If you want to own a business, but you’re not sure where to start, franchising might be a good option. Instead of developing a brand new business idea, you can open your own local branch of an existing business as a franchise. Here’s how it works.
What is franchising?
Franchising is a system in which individuals (known as franchisees) purchase the right to use a company’s (the franchisor) trademark. A franchise agreement typically goes beyond trademarks to include the plan and method for operating the franchise business.
“It’s a playbook put together by the franchisor that includes the systems, the processes, and the marketing,” says Teri Villanueva, a franchise consultant with FranNet. “And then an owner comes in and executes the model that’s already been created by the franchisor.”
Benefits of franchising
When you open a franchise, you’re setting up a business of your own—but you have a leg up and plenty of support. Some of the benefits of opening a franchise include:
Brand recognition
Unlike starting a business from scratch, opening a franchise usually comes with established brand recognition. Everyone knows McDonald’s golden arches mean inexpensive burgers and fries, and a blue-and-yellow IKEA sign signals affordable Swedish furniture.
Franchise owners are often willing to pay a premium to hitch their wagon to successful, big-name brands.
Support and training
Before you open a franchise, you’ll receive extensive training in franchise operations. Franchises require consistency, so it’s in the franchisor’s best interest to teach you how to run your business.
This kind of support can be hard to find in the competitive world of solo entrepreneurship. Teri says franchising is particularly attractive to people used to being part of a larger organization. “When people leave the military or corporate America, you miss that camaraderie that you had,” Teri says. Joining a franchise offers the opportunity to connect with other franchise owners during training, conferences, and beyond. “You really support each other,” she says.
Ease of financing
One of the hardest things about launching a new business is securing funding. “If somebody starts from scratch, there’s really no track record for banks to look at,” Teri says. With franchising, the likelihood of getting approved for a Small Business Administration (SBA) loan or other financing is higher because the franchisor’s model has already proven to be successful.
Drawbacks of franchising
Franchisors want to expand their businesses and collect royalties, so they might downplay some of the negative aspects of franchising. These might include:
Financial risk of owning a business
As with any business, there is financial risk involved with opening a franchise. Although as a franchise owner you operate under the franchisor’s name and business model, you’re investing your own capital. If your business fails, the franchisor won’t bail you out.
What if the franchisor goes bankrupt? It depends on your franchise agreement, but it’s possible your agreement will simply be voided, and you’ll have to figure out what’s next on your own. It’s a good idea to have a lawyer look over the franchise agreement before signing anything.
Limited creative control
If your reasons for becoming a business owner include expressing your creativity, franchising might not be a good fit.
“One of the things that some people may not like is that the franchisor dictates the products and services that you sell,” Teri says. “So if you say, ‘Hey, we could add this to the order, or maybe I would add this service,’ well, you can’t.” In other words, you must be comfortable selling the goods or service as is, without much of your own input.
Royalties and franchise fees
To open a franchise, you need to pay an initial franchise fee to the franchisor. You’ll also pay ongoing royalties, which can cut into your profit.
7 types of franchises
- Business services
- Commercial and residential services
- Lodging
- Personal services
- Real estate
- Restaurants
- Retail
When someone thinks of a franchise they often think of McDonald’s or some other fast-food chain. But franchises are much more than just restaurants. According to the International Franchise Association (IFA), there are about 806,000 franchise establishments in the US in a range of industries. The IFA breaks franchises down into seven business lines:
1. Business services
Business services franchises exist to help other businesses run smoothly or make it easier for consumers to get things done. They include accounting and tax-preparation franchises like H&R Block and shipping franchises like the UPS Store.
2. Commercial and residential services
This category covers services needed to build, renovate, and maintain homes and businesses. These franchises may or may not have a physical location and typically require equipment like a truck and tools.
Cleaning services like Molly Maid, plumbers like Mr. Rooter, and exterminators like Orkin are all franchises. This category also includes construction and renovation businesses like California Closets.
3. Lodging
Lodging franchises range from campgrounds like Kampgrounds of America (KOA) to hotels like Days Inn. These are often some of the most expensive franchises to open because of their large real estate footprint.
4. Personal services
Personal services include everything from educational franchises like School of Rock to gyms like Planet Fitness, workout studios like Pure Barre, and spa services like the NOW massage boutique and Drybar.
5. Real estate
Some of the biggest names in real estate are franchises, including Re/max, Sotheby’s International Realty, and the Corcoran Group. The real estate industry also includes property management and home inspection.
6. Restaurants
When you think of franchising, fast food chains like Subway probably come to mind. And for good reason: McDonald’s is the biggest US-based franchise in terms of sales, generating more than $118 billion in worldwide sales in 2023. (The largest franchise system by number of outlets is Subway.)
Quick-service restaurants (QSRs)—or restaurants that don’t have a full dining area—aren’t just the largest franchise industry, they’re also growing. In 2023, 21% of new franchise concept lines were QSRs.
Restaurants that offer table service are known as full-service restaurants (FSR) and include establishments like California Pizza Kitchen, the Counter, and Ruth’s Chris Steak House.
7. Retail
Retail franchises sell goods. This business line includes retail bakeries like Nothing Bundt Cakes, grocery stores like Grocery Outlet, furniture stores like Relax the Back, IKEA, and La-Z-Boy, supplement stores like The Vitamin Shoppe, florists like 1-800-Flowers, and secondhand shops like Plato’s Closet.
How to open a franchise
Opening a franchise is different from starting your own business from scratch. Here’s how it usually works:
1. Plan
Determine what you want to get out of franchising. “Everybody has a really different driver,” Teri says. “I always ask, ‘What’s your why for business ownership? What do you want the business to do for you and your family?’”
Narrow your options by asking yourself practical questions like:
- How are you going to finance your franchise?
- What is your net worth and liquidity? (This will determine if you meet the franchisor’s specifications.)
- How long do you want to own your franchise? (Franchise agreements typically have strict rules about how you can sell your franchised business.)
2. Research
Once you know what you’re looking for in a franchise, you can start comparing your options. Teri says the research process can take a prospective franchisee anywhere from 60 to 90 days. You’ll get information from three main sources:
- The franchise disclosure document (FDD), which is a public, legal document providing information like the franchisor’s financials and expectations of the franchisee (including the franchise fee and royalties)
- Conversations with the franchisor’s representatives
- Talking to current franchisees about their experiences
3. Commit to a territory
Once you’ve decided on a franchisor, the next step is to pay the one-time franchise fee to secure your franchise location. You can’t open franchise locations just anywhere—the franchisor decides which regions are eligible for new franchises and then breaks those regions up into exclusive territories to prevent market oversaturation.
“Once you commit to a territory, that’s yours and no one else can come in,” Teri explains. If your business is a brick-and-mortar, your physical location will be within your territory’s boundaries. If you don’t have a physical location, you’ll provide services within your territory.
4. Attend training
The length and format of training varies, depending on which franchise you decide to open. Training may consist of an online course or in-person training at headquarters or a regional office.
Teri says that one of the biggest misconceptions about franchising is that franchisees need experience in their industry. “[The franchisor is] going to train you on whatever the specific industry is and how the model works, how it performs most efficiently,” Teri says. “So you don’t have to have experience. That’s what you’re paying for—the support from the franchisor.”
5. Set protocols for a smooth open
If your business is a brick-and-mortar, you’ll need to find a location and build out the space. In some cases, the franchisor will help you select a location. Other franchisors may require you to purchase a location they have already selected and built out.
If your business does not have a physical location or operates out of a small office, then you’ll be able to open more quickly.
You also might have to purchase equipment, such as a van for mobile pet-grooming, or carpet-cleaning machines for a rug-cleaning business, but some franchises require little more than a laptop and a phone, such as a travel agency. The franchisor may require you to purchase equipment and materials from specific vendors.
Once you open your business, the hard work begins. “Even though the system’s been created for you, you still have to get out there and promote your business,” Teri says. “You have to hire the right people. You have to spend on marketing and all those things.”
How to start a franchise FAQ
Can anyone open a franchise?
Most franchise opportunities are not available to everyone. To open a franchise, you’ll need to meet the franchisor’s net worth and liquidity requirements. For example, you’ll need a net worth of $3 million and $1.5 million cash to open a Planet Fitness, but you can start a travel agency from home with just $3,500.
What is the difference between licensing and franchising a business?
The difference between licensing and franchising is that licensing involves paying to use a business’s trademark; franchising includes the trademark but also the business model and an ongoing business relationship. Licensing is common with products, while franchising is common with service-based businesses.
What fees do you pay for owning a franchise?
To own a franchise, you’ll pay a one-time franchise fee plus ongoing royalties and marketing fees. These fees vary significantly by franchise.
