When do you franchise

To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice.

Popular Courses. Table of Contents Expand. Lofty Raw Material Costs. Lack of Financing. Lack of Territory Control. Lack of Individual Creativity. How Much Franchise Owners Make. The Bottom Line. Buying a Franchise FAQs. Warning Buying a franchise might seem like easy money, but those royalties and fees will quickly cut into profit margins.

Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.

Related Articles. Partner Links. Related Terms Understanding How a Franchise Works A franchise is a business whereby the owner licenses its operations—along with its products, branding, and knowledge—in exchange for a franchise fee. Franchisor Definition A franchisor sells the right to use its brand and expertise to one who will open another branch of the business to sell the same products or services. Franchisee Definition Franchisee refers to a small business owner who purchases the right to use an existing business's trademarks, brands, and proprietary knowledge.

Licensee Definition A licensee is a business, entity, or individual that has legal permission to conduct activities using something that another party owns or controls. Franchising, by its very nature, isn't a business that's well suited to everyone. First of all, it involves a different kind of relationship--in fact, it's all about relationships. Some business owners will find that the independent nature of franchisees isn't well suited to their personalities. If, for example, you tend to be autocratic in your management style, you may find franchisees impossible to manage or at least understand.

Franchisees aren't employees, and if you treat them like they are, conflict is sure to follow. That is not to say that you cannot enforce standards or lead the company in the direction you see fit.

In fact, it's the franchisor's duty to take this role. That said, the best franchisors are often those with the best communications skills.

As with any company, it's important that you have sound management skills, but only in franchising, because of the unfettered growth afforded through the use of the franchisee's capital, do these management skills become of paramount importance.

One of the most important of these skills is discipline. You must have the discipline to say "no" to growth that doesn't make sense--because a franchisee is unqualified or a bad "fit," because they aren't ready to expand in a particular market, or because they don't have the resources to support a certain level of growth. Lastly, as the old saying goes, "You gotta wanna.

The founders of more than one franchise company have found that they left their passion behind when they started franchising--some even going to the extent of selling the franchise company in order to return to operating an individual franchise.

It's all About the Goals Even if both you and your business are well suited to franchise, you need to ask yourself why you're thinking about franchising in the first place. Just because you can franchise doesn't mean you should. Generally speaking, companies choose to franchise for one of four reasons: time, people, money and risk.

Franchising allows companies to grow more quickly to take advantage of market opportunities, as franchisors can leverage off of both the capital and the efforts of their franchisees. It allows companies to capitalize on highly motivated owner-operators. It vastly reduces the need for expansion capital and, of course, risk.

Choosing an appropriate growth vehicle is a lot like choosing any mode of transportation; you need to account for distance, obstacles and speed requirements. If, however, my ultimate destination were London, my options would be limited to some combination of planes, trains, automobiles and boats.

Need to make the journey in a day? Your options get narrowed further. Likewise, look at your personal goals before making the final decision. The further you want to go and the faster you want to get there, the more likely franchising will be your answer. If your goals are near and you're not constrained by time, consider a leisurely walk instead. Entrepreneur Staff. Adam Horlock. Roger David. Abby Miller. Entrepreneur Store. Aman Jain. Skip to content Profile Avatar.

In order to be franchisable, the business model also needs to be attractive to potential franchisees. Moreover, they already had a handful of unsolicited franchise inquiries — always a good sign when it comes to salability. Can you clone it? The key to success in franchising is making sure that your franchisees are easy to replicate.

If the concept only works because of a unique location, a superstar salesperson, or because an owner is working hour weeks, it is going to be difficult to repeat the magic. Ideally, a franchise concept should be relatively simple to operate and should be able to work in a variety of markets.

The business model was easily teachable and readily duplicated. Can you provide the franchisee with an adequate return? A franchisee who is an owner-operator will expect to get a return, both for the time that they spend in the business as well as their investment in the franchise.

While Massage Envy had only a brief operating history, we projected that franchisee returns would be well above those of comparable investment opportunities, even after deducting a royalty. Are you committed to providing value? The franchise business is largely about maintaining relationships. The most successful franchisors are typically those that are the most committed to making sure that their franchisees are successful.

It was clear from the start that John and his team wanted to create a first-class franchise organization that would do everything within their power to ensure franchisee success.

They created state-of-the-art training programs, hired a top-flight consumer ad agency, and ultimately staffed their organization so that they could provide frequent franchisee interaction. Do you have the capital? A new franchisor will need capital to develop legal documents, manuals, training programs and marketing materials, not to mention a marketing budget for franchise lead generation.

Massage Envy was a young brand when it made the decision to franchise, so a great deal of care was taken to design a franchise strategy that would succeed without exceeding its budget.