notes that the benefits of the franchising business model don’t end there. Reasons for brands to franchise include:

  • The ability to improve operations
  • Economies of scale
  • Increasing market share
  • Building more equity in the brand
  • Efficiencies and economies of scale
  • Increase market share quickly and build brand equity

By electing to expand through franchising, brands have the opportunity to expand at a more rapid rate. Even if companies have enough money to expand through their own resources, it takes more time to experience strictly corporate growth. Finding franchising partners enables businesses to make the most out of their potential in a low-cost way, and also shifts responsibilities like site selection, employee training, personnel management and advertising to its local owners.

According to Steve Beagelman, president and CEO of SMB Franchise Advisors*, the benefits of that rapid expansion aren’t limited to franchisors. The system is also designed to enhance franchisees’ experiences and boost their bottom lines.

“Concepts that become franchise chains are able to achieve a heightened level of brand recognition at a much faster rate,” said Beagelman. “Franchises have the ability to build on the momentum that comes with expansion, and appear on billboards, radio shows and TV. That exposure is ultimately what drives a brand forward.”

In order to officially launch a franchise concept and tap into those benefits, brands need to follow three initial steps, according to Sherman:

  • Identify your intellectual property (IP) and evaluate its commercial potential
  • Develop that IP into a commercial product
  • Go to market

There’s no shortage of protectable types of IP that brands can claim when getting their emerging franchise off the ground. And awarding these legal licenses to franchisees is what defines the industry at its core:

  • Patents
  • Trademarks, including slogans and brands
  • Web sites and content
  • Show-how and know-how
  • Distribution channels
  • Trade dress
  • Customer and strategic partner relationships
  • Proprietary processes and systems
  • Knowledge and technical works

In franchising in particular, the brand creates demand that then allows the model to grow through an operating system that builds loyalty and brand equity. By repeating factors like trademarks, service marks, trade dress, decor and other intangible qualities, concepts are able to establish a strong presence that lead to strong awareness on local, regional, national and even international levels. And while franchisees pay royalties to their franchisors, they also receive ongoing training and support in return.

“For a small fee, franchisees get so much in return. From brand recognition to website maintenance, franchise brands bring years of experience to the table when they’re helping a new owner launch their business,” said Robinson. “Joining a franchise brand can ultimately help a new owner speed up the time it takes to become profitable, which isn’t something that should be overlooked.”

One of the biggest misconceptions facing the franchising industry is that it’s limited to major fast food chains. However, many types of businesses are related to franchising. Examples include:

  • Home-based businesses
  • Sales and distributors that are product driven
  • Retail store where business formats are emphasized
  • Management-driven, multi-unit concepts that stress large territories or regions
  • Satellite carts and kiosks
  • Financial investments and large-scale projects

However, it’s not enough for brands to simply franchise their concept in order to experience success. Good franchisors need to bring a proven and established system to the table in order for franchisees to make the concept their own in local communities across the country or globe. That’s why entrepreneurs weighing whether or not to buy a specific franchise should investigate and check for the following:

  • Proven prototypes
  • Strong management teams
  • Sufficient funds
  • Distinctive and protected trade identities
  • Proprietary or proven methods of operation and management
  • Comprehensive training programs for franchisees
  • Field support staff
  • A set of comprehensive legal documents
  • Demonstrated market demand

Without those traits, franchise brands risk failure. That’s why some of the most common reasons that franchisors never achieve success include:

  • A lack of leadership
  • A lack of franchise communications systems
  • Breakaway franchises who don’t follow the system
  • Decentralized advertising
  • A lack of an effective PR strategy
  • An absence of market research
  • No screening systems for prospective franchisees

To succeed as a franchise, brands need to have a full and equal understanding of their local owners and consumer trends. At the end of the day, it’s those personal interactions that will make or break their success-- both as a franchisor and for their franchisees.

“At the end of the day, a franchise brand is only as good as the people behind it. Who brands chose to partner with can ultimately determine your success, which is why they should be selective when partnering with franchisees,” said Beagelman.

But it’s not just up to brands in determining who is the best fit for them. Ultimately, buying into a franchise concept begins and ends with an aspiring entrepreneur. And as the industry continues to grow, the number of business owners turning to franchise concepts for help is expected to climb. According to the International Franchise Association’s Economic Outlook for 2017, the franchise sector is expected to grow by $36 billion in 2017 to $710 billion, which is a 5.3 percent jump. And by following along with 1851 Franchise’s guide to buying a franchise, aspiring business owners will go into the increasingly popular industry armed with the confidence that they’re making the best possible decision for themselves.

*This brand is a paid partner of 1851 Franchise. For more information on paid partnerships please click here.