Franchising 101: Essential Tips, Terms, and Facts for New Entrepreneurs

Franchising might seem like a complex business venture, but it’s actually a streamlined path to business ownership that’s been paving the way for entrepreneurs for decades. In the U.S. alone, there are over 750,000 franchise establishments, contributing to nearly 8.4 million jobs, and generating more than $787 billion of economic output annually. Whether you dream of opening a home services business, coffee shop, or fitness center, franchising can help you turn your entrepreneurial dreams into reality, with the added support of a brand that’s already loved by many.

What is Franchising?

Franchising is a collaborative business model that bridges a franchisor, the owner of a brand and business model, with a franchisee, an individual eager to manage their own business under an established brand and proven business model. This partnership is mutually beneficial – the franchisor expands its brand’s reach without the high costs of opening and managing new locations, and the franchisee gets to steer a business with a lower risk of failure thanks to the proven business model and support provided.

Key Terms in Franchising

• Franchisee: Also referred to as a Franchise Owner, this is who purchases the franchise and is granted the right to operate a business under the franchisor’s brand and system.
• Franchisor: The company or individual that owns the brand and business model, and grants licenses to franchisees to operate under the brand’s name.
• Franchise Agreement: A legally binding document that outlines the duties and rights of both the franchisor and franchisee as well as fees, territory rights, and other terms and conditions.
• Franchise Fee: An upfront cost paid by the franchisee to the franchisor for the right to use the brand and business model. This fee often covers training, support, and marketing.
• Royalties: Ongoing fees paid by the franchisee to the franchisor, usually a percentage of the franchise’s sales. This fee compensates the franchisor for ongoing support and use of the brand.
• Franchise Territory: Refers to the geographical area where the franchisee is allowed to operate and market their business. It can be exclusive or non-exclusive.
• Initial Investment: The total amount of capital required to start the franchise, including the franchise fee, equipment purchases, initial inventory, and other startup costs.
• Franchise Consultant: A professional advisor who helps potential franchisees find and evaluate franchise opportunities. They can also assist in navigating the franchising process.
• Franchise Disclosure Document (FDD): A legal document provided by the franchisor to help potential franchisees learn about the franchise opportunity before coming onboard. The FDD contains important information about the franchisor, the franchise system, the agreement, and what is expected from the franchisee.
• International Franchise Association (IFA): A leading trade association for the franchising industry, offering resources, support, and advocacy on behalf of franchisors, franchisees, and suppliers.

Benefits of Franchising

Franchising opens a world of opportunities for entrepreneurs and provides them with a safety net that independent startups often lack. When it comes to franchising, five key benefits make it an attractive option for new entrepreneurs.

1. Established Brand and Proven Business Model

One of the most significant advantages of franchising is building a business with a brand that’s already recognized and trusted by consumers. This comes with a tried-and-tested business model, which reduces the traditional challenges of starting a business from scratch.

2. Training and Support System

Franchisors typically provide comprehensive training and ongoing support to their franchise owners. This can include everything from operational training to staff hiring practices to financial management. This support is invaluable, especially for first-time business owners, ensuring you’re well-equipped to run your business efficiently and successfully.

3. Marketing and Advertising Assistance

Franchisees benefit from the franchisor’s national or regional marketing campaigns, which can be more robust and effective than what an individual business owner could afford or manage. Additionally, many franchisors offer resources and support for local marketing, helping you attract customers in your specific territory.

4. Existing Customer Base

When you open a franchise, you immediately tap into an existing customer base that is familiar with and trusts the brand. This can lead to a higher rate of success upon opening, rather than slowly building customer awareness and loyalty.

5. Higher Success Rate

Franchises tend to have a higher success rate compared to independent businesses. The established systems, brand recognition, and ongoing support significantly reduce the risk of business failure, offering a more promising path to business ownership.

Tips for Prospective Franchisees

Your franchising journey will require careful consideration and due diligence. There are a lot of decisions to be made and a lot of opportunities to explore. Here are some tips to guide you throughout this process.

Research the Support System

Not all franchisors offer the same level of support. Investigate the training (especially if you need to build any skills or gain trade knowledge), operational guidance, marketing assistance, and other support services a franchisor provides. You should also reach out to current franchise owners to gain a better understanding of the level of support you can expect from the franchise system.

Review the Franchise Disclosure Document (FDD) Carefully

The FDD is packed full of information. It’s often very lengthy and written in legalese. It’s important that you read through and understand the information in its entirety as it details the franchisor’s history, the financial performance of existing franchises, legal obligations, and ongoing fees. This due diligence can help you set realistic expectations and make an informed decision about how well the franchise suits your needs and goals.

Seek Legal and Financial Advice

Before signing your Franchise Agreement, consult with professionals who specialize in franchising. A lawyer can help you navigate the legal intricacies of the franchise agreement, while a financial advisor can assist you in evaluating the business model’s viability and your financial commitments. Their expert advice can help protect you from potential pitfalls with the franchise opportunity.

Evaluate Market Potential

Assess the demand for the franchisor’s products or services in your desired territory. Consider factors like local competition, market saturation, and demographic trends. Understanding the market potential can help you predict the success of your franchise and identify the best location for your business.

Financing Your Franchise

Securing the necessary funds is a crucial step in your franchising journey. Thankfully, there are several financing options available to prospective franchisees. Understanding these options is important when planning how you intend to finance your franchise.

Franchise Financing Options

• Traditional Loans: Banks and credit unions offer traditional loans that can be used to finance your franchise. These loans are generally based on the borrower’s creditworthiness and require collateral. Interest rates and terms vary, so it’s important to shop around to find the best deal.
• SBA Loans: The Small Business Administration (SBA) offers loans specifically designed to help entrepreneurs start or expand their businesses. SBA loans are backed by the government, reducing the risk for lenders and often resulting in more favorable terms for borrowers. The SBA 7(a) loan program is popular among franchisees due to its flexibility and lower down payment requirements.
• Franchisor Financing: Some franchisors provide financing options to help new franchisees get started. This could include direct loans or assistance in securing loans through partner lenders. Terms and availability vary by franchisor, so ask your potential franchisor if they offer any financing solutions.

Tips for Securing Financing for Franchises

• Prepare a Strong Business Plan: Lenders want to see a comprehensive business plan that outlines your strategy for making the franchise successful. Include details about the franchisor, your management team, market analysis, financial projections, and how you plan to use the loan.
• Understand Your Financial Requirements: Be clear about how much money you need, how it will be used, and your repayment plan. Being able to articulate your financial needs will make you a more attractive candidate to lenders.
• Maintain a Good Credit Score: Your personal credit score can significantly impact your ability to secure financing. Ensure your credit score is in good standing by paying down existing debt and avoiding late payments. You should also avoid opening any new credit cards or taking on any new debt, like buying a car or a house, to maintain your credit score.
• Explore Multiple Financing Options: Don’t limit yourself to just one type of financing. Explore all available options to find the one that best suits your needs and offers the most favorable terms. You may even be able to combine different types of financing to meet your financial needs.
• Leverage Franchisor Support: Many franchisors are invested in the success of their franchisees and may offer resources or guidance on securing financing. Some may even have relationships with lenders that are familiar with their franchise model.

Buying a Franchise and Building a Family Legacy: Franchise Success Story

One day, Bob called on WIN Home Inspection to come out and do a thorough inspection on the home he and his wife were looking to purchase. Little did he know that home inspection would change his life. In talking with his WIN home inspector, he learned that after years of building a flourishing business, the owner was looking to retire. Pleased by the overall experience and growth potential of the industry, Bob jumped on the opportunity to buy the business and create a legacy for himself and his entire family.

“When I bought the business, it was doing 370+ inspections that year, and the next year I was able to repeat that, surprisingly. I didn’t lose any business and it worked out great. Every time I went on an inspection, I knew that I was representing WIN, looking professional in my vehicle, and doing the best inspection I could. It grew until I was doing 600+ inspections by myself. In 2022, I did 750+ inspections, which is incredible! Last year, I was able to train four new team members.”

– Bob Twaddle

As of January 2024, Bob has now transitioned his WIN business to his son-in-law, Adam. With his wife by his side and Bob as an incredible mentor, Adam is excited to continue creating the family legacy and serve his community with the best home inspection services he can, just like one home inspector did for Bob.

Franchising Facts

1. A New Franchise Opens Every 8 Minutes

A new franchise opens its doors every 8 minutes during a business day, showcasing the rapid expansion and constant growth of the franchising sector.

2. Franchises Fuel Employment & Economic Growth

Over 8.5 million people are employed across various franchise businesses, highlighting the significant contribution of franchises to employment and the economy.

3. Over 3,000 Franchise Systems in the U.S.

More than 3,000 unique franchise systems are operating in the U.S., offering a vast array of opportunities for prospective franchisees in diverse sectors.

4. U.S. Hosts Over 70 of the World’s Top 100 Franchises

The U.S. is home to over 70 of the world’s top 100 franchises, underscoring the innovation, strength, and international appeal of U.S.-based franchises.

5. U.S. Franchises Generate $827 Billion Output

Franchises in the U.S. generate an impressive economic output of $827 billion, demonstrating the substantial impact of franchising on the national economy and its role as a key driver of economic growth and stability.

6. Higher Success Rates and Entrepreneurial Safety Compared to Independent Businesses

Franchises tend to have a higher success rate compared to independent businesses. The established systems and support provided by franchisors significantly reduce the risk of failure, offering a safer route to entrepreneurship.

7. WIN Home Inspection Tops Entrepreneur Magazine’s Rankings

WIN Home Inspection has been ranked as the #1 home inspection franchise in the U.S. by Entrepreneur magazine for two consecutive years, 2023 and 2024.