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The Franchise Business Model: Everything You Need to Know

You may be wondering what to make of franchising and whether it's something you should pursue. But if you don't have a solid indication of what franchising is, even the basic concept can be overwhelming. Here's a guide to everything you need to know about franchising.

What Is Franchising?

Franchising, or a business franchise model, is a contractual business model or relationship whereby an established brand, known as the 'franchisor,' allows an independent business owner, or franchisee, to use its branding, business model, and other intellectual property. In return, the franchisee agrees to pay an upfront franchise fee, plus ongoing royalties to the franchisor.

There are dozens of different types of franchise arrangements, but three of them are the most common. They include:

  • Business format franchise: This is the most common type of franchise arrangement. In this model, the franchisor allows a third party to do business using their trademarks and business model in exchange for fees and a recurring percentage of sales revenue. Franchisees under this model are run according to the parent company's guidelines and rules.
  • Product franchise: This is the oldest form of a franchise arrangement. Under this model, the franchisees exclusively distribute or sell franchisor's products.
  • Manufacturing franchise: Within this model, third-party manufacturers obtain exclusive rights to produce and distribute products using the franchisor's trade name and trademark.

Advantages of Franchising For Entrepreneurs

Ongoing support from the franchisor is not the only benefit of franchising. Here are a few benefits associated with franchise businesses:

  • You'll work with an already established brand name: A strong brand will inspire customer loyalty, lead to more sales opportunities, and lend a competitive edge to your business.
  • Reduced risk: If you work with a top franchisor, the risk of your business failing is very low compared to starting a business of your own.
  • Simplified procurement processes: Another added advantage of franchising is you'll get access to quality suppliers and better deals.
  • You don't have to worry about advertising or marketing: Your business will benefit from ad campaigns and promotions managed by the franchisor. The franchisor will also conduct market research on the best potential locations and share the findings with you.
  • Quality leadership and lower operating costs: The franchisor will train you and help you identify the best strategies to manage your business operations effectively while keeping your costs low.

What Does the Franchisor Get Out of This Arrangement?

On the opposite end, there are a variety of incentives for businesses to adopt the franchise model. Here are some benefits of franchising for the franchisor:

  • New locations and desirable market: Franchising is a source of capitalized expansion to new and desirable locations. Rather than franchisors putting their own money into market research, franchisees invest their funds to establish a business in a desirable location.
  • Additional revenue: Franchisors benefit from ongoing royalties.
  • Additional advertising: Franchisors also benefit from expanded advertising power through franchisees.

How Does the Franchising Process Work?

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The franchising process varies depending on the type of franchise arrangement, state, and franchisor guidelines. That said, a typical franchising process will look something like this:

Step 1: Gather background information

First things first, conduct research to identify the type of franchise you would like to venture into. Make sure you have a clear idea of what you expect to gain from starting a franchise. Next, come up with a list of franchisors you'd be interested in investing in. Prioritize selecting businesses that match your goals, budget, and business acumen. Also, make sure you research the legal considerations involved with a particular industry or jurisdiction for starting a franchise in your state.

Step 2: Reach out to the franchisor

Contact the franchisor's representative and schedule a meeting. A face-to-face meeting is an opportunity for you to know more about the business and help you make an informed decision. Key questions to consider include inquiring about how long the business has been in operation, its growth plan, and risk factors. After the interview, the franchisor should offer you their franchising brochures, guidelines, and other relevant initial documentation for potential franchisees.

Step 3: Negotiations

Assuming initial conversations go well and the franchisor meets your key criteria, it's time to negotiate the terms of the partnership. This stage is often quite complicated, so you need to equip yourself with the best negotiation skills and strategies. Tulane SoPA can help sharpen your negotiation skills and understand business fundamentals via our Applied Business Studies program.

Step 4: Agreement Signing

Once the terms on the table are accepted, the next step forward is signing a formal agreement. At this stage, consider hiring a legal expert to guide you. Also, take some time to review the agreement to ensure that it's as clear and detailed as possible to avoid confusion and potential disputes down the road.

Franchise Regulations

The franchise disclosure document, or FDD, forms the legal foundation to sell a franchise. It is a fundamental requirement for both the federal and state franchising laws. The FDD requires a franchisor to provide all franchise disclosure documents with their respective state regulators. Also, under the FDD, franchisors can renew their agreement with their franchisees at the end of an agreement in accordance with (Sec. 8) Small Business Franchise Act.

Prepare to Become a Leader in the Business Sector with Tulane SoPA

To run a successful franchise, you'll need to equip yourself with the right business management skills that will mold you into an effective entrepreneur. Tulane School of Professional Advancement's Applied Business Studies courses can help you start your journey to building your future as a business owner. Request more information about our program today to learn how we can help you pave the way to a new career with our flexible online degree programs.

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