Franchising is big business in the U.S. In 2022, there were over 790,000 American franchise establishments, producing an economic output of roughly $827 billion.
Since its U.S. beginnings with entrepreneurs like Benjamin Franklin, the American franchise has become a widely popular business model, especially in the food and hospitality sectors.
In this article, we’ll go over what a franchise is exactly and the benefits of investing in one (over starting a business from scratch). Let’s get started!
What is a franchise?
A franchise is a business model in which a parent company licenses smaller operators to sell its products and services under its brand name. The parent company is called the “franchisor” and the operator is called the “franchisee.”
In addition, franchisors often offer franchisees ongoing support with running their businesses. This can come in the form of established business processes, marketing materials, access to better financing, and more.
In exchange, franchisees must typically pay an initial start-up fee and annual licensing fees. But for many franchisees, these costs are well worth the investment. Here’s why:
Benefits of becoming a franchisee
On top of the benefits of starting your own business in general (such as being your own boss and getting rewarded for your work in a more direct way), entering into a franchise agreement provides the following advantages:
1. Brand recognition
Finding customers is one of the hardest parts of starting a business. As a franchisee, however, you’ll gain a built-in customer base thanks to brand recognition.
Instead of spending countless hours trying to get your name out there and build a brand from ground zero, you’ll have a brand name that consumers already know.
This is a huge benefit, especially if you are in a highly competitive industry that’s already saturated with other businesses like yours. When consumers already know your name, they view you as more reliable and trustworthy.
Take McDonalds, for example. It has locations all across the globe. When faced with the decision of where to eat, you may choose Mcdonald’s simply because you know what you’re getting—regardless of where you are in the world.
2. Lower risk
Startups have a high failure rate. According to 2021 data from the U.S. Bureau of Labor Statistics (BLS), 20% fail in the first year, 50% fail within five years, and 65% fail within 10 years.
Those aren’t great odds. But when you partner with a franchiser, you’re less likely to go out of business. Why? Because franchisees inherit a proven business model with an established support system in place.
According to a representative at Freedom Fun USA Orange County, “launching our party game rental business was much easier thanks to Freedom USA. By partnering with them, we could hit the ground running with immediate name recognition.”
3. Ongoing support
Starting your own business can be overwhelming. From setting up an LLC to securing funding to hiring your first employees, there’s a lot to tackle.
As a franchisee, however, you can get ongoing support from day one. Depending on the franchise agreement, you may get assistance with administration, insurance, legal documents, financing, marketing, and more.
For example, instead of designing marketing materials like logos, ads, or a website from scratch, you can get them ready-made from the franchiser. You may also gain access to training on how to run your business successfully.
At a minimum, a franchisor will have a wealth of experience and expertise for you to draw on if you have questions. They are there to support and guide you.
4. Protected market territory
Another benefit of entering into a franchise agreement is that you get exclusive rights to a market territory.
For example, if you open a franchise location under the real estate brokerage company Keller Williams (KW), you may face competition from other brokerages but none from other franchise arms. You’ll be the only KW in your area.
5. Economies of scale
As a franchisee, you also benefit from economies of scale. Because you are part of a larger network of similar businesses, you can take advantage of bulk discounts on material costs, for example.
Say you own a Subway location. Instead of paying top dollar for restaurant equipment and sandwich ingredients, you can get bulk discounts by ordering through the main Subway corporation. In the long run, this can save you a lot of money and help increase your profit margins.
6. Better access to financing
Finally, it’s easier to get approved for business loans and gain better loan terms when you are part of a franchise. Lenders will view you as less of a risk because you are part of a larger organization, not just a solo business. This can give you access to more capital to improve your business.
Adding it all up
Owning a business isn’t for everyone. But if you have an entrepreneurial spirit, becoming a franchisee could be for you. It helps you get a headstart with brand recognition, ongoing support, protected market territory, economies of scale, better access to financing, and more.
Explore what franchise opportunities are out there today. It could be the start of the business venture you’ve always wanted!