How Does a Franchise Work?
Are you ready to be your own boss? Start a profitable side hustle? Franchises provide a way to invest in a tried-and-tested business model, rather than starting a business from the ground up. Sounds pretty great, right? Read on for more details about how franchises work, along with the whys or why-nots.
What ARE Franchises?
Simply put, a franchise is an agreement in which a parent company (franchisor) grants the rights to use its business model to an independent operator (franchisee) in exchange for fees. These fees can take the form of monthly royalties, an upfront payment or, most likely, a combination of the two.
Franchises provide some unique benefits when compared to starting a business from scratch:
- Franchises are typically well-established, easily recognizable brands that consumers already understand and may already trust (McDonald’s, 7-Eleven, Great Clips, Ace Hardware, etc.). Having a built-in consumer base can save marketing money and time educating the public about a startup.
- Franchisors often provide franchisees with help to identify business locations, which reduces the risk of an individual franchise not operating profitably. Franchisors need successful franchisees for their sustained growth.
- Franchisors usually provide ongoing support, training and coaching. Again, franchisors know that when their franchisees succeed, so do they. So, providing the business support to ensure franchisees succeed is in their best interest.
- Franchisees commonly benefit from large, national marketing campaigns from the franchisor. The royalties and fees that franchisees pay, in part, go to help support the marketing and advertising campaigns of the larger franchise—after all, those online, television and radio ads aren’t going to pay for themselves!
- Since franchisors purchase goods in large quantities, they typically receive discounts that are then passed along to franchisees. Most stand-alone businesses don’t have the buying power of a large franchisor to receive industry bulk discounts.
Are Franchises a Win-Win?
An already established and well-known brand, help finding profitable locations, discounts on goods offered and ongoing support? Sure seems like franchising is a win-win. But before you open your checkbook, there are some important things to consider–some downsides:
- Franchises come with hefty startup costs. There are the initial franchisor fees, finding a location, hiring employees, acquiring the often-requisite legal counsel and on and on. Some of the top fast-food franchises can run upwards of $1 million, depending on the location. Yes, there are less expensive options out there, but they come with inherent disadvantages. Let’s face it: less expensive franchises are less expensive for a reason. They’re often smaller and less well-known—meaning less public awareness, market share and, ultimately, profit for franchisees.
- Franchises all have one thing in common: consistency. When visiting a franchise in Texas, you’ll likely find the same products and/or services in Utah. And there’s only one way that franchises achieve this consistency: regulations and guidelines. Franchisees are required to follow the rules of the franchisor, rather than running their business the way they might choose to otherwise. In reality, franchisees work for the franchisor as much as for themselves. And if a franchisee consistently does something outside of the franchisor’s guidelines, they may even lose the right to operate!
- Franchisees generally have to make monthly payments to the franchisor. These payments never end. Again, they never end. The simple truth is that a franchisee is ever indebted to the franchisor—for the lifetime of their business.
- One way franchises protect their brand is by placing restrictions on locations. This means franchisees may not be able to grow their business to other geographic areas as they might see fit. And, even if they can, adding a new franchise location can be an arduous, costly and people-intensive process—which can inhibit business growth. You will want to consider whether you’re comfortable being locked into the time, money and risk associated with a new location.
A Different Option
So, franchises are great, but, then again, not so great. They provide a tried-and-tested business model, an established brand, nation-wide marketing campaigns and ongoing support. But they are also costly, can restrict business growth, usually define precisely how the business must operate and, ultimately, can result in the franchisee simply being a glorified employee.
Lucky for you (chomping-at-the-bit, hopeful entrepreneur looking to be your own boss, or make some passive income with a side hustle), there’s a unique business opportunity at the intersection of Franchise Street and Starting from Scratch Drive.
Healthy YOU Vending provides all the support of a traditional franchise without ongoing royalties and fees. We are not a franchise; we’re better than a franchise. We don’t tell our operators how to run their businesses or limit them to specific geographic locations. In fact, expanding a Healthy YOU Vending business consists of purchasing more machines and finding new locations for them, rather than constructing a new building and the other intense processes required to expand a traditional franchise.