Do you want to start a franchise business? If YES, here is everything you must know about the franchise business model plus examples of successful companies.
The franchise business model has been applauded by some as one of the greatest business models ever developed. It has proven time and time again to be successful when run properly and in addition, it is usually easy to become a franchise owner.
What is a Franchise?
A franchise basically involves a party (known as the franchisor) granting another individual (known as a franchisee) the permission to make use of its name and trade mark, according to an identified system, usually within a territory or at a location, for an agreed upon term. The franchisee is granted a franchise license to use the franchise company’s trademarks, systems, signage, software, and other proprietary tools and systems in accordance with the guidelines in the franchise contract.
Going for a franchise business model allows business owners to grow their businesses without having to spend substantial amounts of their own money to build new units. In this vein, the risk that is associated with establishing and running a new business will be transferred to the franchisee who is responsible for coming up with the initial capital. For new entrepreneurs who have very little business experience, franchising gives them a successful business model to follow, which can relieve some of the uncertainty associated with starting a business venture from scratch.
The franchisee will have to not only abide by the franchise contract and run their business according to the operations manuals, but they will also have to pay an upfront franchise fee (license fee), and ongoing royalties. A franchise license can range from $25,000 -$35,000, even though some businesses have been known to fix the price for their franchise license at $100,000 or more, as in the case of what’s called a Master Franchise. In a Master Franchise, like Jan-Pro Cleaning Systems, the franchisee buys the rights to an entire area, and it’s usually based on population.
The franchisee will also have to pay royalties to the franchisor. The royalties are usually based on a percentage of gross sales. Royalties range anywhere from 4 percent to 9 percent. Some franchisors on the other hand charge a flat monthly royalty fee. In addition to royalties, franchisees usually pay into a national monthly advertising/marketing fund, which amounts to 1-2% of gross sales.
How Big is Franchising, as an Industry?
Reports that were gathered by the IFA (International Franchise Association), has shown that the franchise business model is quite popular. As of 2005, there were 909,253 franchised business establishments in the United States of America alone.
About 11 million jobs or 8.1 percent of national private work force is in the employ of a franchised business. Franchised businesses supplied an annual payroll of $278.6 billion, or 5.3 percent of all private-sector payrolls in the United States.
In addition, franchised businesses produce goods and services worth $880.9 billion per year, or 4.4 percent of private-sector output in the United States of America.
Cost of a Franchise Business Model
A well structured franchise business should be able to provide you with a chart that shows exactly what costs you should incur to start and run your franchise during the first year or two. If the franchise’s UFOC (Uniform Franchise Offering Circular) does not clearly spell this out, ask them to do so.
You should beware of hidden costs that are not expressly spelt out in the UFOC, such as:
- Utility deposits to your landlord.
- Legal and accounting fees (between $1,000 and $2,000 for an attorney to review your franchise agreements, plus an additional $500 to $1,000 to set up a corporation, LLC or other legal entity for your franchise business).
Other costs include;
- The cost of debt service: if you have to borrow money to buy into the franchise.
- Travel, lodging and meal expenses when attending the franchises required training programs.
- Life and disability insurance, employee benefits and payments you will make to retirement plans such as an individual 401(k) or SEP-IRA.
Types of Franchising Relationships
There are two different types of franchising relationships.
1. Business Format Franchising: this is the most common type that comes to the mind of most people when they hear the word “franchising”. Here, the franchisor provides to the franchisee not just its trade name, products and services, but an entire system for operating the business.
The franchisee generally receives site selection and development support, operating manuals, training, brand standards, quality control, a marketing strategy and business advisory support from the franchisor. There are hundreds of different industries that make use of this type of franchising including:
- Business Services
- Children’s Services
- Cleaning, Maid, and Janitorial
- Health & Fitness
- Home Services
- Retail Products and Services
- Medical Services
- Senior care
- Travel and Tourism
2. Traditional or Product Distribution: even though this is less identified with franchising, traditional or product distribution franchising is actually larger in total sales than business format franchising. Here, less emphasis is placed on the system of doing business, with products manufactured or supplied by the franchisor to the franchisee taking center stage.
In most, but not in all situations, the manufactured products generally need pre- and post-sale service as found in the automobile industry. Examples of traditional or product distribution franchising can be found in the bottling, gasoline, automotive and other manufacturers
Other Important Details About the Franchise Business Model
a. Relationships in the franchise building business model: when a lot of people think about the franchise business model, they tend to place a major emphasis on the law. Even though the law is very important, it is not the most important thing in the franchise business model.
At its core, franchising is about the franchisor’s brand value, how the franchisor supports its franchisees, how the franchisee meets its obligations to deliver the products and services to the system’s brand standards and most importantly – franchising is about the relationship that the franchisor has with its franchisees.
According to a survey that was carried out in the year 2014 by Franchise Business Review on franchisees’ relationship with their franchisors, they found out that:
- 90 percent enjoy operating their business,
- 88 percent of franchisees enjoy being part of their organization,
- 85 percent feel positive about their affiliation with their franchisor,
- 83 percent respect their franchisor,
- 80 percent feel their franchisor operates with a high level of honesty,
- 78 percent would recommend their franchise brand to others, and
- 73 percent would “Do it all over again” if they had the option.
b. The franchise business model is About Brands: A franchisor’s brand is one of its most valuable assets and clients will decide which business to patronize and how often to frequent that business based on what they know, or think they know, about the brand. More often than not, customer do not really put much thought into who owns the business so long as their brand expectations are met.
If you buy into the franchise business model, you will certainly be developing a relationship with your customers to maintain their loyalty, and most certainly customers will choose to purchase from you because of the quality of your services and the personal relationship you establish with them. But first and foremost, they have trust in the brand to meet their expectations, and the franchisor and the other franchisees in the system rely upon you to meet those expectations.
c. Systems and Support provided by the franchise business model: Great franchisors provide systems, tools and support so that their franchisees have the ability to live up to the system’s brand standards and ensure customer satisfaction. In return, the franchisor expects that the franchisee will run his business in a way that will be in line with their expectation and also enhance the reputation of the company in the market area.
If you want to select a franchise system to invest in, you should do well to evaluate the types of support you will be provided and how well the franchisor is managing the evolution of the products and services so that it keeps up with changing consumer expectations. Some of the more common services that franchisors provide to franchisees include:
- A recognized brand name,
- Site selection and site development assistance,
- Training for you and your management team,
- Research and development of new products and services,
- Headquarters and field support,
- Initial and continuing marketing and advertising.
An ideal franchisor should be one who enforces system standards from time to time. This is very crucial because enforcement of brand standards by the franchisor is meant to protect franchisees from the possible bad acts of other franchisees that share the brand with them. To customers, franchises systems are branded chains of operations, and as such, they may attribute the same quality of product or service with all franchise systems.
d. Contractual Relationship in a franchise business model: from the untrained view point of the average public, a franchise business is just like any other chain of branded business, however, the truth remains that they are quite different. In a franchise system, the owner of the brand does not manage and operate the locations that serve consumers their products and services on a day-to-day basis. Serving the consumer is the role and responsibility of the franchisee.
The franchise business model involves a contractual relationship between a licensor (franchisor) and a licensee (franchisee) that allows the business owner to use the licensor’s brand and method of doing business to distribute products or services to consumers.
While every franchise is a license, not every license is a franchise under the law. Sometimes that can be very confusing. In the United States of America, a franchise is a specific type of licensing arrangement defined by the Federal Trade Commission and also by several states. In the United States a franchise generally exists when:
- The franchisor licenses a franchisee the right to use its trade or service mark; To identify the franchisee’s business in marketing a product or service using the franchisor’s operating methods;
- The franchisor provides the franchisee with support and exercises certain controls; and,
- The franchisee pays the franchisor a fee.
Every state in America does not have the same definition of what a franchise is. For instance, some states may also include a marketing plan or community of interest provision in the definition. The definition of what a franchise is can vary significantly under the laws in some states and it is important that you don’t simply rely on the federal definition of a franchise in understanding any particular state’s requirements.
e. Franchisors are in a way culpable if things go wrong: Just because franchisors do not own the individual franchises doesn’t mean that they’re necessarily “off the hook” if something goes wrong with a unit. If a franchise unit develops a bad reputation for quality or service, it affects the reputation of the franchise as a whole. If a unit underperforms, it also means less in royalties for the franchisor.
50 Examples of Companies That Operate the Franchise Business Model
- Edible Arrangements International: Edible Arrangements is a staple in the gift department. The global company is trendy, easy to order online, and has numerous personalization options to customize gifts. Before opening an Edible Arrangements franchise, owners are trained and offered instructional guides on all sectors of the business. They have over a thousand franchises under them. The cost to open a franchise with them ranges from $156,990 to $276,980.
- Great Clips: Great Clips is one of the world’s largest salon brands. This business is well known for its high quality and cheap prices. They make sure that all stylists and employees receive training to work at the salons. They have 3,518 franchises and the cost to open a franchise with them is from $114,200 to $216,000.
- Ramada: Ramada is part of the Wyndham Hotel Group, one of the largest in the world. The hotel group has the largest loyalty program because of the number of participating hotels; this loyalty program encourages visitors to come again and rack up points and rewards. Ramada has over 800 franchises scattered all over the globe. The cost of starting a franchise with them ranges from $195,700 to $13.1 million.
- Hampton Hotels: Hampton Hotels is owned by Hilton Worldwide. Hilton offers tremendous assistance to its franchises, including training, ongoing support with launches and evaluations, and marketing support. They have 1,963 franchises in the world today and the cost of opening a franchise with them ranges from $3.7 million to $13.5 million.
- Menchie’s: Menchie’s philosophy is built around customer satisfaction. The frozen yogurt company prides itself on focusing on making the customer experience great. Menchies has 478 franchises. The cost of opening a franchise with them ranges from $218,300 to $385,200.
- Yogen Fruz: Yogen Fruz has a large global presence with more than 1400 locations in over 46 countries. The healthy frozen yogurt is growing fast because of the company’s respected reputation. Yogen Fruz has 1,121 franchises under it and in order to get started with them, you will need to have from $135,700 to $472,200.
- Church’s Chicken: Church’s Chicken is one of the largest chicken chains recognized around the world. The company is aiming for rapid growth, so they really support their franchisees. Church’s Chicken encourages those with an entrepreneurial spirit to join. It has over a thousand franchises under it. It cost $413,300 to $1.3 million to open a franchise with them.
- Sign-A-Rama: Sign-A-Rama is more than just a sign company; it works with its customers to build and shape a customer’s brand. The company personalizes signs and promotional material to accommodate the strategy and direction of the brand it’s working with. It has close to a thousand franchises under it and the cost of opening a franchise with them is about $91,100 to $234,200.
- Jazzercise: Jazzercise revolutionized the workout industry in the 80s, making it one of the most popular, trusted forms of exercise. It’s gained a cult-like following over the years, and its dance parties are still increasingly popular. Opening a Jazzercise is relatively inexpensive ($3500 to $75,800), which draws in many entrepreneurs. Jazzercise has 8,370 franchises under them.
- Carl’s Jr. Restaurants: Carl’s Jr. is known for its provocative advertising campaigns. These ads attract a lot of attention to the company and bring in franchisees. The cost of opening a franchise with them is about $1.3 million to $1.9 million and they have 998 franchises under them.
- Home Instead Senior Care: A big selling point for Home Instead Senior Care franchises is the idea that one is purchasing a stake in a gratifying, rewarding business that will give back to others. Entrepreneurs that invest in this franchise are sometimes looking to give back and help others. It costs from $99,000 to $114,900 to open a franchise with them and currently they have 1,011 franchises.
- Pita Pit: Pita Pit is a healthier spin on fast-casual. The company has experienced tremendous growth in recent years due to its abundance of nutritious options. The investment required to open a Pita Pit is relatively inexpensive ($187,500 to $314,980) when compared to other fast food restaurants which draws franchisees in, according to Franchise Chatter. This business has 489 franchises.
- Nutty Scientists: Nutty Scientists is an educational program founded in 1996 that teaches children science education through interactive activities. The company brings fun into learning topics that some children struggle with. The cost of opening a franchise with them cost about $40,300 to $54,600. Currently, there are 229 franchises under them.
- Budget Blinds: this business deals in an assortment of binds, shutters, drapes, and more at a cheap price. Their selling point is that they make the process of finding installations and fixtures for homes a lot easier and less stressful. The blinds company offers at-home service and free consultations and estimates. Opening a franchise with budget binds will set you back to the tune of $89,200 to $187,100. Currently, there are 971 franchises under Budget Binds.
- Interim Healthcare: Interim is the oldest healthcare franchise company in the United States with 523 franchises. The company provides home care services, like nursing, hospice, and non-medical assistance, and it’s widely spread across the country, with franchises in 43 states. The cost of opening a franchise with interim healthcare ranges from $115,500 to $188,500.
- InXpress: The franchise works with its customers to fit their individualized shipping needs. The worldwide package and freight delivery company is known for its customer service and affordable shipping costs. They have 263 franchises. Cost of setting up a franchise with InXpress ranges from $55,300 to $160,200.
- My Gym Children’s Fitness Center: this business has developed a structured fitness program to combine development and exercise. The company helps children 6 weeks to 10-years-old to remain fit and active and grow cognitively as well. The company is also huge; it has different locations in more than 30 countries where it has 329 franchises. The cost of opening a franchise with them is from $34,300 to $247,200.
- JEI Learning Centers: This business is known for the Self-Learning Method it takes with its students. Upon entering the program, each student takes a diagnostics test, which is designed to highlight the areas the student struggles and excels in. These results outline the trajectory of his or her coursework with the learning center. This business has close to 290 franchises in the United States. The Cost to open a franchise with JEI learning center ranges from $54,300 to $93,300.
- RE/MAX: RE/MAX is a well known and trusted business that deals in real estate which is why so many people chose to invest in this franchise opportunity. Its worldwide recognition, massive network of resources, and advertising have made it a leader in the industry for the past 40 years. RE/MAX has a 6,665 franchises scattered all over the world today. A franchise from them will cost about $37,500 to $259,000.
- Jiffy Lube International: Jiffy Lube franchisees speak highly about the support they receive from the company in building out their businesses. Owners can participate in training at Jiffy Lube University, an online program designed to educate owners on all aspects of the business. Jiffy Lube International has 2,079 franchises affiliated with it and its cost around $221,000 to $400,000 to get a franchise from them.
- Vanguard Cleaning Systems: Vanguard Cleaning Systems is independently owned, and absentee franchise ownership is not allowed. However, the franchises can be run from home and usually only requires 1-2 employees. Janitorial services are essential to large corporations, which is one of the things that make this franchise successful. The cost of opening a franchise with them is around $9,900 to $35,800. Currently they have 2,946 franchises.
- Dairy Queen: Dairy Queen has strong global brand recognition, which is what makes the restaurant such an enticing franchise opportunity. Dairy Queen has 6,385 franchises scattered all over the world. The cost of opening a franchise with them ranges from $362,400 to $1.8 million.
- Cold Stone Creamery: Cold Stone Creamery also has strong brand recognition. Customers of the chain tend to be very loyal to the eatery, and the company offers its franchisees plenty of training and support in constructing and running their individual stores. Cold stone creamery has 1,401 franchises and the cost of opening a franchise can cost between $277,400 and $464,300.
- Snap Fitness: With people leaning towards clean eating and healthier lifestyles, fitness franchising is a profitable market. Snap Fitness is a 24-hour gym with a sleek look that entices franchisees. The company also helps owners increase sales quickly with its instructional program. Snap Fitness has 1,310 franchises and the cost of opening one for yourself ranges from $107,300 to $258,100.
- Taco Bell: Like many of the other top franchises, Taco Bell has incredible brand awareness that attracts customers nationally. The Mexican chain also has a large peer network of 350 franchisees, and 35% of them have more than 25 years’ experience. This support system is helpful when building a business. The cost of opening a Taco Bell franchise ranges from $1.2 million to $2.6 million.
- ServiceMaster Clean: The ServiceMaster parent brand is an established name in the service industry. ServiceMaster Clean has a unique business plan that allows for residential cleaning daily and commercial cleaning by night. It also offers a wide variety of other cleaning services, like disaster restoration and floor care. ServiceMaster Clean has 4,983 franchises and the cost of setting up one is about $49,600 and $180,600.
- Papa John’s International Pizza: Papa John’s International Pizza has 3,924 franchises worldwide. The cost of opening a franchise with them ranges from $129,900 to $844,200.
- Denny’s: Denny’s is a company that focuses on growth, so it puts a lot of its efforts into building strong relationships with its franchisees. Around 90% (1,536) of Denny’s are franchise-operated, and the company offers its franchises support across all levels of the business. The cost of setting up a franchise with them ranges from $1.3 million to $2.6 million.
- Hardee’s: Like Carl’s Jr., Hardee’s is owned by CKE. It cost from $1.3 million-$1.6 million to open a franchise with them and there are 1,538 of them.
- H&R Block: H&R Block is one of the leading companies in the tax services industry. As a 50-year-old company with an impressive track record, H&R Block attracts franchisees with its dependency and brand recognition in the financial industry. Currently, it has 4,846 franchises affiliated with it. The Cost of opening a franchise with them is around $31,500 and $148,700.
- Cinnabon: Cinnabon makes one of the best cinnamon rolls. The company markets its product as an ‘escape’ from reality and it really focuses on the customer experience, which encourages brand loyalty and growth. Cinnabon has 1,245 franchises and the cost of opening a Cinnabon franchise can range anywhere from $180,100 to $385,500.
- IHG (InterContinental Hotels Group): IHG owns 10 successful hotel brands that include InterContinental Hotels & Resorts, Crown Plaza Hotels & Resorts, Holiday Inn Hotels and Resorts and Candlewood Suites among others. It’s one of the most recognized hotel brands in the world, and it is continuing to grow. IHG has 4,831 franchises spread across the whole world. To get in on the action, you will need to have from about $7.2 million to $94 million.
- Ace Hardware: With stores in seven countries, Ace is one of the leading forces in the home improvement market. Along with the chance to be a part of a recognized, respected company, investors are also drawn to some of the franchisee perks, like no royalty fees. Ace Hardware has 4,802 franchises and it cost about $750,000 to $1.3 million open one.
- The UPS Store: The UPS Store has a variety of different franchise options for entrepreneurs. Franchisees recommend the company for its forward thinking, ethical code of business, and increase in popularity in recent years. This business has 4,793 franchises under it and the cost of opening one is about $150,200 to $420,300.
- Snap-on Tools: Snap-on tools is an innovative business that requires no real estate investment. The mobile tool store gives the franchise owners complete control of the direction of the business and the clients which they cater to. It costs from $152,700 to $318,980 to open one and there are 4,581 of them.
- Days Inn Hotels: Days Inn Hotels is owned by the Wyndham Hotel Group, a frontrunner in the hotel industry. It includes Days Inn and Days Inn & Suites, Days Hotel, and Days Suites. This hotel offers a free complimentary breakfast in most of its locations and this is one thing that customers like about the business. There are 1,784 Days Inn Hotels and the cost of setting a franchise with them is about $198,900 to $7.3 million.
- Super 8 Hotels: Like Days Inn Hotels, Super 8 Hotels is also owned by Wyndham Worldwide. Super 8 is successful because it’s economical and simple. Super 8 Hotels has 2,519 franchises under them and the cost of opening one is around $176,200 to $3.96 million.
- Krispy Kreme Doughnut: Krispy Kreme offers people the opportunity to franchise within the United States or internationally. The brand is identifiable worldwide, and the company provides its franchisees with extensive training before opening up shop. Krispy Kreme Doughnuts has 890 franchises all over the world. The cost of opening a franchise with them can range from $275,000 to $1.9 million.
- Dunkin’ Donuts: Dunkin’ Donuts is another company that’s distinguishable worldwide. With coffee being such a large commodity in the world, these franchises succeed in most cases. Brand loyalty is at its peak with the chain’s customers as well. Dunkin’ Donuts has a staggering 11,310 franchises under them and the cost of opening a franchise with them is from $216,100 to $1.5 million.
- Jan-Pro Franchising International: Jan-Pro is a cleaning service company with clients in 13 countries and more than 10,000 franchises. The company offers both international and home-based franchising opportunities. Using the Jan-Pro Tracker System, the company ensures that it provides clients with the best customer service possible. The cost of opening a franchise with them is around $3,100 to $50,900.
- Baskin-Robbins: Baskin-Robbins has around 7,300 locations worldwide. It places its efforts into fostering stable relationships with its franchisees. The cost of opening a franchise with them will range from $102,900 to $388,600.
- Circle K: Circle K is an international convenience store chain that allows its franchise owners to customize their individual quick service restaurants. The company stocks many popular brands and offers its franchisees support in business and marketing systems among other services. There are 5,093 franchises that are associated with Circle K and to be one of them, you will need to have from $211,500 to $1.6 million.
- GNC Franchising: The health and nutrition industry is booming, and GNC is one of its leaders. The vitamin and supplement chain has outlets worldwide, and franchisees are attracted to the company for its name, solid service reputation, and support system for individual stores. GNC has 3,188 franchises to its name and the cost of starting one can range from $167,900 to $294,500.
- Anytime Fitness: With over 2 million members in 2,885 sites across the globe, customers have 24 hour access, 365 days a year. With the secure access key and Anytime Fitness state of the art security systems, customers can feel comfortable visiting thousands of locations at no extra cost. The chain credits its top ranking to, “financial strength and stability, growth rate, and size of the system,” according to its website. Anytime Fitness has 2,796 franchises associated with it and the cost of opening one is around $78,700 to $371,000.
- 7-Eleven: The international convenience store chain is well-known and simple. Customers know what to expect when shopping at 7-Eleven, and that business model has always worked for the store. It also has a unique sales method that attracts investors. Most franchise systems require royalty payments based on a percentage of sales. With the 7‑Eleven system, you can pay royalties based upon the store’s gross profit, that is, net sales receipts minus the wholesale cost of the merchandise you sell. There is a total of 53,027 franchises associated with this brand and the cost of setting up one can range from $37,200 to $1.6 million.
- McDonald’s: this fast food juggernaut is undoubtedly one of the most popular fast food chains in the world today. They provide their franchisees with extensive training and support. McDonalds has 29,544 franchises and opening each of them costs about $1 million-$2.3 million.
- KFC: Like McDonald’s, KFC is a world-renowned company. Recently the chain been shaking up its menu and expanding, helping it to gain plenty of media attention. This brings in entrepreneurs looking to take part in the innovative time for the company. There are 13,846 franchises associated with this business and to open up a franchise with them, you will need to have from $1.3 million to $2.5 million.
- Auntie Anne’s Hand-Rolled Soft Pretzels: This global pretzel chain is beloved and unique in the sense that no other chains produces product like it. It has such a large number of franchises (1,598). The cost of opening an Auntie Anne’s Hand-Rolled Soft Pretzels franchise is around $194,900 to $367,600.
- Pizza Hut: The pizza industry is lucrative, and investors can trust respected companies like Pizza Hut to succeed. The recognizable chain has a trusted reputation and a strong support structure for franchises to help its owners successfully run their stores. Currently there are 12,959 Pizza Hut franchises spread across different locations. The cost of opening a franchise with them is around $297,000 to $2.1 million.
- Subway: this is one of the most popular sandwich chains in the world today. The company started making its menu healthier in recent years, which is also helping to attract customers. It’s expanding globally, and many look to be a part of this expansion. Subway has a staggering 42,227 different franchises. The cost of setting up one is around $116,600 to $263,200.
In conclusion, going for the franchise business model can be a great opportunity. But before you select any franchise, investment in or sign any franchise agreement, do your homework, understand what the franchise system is offering and get the support of a qualified franchise lawyer.