The franchise business model is synonymous with business expansion. And that’s because many franchise brands have utilized the concept to great avail, especially household-name organizations that represent some of the best franchise businesses in the U.S. and beyond, with reputable and award-winning franchise business examples including McDonald’s and FASTSIGNS International.
Many people learn about the aforementioned global brands and ask themselves: ‘What is a franchise business?’ According to the BBC’s franchise business definition, a franchise is a business that gives the right to another person or business to sell goods or services using its name. It does this by supplying the person or other business with a license. When you buy into a franchise, you pay a franchise fee and other associated costs, and then rather than start your own business from scratch, you’ll be running a successful franchise business instead.
In return for paying a fee, the prospective franchisee benefits from using the franchise brand’s name, products, systems, training, marketing, business plan, equipment and other factors.
At its core, though, franchising is about taking an established brand and overseeing its expansion across a network of units in a new region. Although the franchise business model boasts terrific growth and financial potential, there are a number of legal issues that need to be carefully considered first – these are usually ironed out in the Franchise Agreement document that the franchisor produces in conjunction with their legal representatives.
If you are a business owner and have a concept that is proving popular and lucrative, you can always franchise a business concept, which will, in turn, make you the franchisor and enable you to sell your own brand’s franchise opportunities. If you do decide to franchise your business, there are a vast amount of advantages to utilizing this business model, including opening up franchise locations in your country and beyond, which we will cover below.
How does a franchise business work?
Becoming a franchisee has many benefits. An often overlooked, but very important benefit of becoming a franchisee is the positive impact it can have on your business’s value. Most business owners do not have an exit strategy when starting their business; a personal issue usually brings a business owner to the table to sell. The business will be evaluated and valued lower than the owner expected.
However, becoming part of a systematic brand through franchising will put your business in a much better position when it comes time to sell. It creates a larger pool of buyers with more money and more financing options.
Whether you’re buying into a franchise or converting your existing business into one, power of brand is very impactful. A unified name allows for broader recognition through wide-ranging advertising campaigns that are often rolled out and supported by executives on the franchisor level. Being a part of a franchise opens doors with its wide scope and will bring your business name recognition in markets it otherwise wouldn’t have. Power of brand brings comfort and confidence to potential buyers.
The power of a franchise brand
A confident buyer is a more aggressive buyer. A buyer will be more confident in investing in a business that’s a household name as opposed to ‘Company XYZ’. Both companies could have the same financials but the company with the brand name will be worth more to the buyer. Outside influencers, such as a spouse, business partners, attorneys, et cetera, are motivated to get behind a buyer who is buying into a brand. Power of brand will drive the value of your business.
Franchisees are buying into an existing and proven system. Becoming a part of an established business network allows you and your subsequent buyer the ability to follow a road map, allowing more time to focus on other aspects of the business. Flexibility for faster growth and expansion into new markets and the addition of new locations can become a reality with the support of a franchisor. Strong systems provide reassurance in situations that range from employee turnover to offering comprehensive training.
Proven franchise business systems
Buyers who are willing to spend more money on a business expect effective and efficient systems to be in place, and want to spend less time on resources toward getting a business on track. Most buyers want to plug-and-play, not to overhaul and reinvent the wheel. Systems in good working order make a business more attractive and more valuable.
A buyer also doesn’t want to be held hostage by existing employees who may hold processes and knowledge in their mind. An effective business system that is well-documented and universally implemented throughout the business allows the new buyer to easily plug in new pieces as needed without taking a step back. A successful franchise system will have processes and an operations manual with clearly defined roles, rules and guidance to whoever is operating the business.
A franchised business can bring you the brand and systems you need to expand the group of interested potential franchisees, with countries like the UK., U.S.A., Australia, New Zealand, China and more all boasting vibrant franchise markets.
Franchising provides an expanded market of buyers
Strong brands and well-defined systems allow people or groups without industry experience to enter. For example, former corporate employees will feel more confident to enter an entrepreneurial-style business, or someone with a technology background could enter the retail industry. Buyers enter the industry with confidence when a brand has strong support from the consumer market. If they understand how to run a business, they just need a blueprint and clear direction to achieve success in a market they have little knowledge in. Buying into a franchise does just that.
If you have a brand that you’re looking to export and grow via selling franchise units in overseas destinations, it’s important you do your due diligence in this respect. The most popular strategy for international expansion is via the master franchise opportunity method, which is something Global Franchise covers extensively. Articles, such as this one by Suzie McCafferty on the vital steps behind a successful business launch, have you covered for when international expansion arises.
Bank financing for a buyer becomes a much more viable option if the business being sold is a franchise. With bank financing the business purchase becomes more attractive and is another reason the potential buyer pool can be larger. Larger markets of buyers drive interest and competition. Competitive purchase offers will come faster and increase the multiple your business sells for.
People or groups who are willing to spend more money to buy a business want reassurance they can initially maintain and then grow what you have already built. Having power in brand, proven and documented systems, and a large pool of potential buyers opens your business up to more opportunity. As opportunity increases, it leads to higher spending and better terms for business sellers.
A franchise brand offers better purchase price and terms
If you buy into a franchise to become a franchise owner, be diligent and do your homework on the franchisor. Ask questions of the franchisor and don’t hesitate to ask for contact information on franchisees who will be able to give you a glimpse into how your business can be transformed. Ask them if they would do it again, if the franchisor communicates well, and if they’re organized and systematic in their processes. Their insight is crucial and is a critical element of due diligence when buying or transitioning your business into a franchise. The more knowledge you have, the more leverage you will have to make an informed decision. Find the franchise situation which will add value and be the right fit for you.
How to finance a franchise business
The franchise sector has experienced significant growth in recent years with a number of new providers opting to franchise as their growth vehicle. The range of brands and sectors with franchise offerings includes fast-food restaurants, gymnasiums and domiciliary care companies to name a few. So when looking to raise funds for the purchase of a franchise for sale, where is the right place to go?
Banks with a specialist franchise team are an excellent starting point. For expert support and guidance, franchisee prospects should contact the bank’s franchise department directly, not their local manager.
The bank’s franchise experts will be able to give you an indication of the possible finance available and funding options for the brands you are interested in, even before you’ve made your final decision. Their experience of working with franchisees in the past will give them the confidence to be able to lend on more favorable terms for your proposed purchase, as they will have confidence in your ability to replicate the success, as well as assess how you can pay the ongoing royalty fee and other overheads.
When looking to raise finance for a franchise, one of the first factors to consider would be to ensure that you can afford the business for sale. Most franchisors will be able to advise you of the total investment costs including the proposed working capital needed to set up the business. This total cost would also include the franchise fee, equipment costs and professional fees such as solicitor’s fees.
Franchise banks are able to support your purchase by lending between 50 to 70 per cent of these costs, with the remainder needing to be input from your own personal savings.
If you have a strong business plan but don’t have any personal assets to support the lending then the bank may be able to consider financing your plans using government-backed initiatives and business grants.
Advantages of setting up a franchise
- One of the advantages of franchising is the sheer amount of opportunities for sale and on offer. Businesses for sale span sectors such as fast-food, home care, business professional services, fitness, children’s education, and more.
- Franchises are often called ‘businesses in a box’ because they are turnkey solutions to getting you started on running your own company swiftly and seamlessly, without you needing to create a new business from scratch. There are also lots of low-cost, home-based and part-time opportunities available, making it a very flexible proposition.
Disadvantages of setting up a franchise
- While an entrepreneurial spirit plays a fundamental part in business ownership, being a successful franchisee requires you to follow the manual created by the franchisor. This means that you will need to follow the processes, strategies and overall franchise business plan created by the head office, offering the products and services they have perfected. This doesn’t mean there are strict limitations when it comes to control of day-to-day duties: for instance, franchisees are often responsible for their own payroll, hiring employees, and other business functions. It’s important to check these finer details when requesting a copy of the Franchise Disclosure Document.
- The fact that a high percentage of businesses are franchises should go to show that their business model offers unrivalled and unprecedented growth, but it’s not all plain sailing. If you’re excited by starting your franchising journey by owning a world-renowned, fast-food brand like McDonald’s or KFC, then the initial investment cost can be jaw-dropping. While these brands offer very lucrative businesses, investment costs can sometimes be over $1m, and are more suited to investment groups; not your typical start-up entrepreneur.
If you’re based in Britain and want to check out the top franchise business opportunities in the U.K., head to our sister franchise website what-franchise.com.
