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Guidant’s Complete Guide to Buying a Franchise outlines what it means to be a franchise owner. We have broken down the guide into segments to give prospecting franchise owners an understanding of hidden costs, important documents, and the overall journey to franchise ownership. This introduction to the Guide is the first step.
The journey to becoming a business owner is exciting…but can be overwhelming at the same time. There are a variety of options and opportunities available to you – the world is your proverbial business oyster. This guide is designed to familiarize you with what it means to own a franchise, help you decide if being part of a franchise suits your goals and personality and take you through the ins-and-outs of the journey to franchise ownership.
Don't be fooled into thinking that you have to start a business from scratch to be a business owner, or that you aren't an entrepreneur unless you go it alone. Being a franchise owner is an excellent way to achieve business ownership and feed your entrepreneurial spirit, without some of the risks and uncertainty associated with a start-up.
The first and most important question we will address in this guide is what a franchise actually is. What makes it different from your typical startup or independent business?
A franchise is an arrangement where the owner of the brand and business model gives you the right to use said brand and business model (with all attending trademarks, products, systems, etc.) in exchange for money. In the franchise system, the owner is the franchisor and you are the franchisee.
Often, this is how a franchise comes to be: an entrepreneur starts an independent small business, and over time refines it into a successful and stable business model. Let’s call this entrepreneur Alex. Alex realizes the efficacy of what she has built, and wants to expand it. She could do this by opening more branches herself, or she could sell her business model (and all attending perks) to another entrepreneur.
Sam wants to be his own boss, but doesn’t necessarily want to deal with the trial and error of starting his own business from scratch. He wants to use somebody’s business model that has already been proven, with a brand that has widespread recognition. When Sam purchases the right to use Alex's business model and brand, the franchise is born. Sam then opens a franchise location and runs his business according to the model that Alex developed. He gets to use a market-tested brand, marketing materials, business model, techniques and products. In this situation, a franchise agreement is a win-win for both Alex and Sam. Alex gets to build her brand and wealth by expanding through a franchisee, and Sam gets to become his own boss with a proven business model (and without the risk and uncertainty that can come with a startup).
For the use of her brand, Sam pays Alex a one-time franchise fee, and typically an annual percentage of revenue as a royalty. This payment structure differs with each franchise – we’ll cover the costs of franchise ownership in depth in Chapter 5.
So how does franchising differ from a chain or licensed business? The concepts are similar, but each has specific qualifiers that hold it apart from the other.
A chain is a group of identical businesses that use the same logo, products, marketing, etc. (just like a franchise) where each individual location is owned by the parent. This means that a location can have a store manager who runs day-to-day operations, but that person does not own the business. With a franchise, as we know, each location is owned by the individual.
Restaurants are the most common form of this, but not the only option. Costco and Walmart are chains: multiple locations, each owned by Costco or Walmart’s central business structure.
A licensed store has slightly more subtle differences. It is very similar to a franchise in that the brand owner (licensor) gives permission to the individual (licensee – are you sensing a theme here?) for the brand to be used and products to be sold, but the structure and fees associated differ widely. Typically, the licensor has little to no operational control of the licensee, and the licensee receives significantly less training from the brand. Additionally, there is typically no one-time fee upfront, like with a franchise. Instead, an ongoing licensing fee is typically assessed.
An excellent example of licensed stores are Starbucks that appear inside of other stores, like a Target or Safeway, often in the form of a big kiosk rather than a self-contained space. These mini-Starbucks still carry all of the same coffees, snacks and merchandise, but they are not held to the same standards as traditional Starbucks locations. Nor are the Target Starbucks baristas employees of Starbucks: they’re employed by Target.
Naturally, all business opportunities have their upsides and downsides. This list will help you make an informed decision on whether or not franchising is the right options for you.
This information is not intended as an offer to sell, or the solicitation of an offer to buy, a franchise. It is for information purposes only. Currently, the following states regulate the offer and sale of franchises: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. If you are a resident of one of these states, we will not offer you a franchise unless and until we have complied with applicable pre-sale registration and disclosure requirements in your jurisdiction. Franchise offerings are made by Franchise Disclosure Document only.