zpostcode
Franchising as an investment: How does it work?
Jan 9, 2025 10:44 AM

  

Franchising as an investment: How does it work?1

  Maybe you’ve got an entrepreneurial streak and a keen sense of the kind of business your local community needs. And perhaps you’re willing to spend the time, effort, and cash to get it started. Still, there may be gaps in your knowledge and resources that might prevent you from opening up shop, at least in a way that matches your vision.

  On the flip side, there are well-established businesses that would be eager to expand into your area if only they had the right person (perhaps someone like you) with the time, capital, business acumen, and risk tolerance to become a local “owner” of their brand.

  If this sounds like a reasonable deal—starting an entrepreneurial venture by piggybacking on an established brand—then maybe franchising is right for you.

  What is a franchise?A franchise is a business agreement in which a business (franchisor) grants another person or business (franchisee) the right to use its trademark brand and business systems in exchange for ongoing royalties and/or fees.

  Think of it as opening up and operating your own business, but as an extension of another business. The franchisor sets the ground rules, operational structure, and royalty payments and/or fees, while you pretty much own and oversee everything else (with the exception of certain agreements where the franchisor retains a minor stake in your business).

  Why would a business want to franchise?For businesses that are looking to expand, franchising may be a cost-effective growth strategy with the added benefit of reducing risk and alleviating the various burdens that managing employees can often bring. Furthermore, the franchise model allows a business to leverage the local market knowledge and expertise of the franchise owner. Plus, unlike hiring a “branch manager” type, the franchisee has skin in the game—they’re putting their own capital at risk.

  The franchise model can help businesses expand quickly, efficiently, and with less risk. The franchisee can hit the ground running with a proven business system and a relatively established brand.

  Franchising: It’s a form of investmentIf investing means allocating time, money, and other resources in search of a profit, then yes, owning a business is an investment. It’s much more intensive than purchasing stocks or bonds, though. And it isn’t for every investor.

  So, why do it? It really depends. According to research from the Small Business Administration and the Federal Reserve, business owners tend to have a higher net worth than those who work for companies. Some people choose to buy a franchise while holding on to their regular nine-to-five (although that’s tough to do). Others opt to go all in, investing all their resources and energy into a franchise business.

  Advantages of buying a franchiseThe biggest advantage of becoming a franchisee is that you get to start a business, but skip past the growing pains associated with the start-up phase. What might that look like?

  A proven or ready-made business system. Figuring out what to sell and how to efficiently source, produce, and sell it is a huge part of a business. If you buy a franchise, you’re essentially purchasing a business plan that works. All you have to do now is implement it in a way that meets the needs of your local market.

  Immediate brand recognition. Depending on the popularity of the franchise brand, your business can benefit immediately from name recognition. This alone can save you the time and capital you’d otherwise spend introducing your business and your product to potential customers.

  Marketing and ad campaigns. Some brands have enough recognition to create local word-of-mouth buzz; hence they don’t do much marketing or take out many ads. But some franchises, like McDonald’s (MCD), launch massive campaigns on a national scale, regardless of the popularity of their brand. Such costs can add up when you’re doing it on your own. So if your franchisor handles most of the costs in addition to providing guidance on local marketing strategies, you can consider it a real plus.

  Economies of scale. When you join a franchise network (depending on the franchise), you get to benefit from the network’s collective purchasing power, obtaining bulk goods and services from suppliers at a reduced cost. This is a key advantage that attracts many people to the franchise model; you get to plug into economies of scale that, if done on your own, could take a tremendous amount of time and money to build.

  Overall, buying a franchise gives you a boost in strategy and resources while reducing several risks typically associated with building a start-up from scratch. Still, there are risks you should consider.

  What are the risks of owning a franchise?Start-up and ongoing costs can be expensive. Some franchises come with high start-up costs. Plus, you’ll have to pay ongoing royalties or fees to maintain the franchise. This can rapidly eat up your cash. Sure, you can take out a small business loan. But there’s no guarantee your franchise will succeed.

  The franchisor’s rules can be constraining. If you’re the creative type who constantly develops new product ideas or improvements, the franchisor’s rules and restrictions may be too limiting. You can’t just tweak a product, make changes to your employees’ uniforms, or redesign your store without violating the terms of your licensing agreement. Remember: it’s your business, but it’s their brand.

  You take on the franchisor’s reputational risks. Let’s say your franchise is part of a nationally recognized brand. Unexpectedly, some scandalous news about the company triggers a controversy, sparking an immediate and harsh backlash. No matter how successful or well-liked your business may be at the local level, the reputational risks of the brand can hurt your business prospects. If you’re willing to benefit from a brand’s reputation, you must also be willing to assume the reputational risks that come with it.

  These are just a few of the pros and cons of becoming a franchisee. Consider each and every one before deciding whether franchising is right for you.

  The bottom lineDoes the thought of becoming a franchisee intrigue you? Do you have the capital, commitment, and cool demeanor to play by someone else’s rules in exchange for the right to use their patents, trademarks, and processes? Or would you rather develop your own business model, logo, and marketing plan in hopes of launching your own brand (and maybe becoming the franchisor someday)?

  If you’re going the franchisee route, make sure you choose the right franchise for your interests, personality, capital requirements, and location.

  References[PDF] Small Business Facts | advocacy.sba.gov

Comments
Welcome to zpostcode comments! Please keep conversations courteous and on-topic. To fosterproductive and respectful conversations, you may see comments from our Community Managers.
Sign up to post
Sort by
Show More Comments
Recommend >
apophenia
  apophenia psychology Actions Share Share Share to social media Facebook X URL https://www.britannica.com/topic/apophenia Share Share Share to social media Facebook X URL https://www.britannica.com/topic/apophenia Written by Kara Rogers Kara Rogers is the senior editor of biomedical sciences at Encyclopædia Britannica, where she oversees a range of content from medicine and genetics to microorganisms. She joined Britannica in 2006 and... Kara Rogers...
Joyce Meyer
  Joyce Meyer American televangelist, author, and speaker Actions Share Share Share to social media Facebook X URL https://www.britannica.com/biography/Joyce-Meyer Share Share Share to social media Facebook X URL https://www.britannica.com/biography/Joyce-Meyer Also known as: Pauline Joyce Hutchinson Written by Frannie Comstock Frannie Comstock is a writer based in Chicago. Frannie Comstock, Melissa Petruzzello Melissa Petruzzello is Assistant Managing Editor and covers a range...
Eight Elections That Changed History
  Eight Elections That Changed History Newsletter sign-up Actions Share Share Share to social media Facebook X URL https://www.britannica.com/topic/Eight-Elections-That-Changed-History Share Share Share to social media Facebook X URL https://www.britannica.com/topic/Eight-Elections-That-Changed-History Written by Tracy Grant Tracy Grant is editor-in-chief of Encyclopaedia Britannica. Tracy Grant Fact-checked by The Editors of Encyclopaedia Britannica Encyclopaedia Britannica's editors oversee subject areas in which they have extensive knowledge,...
Universal basic income: Pros and cons of free money for all
     If you’ve ever wondered what it’d be like to have some money coming in whether you have a job at the moment or not, you get the idea behind universal basic income (UBI). It’s a simple premise that could change lives, but implementing UBI is complex.   UBI is a social welfare program that provides residents of a city, state,...
Information Recommendation
list of notable computer viruses and malware
  list of notable computer viruses and malware Actions Share Share Share to social media Facebook X URL https://www.britannica.com/topic/list-of-notable-computer-viruses-and-malware Share Share Share to social media Facebook X URL https://www.britannica.com/topic/list-of-notable-computer-viruses-and-malware Written by Tara Ramanathan Assistant Technology Editor at Encyclopedia Britannica. Tara Ramanathan Fact-checked by The Editors of Encyclopaedia Britannica Encyclopaedia Britannica's editors oversee subject areas in which they have extensive knowledge, whether...
Bob Jones, Sr.
  Bob Jones, Sr. American evangelist Actions Share Share Share to social media Facebook X URL https://www.britannica.com/biography/Bob-Jones-Sr Share Share Share to social media Facebook X URL https://www.britannica.com/biography/Bob-Jones-Sr Also known as: Robert Reynolds Jones, Sr. Written by Nick Tabor Nick Tabor is a freelance journalist and the author of Africatown: America's Last Slave Ship and the Community It Created. Nick Tabor, Melissa...
Bob Jones University
  Bob Jones University university, Greenville, South Carolina, United States Actions Share Share Share to social media Facebook X URL https://www.britannica.com/topic/Bob-Jones-University Share Share Share to social media Facebook X URL https://www.britannica.com/topic/Bob-Jones-University Also known as: BJU Written by Nick Tabor Nick Tabor is a freelance journalist and the author of Africatown: America's Last Slave Ship and the Community It Created. Nick Tabor...
Federal Election Commission
  Federal Election Commission United States agency Actions Share Share Share to social media Facebook X URL https://www.britannica.com/topic/Federal-Election-Commission Share Share Share to social media Facebook X URL https://www.britannica.com/topic/Federal-Election-Commission Also known as: FEC Written by Frannie Comstock Frannie Comstock is a writer based in Chicago. Frannie Comstock Fact-checked by The Editors of Encyclopaedia Britannica Encyclopaedia Britannica's editors oversee subject areas in which...
Lilly Ledbetter
  Lilly Ledbetter American activist Actions Share Share Share to social media Facebook X URL https://www.britannica.com/biography/Lilly-Ledbetter Share Share Share to social media Facebook X URL https://www.britannica.com/biography/Lilly-Ledbetter Also known as: Lilly McDaniel Written by Fred Frommer Fred Frommer is a sports historian, author, and writer who has written for a host of national publications. Fred Frommer Fact-checked by The Editors of Encyclopaedia...
Hong Chau
  Hong Chau Vietnamese American actress Actions Share Share Share to social media Facebook X URL https://www.britannica.com/biography/Hong-Chau Share Share Share to social media Facebook X URL https://www.britannica.com/biography/Hong-Chau Written by Meg Matthias Meg Matthias is Senior Video Production Manager at Encyclopædia Britannica. Meg Matthias Fact-checked by The Editors of Encyclopaedia Britannica Encyclopaedia Britannica's editors oversee subject areas in which they have extensive...
Maya Rudolph
  Maya Rudolph American comedian and actress Actions Share Share Share to social media Facebook X URL https://www.britannica.com/biography/Maya-Rudolph Share Share Share to social media Facebook X URL https://www.britannica.com/biography/Maya-Rudolph Written by Meg Matthias Meg Matthias is Senior Video Production Manager at Encyclopædia Britannica. Meg Matthias Fact-checked by The Editors of Encyclopaedia Britannica Encyclopaedia Britannica's editors oversee subject areas in which they have...
Dawson’s Creek
  Dawson’s Creek American television series Actions Share Share Share to social media Facebook X URL https://www.britannica.com/topic/Dawsons-Creek Share Share Share to social media Facebook X URL https://www.britannica.com/topic/Dawsons-Creek Written by Kaz Weida Kaz Weida is a freelance writer and journalist, with an academic background in gender studies, philosophy, literature, and education. Kaz Weida Fact-checked by The Editors of Encyclopaedia Britannica Encyclopaedia Britannica's...