If you are a successful small business owner, you may know the feeling. Things are going well, and your concept seems to have drawn consumer interest and found traction. Your customer base and revenues are growing, and demand is exceeding your capacity to keep pace. All signs point towards expansion and scaling up. You start to consider your options for growth, and franchising seems like an attractive way to transform and grow your business to a regional or even national brand and presence.
And while you may generally know what a franchise is – you likely patronize and drive by multiple franchised businesses every day – you have only the haziest idea of what starting and operating a franchise involves. Even less clear is whether franchising makes sense for your business model and long-term goals or whether other paths may better suit your circumstances and objectives.
While the decision as to whether, when, and how to expand your business is one that you should only make in consultation with experienced counsel, here are some basic facts and considerations about franchising that can help guide your next steps.
What Does It Mean To Franchise a Business?
You started your business as an entrepreneur, and at its core, franchising is an approach that allows other entrepreneurs to follow in your footsteps and take the laboring oar in expanding your brand’s footprint. It is a symbiotic arrangement that offers benefits for both the franchisor/parent company (you) and the franchisee (the individual or entity buying the rights to operate under your brand).
While franchising, like any business model, comes with risks and is not necessarily appropriate for every enterprise, it is a well-established and widespread arrangement. According to the International Franchise Association, there were over 800,000 individual franchise establishments in the U.S. in 2023, employing approximately 8.7 million people and producing roughly $860 billion in economic output.
When a business is franchised, the franchisor grants the franchisee the right to use its trademarks, branding, and operational procedures. This includes everything from the products or services offered to the interior decor of a retail location and marketing materials. Franchisors provide extensive support to franchisees, including training programs, operational assistance, marketing support, and access to proprietary systems and resources.
However, while the franchisee gains access to these assets, they must comply with strict standards set forth by the franchisor to maintain consistency across all locations. Franchisors exert significant influence over various aspects of the franchisee’s business operations, including pricing, product offerings, branding, marketing strategies, and quality standards.
For the franchisor, a franchise arrangement is a means to rapidly expand its brand footprint with minimal capital investment and without bearing the full burden of establishing and managing each new location. The franchisor earns revenue through franchise fees, ongoing royalties, and possibly even sales of equipment or supplies to franchisees. Additionally, since franchisees are responsible for day-to-day operations, the franchisor can focus on core business activities such as innovation and brand development.
What Is the Difference Between Licensing a Brand and Franchising a Brand?
Owners looking to grow their brand and business may consider licensing rather than franchising. However, there are significant differences between these two models, primarily regarding the licensing company’s level of control and involvement with the licensee, — the entity receiving the right to use the brand and related processes and procedures.
Like franchising, licensing involves granting permission to use a brand’s name, logo, and intellectual property for specific products, services, or applications. In exchange, the licensee pays upfront licensing fees or ongoing royalties based on sales volume or brand usage.
Unlike franchising, a licensing arrangement does not involve providing the licensee with a complete business model or operational support. While licensors may offer limited support to licensees in terms of branding requirements, marketing materials, and quality control standards, licensees typically have far more decision-making autonomy than franchisees, which means licensors have far less control over quality or how their brand is being used than they would in a franchise arrangement.
Importantly, the legal and regulatory challenges involved in franchising are significantly more complex and burdensome than licensing. Franchises are heavily regulated and scrutinized and involve detailed and specific offering requirements for franchise disclosure documents, agreements, and operating manuals akin to those associated with offering securities. The Federal Trade Commission regulates franchising across the U.S., and 14 states have their own additional requirements. Franchisors must also provide ongoing support and guidance to franchisees to ensure compliance with all applicable laws and regulations regarding everything from employment to health and safety standards.
How To Look at Your Business When Considering Franchising
As noted, franchising may not be the optimal path for all expanding businesses. As you consider the suitability of franchising, consider these factors:
- Established and Proven Concept: Your business should have already demonstrated success as an independent venture with a track record of profitability and a distinctive concept that offers a competitive advantage.
- Registered Brand: Your brand/logo should be nationally registered, and as this process will take at least 12-18 months, this should be done early.
- Scalability and Standardization: Your concept/model should be capable of having well-defined processes, systems, and operational procedures that can be easily replicated across different locations, markets, and economic conditions without losing the core essence that made it successful. Documented manuals, training programs, and support mechanisms will be essential for maintaining consistency and facilitating franchisee success.
- Market Demand and Growth Potential: Carefully analyze the market demand for your product or service and evaluate the competitive environment to determine whether it is saturated or has room for sustainable growth.
- Profitability and ROI: You can’t evaluate franchising without crunching the numbers and assessing your concept’s potential profitability and return on investment (ROI). Calculate the initial investment required, ongoing operational costs, and projected revenues.
In our next post, we will discuss the first practical steps to take when launching a franchise and how you and your attorney can position your business for sustained growth and success. If you would like to discuss franchising or other avenues for expanding your business, contact Roy Hibberd at Ansell Grimm & Aaron.
