How Does Franchising Work?

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There’s a lot of pressure on businesses to show evidence of a commitment to their communities and the environment. Companies worldwide work hard to meet these growing demands.

For those looking to start up their own business, it can take time to tick these boxes while simultaneously making money.

Starting a business can be one of the most complex and financially challenging decisions, but the rewards can be phenomenal. Entrepreneurs should consider all the opportunities available before starting a new business.

Because of this, franchising is an increasingly popular solution: an ‘out of the box’ business with community and environmental measures in place.

A franchise is when a company (the franchisor) has given someone else (the franchisee) the right or licence to market their products and services in a specific location. Find out more about what a franchise is.

In this article, we’re going to look at how a franchise makes money, both for the franchisee and the franchisor.

How Does Franchising Work?

How do Franchises Work to Make Money

Buying into a franchise is an excellent way of getting into your own business. Without the high costs and pressures, franchising makes business easy.

This business model offers franchisees the opportunity to tap into a tried and tested company and, for established business owners, the opportunity to expand quickly with a minimum outlay of money and effort.

These days, there are a vast number of franchise opportunities in every industry, from fast food to essential care, and in the UK, the franchise sector is worth a whopping £17 billion. As well as being lucrative, the franchise business model is considered recession-proof since it tends to deal in low-cost, everyday purchases. Despite 2020’s global pandemic, franchises thrived.  

How franchisors make money

Franchising a Business

Once a business is established and has a proven customer base, the natural desire is to expand. While progressing a business can be fruitful, it can also be expensive and complicated – particularly when trying to break into international territories.

For business owners, the benefit of franchising is that it allows their brand to multiply without the hassle and expense often associated with doing so. Franchising involves allowing individuals to buy into the business to increase the brand’s reach.

For example, a successful hairdressing salon owner in London might offer a franchise opportunity in Manchester. This would involve an individual setting up a new salon in Manchester with the same branding, products and ethics of the original business. An excellent example of this would be Headmasters, which now has 55 salons across the UK.

How Franchisors Make Money

Another advantage of franchising a business is that it offers new ways to generate money with your existing business. Not only does it allow a company to expand into new territories and expose its brand to new customers, but it also allows it to make money directly from franchisees wanting to buy into a business’s existing success.

For the business owner, franchising can be highly lucrative. Here’s how:

Buy-in Fee

When franchising a brand, the business owner will usually charge an initial buy-in fee which the franchisee must pay when signing the franchise contract. This fee will vary from brand to brand: buy-in fees can range from a couple of hundred pounds to several hundred thousand.

For example, the buy-in fee for a Headmasters franchise is £40,000, whereas a Mindspan franchise costs just £1,495.

Start-up Fee

As well as the rights to use the logo and branding, the franchisor will often provide several start-up services, which might include:

  • Training – This helps a franchisee understand a business offering for the franchisee to sell the business’s products or services effectively. Whether learning software for a Computer, Tech & Online Franchise or understanding the cleaning methods involved when operating a cleaning franchise – a franchisor may charge a fee to provide this training.
  • Products – A franchisor can sell its products to the franchisee to purchase and use. This will protect the franchisor from losing stock when franchising its business.
  • Equipment – Depending on the industry of the franchise opportunity, it may require the use of specialised equipment. A franchisor may require payment to provide the equipment to the franchisee.
  • Uniforms – Depending on the brand, uniforms may be required and part of the start-up fee. Examples of large franchises that use uniforms across their franchises include Costa Coffee.
  • Support – One of the benefits for a franchisee is the ability to utilise an existing brand and business model to start a new business venture. This support comes in different forms and, sometimes, can require a lot of time from a franchisor, so they may want to charge for this support as part of a start-up fee.

The franchisee will pay for these services with what is known as a start-up package fee., For Headmasters, the initial investment was  £200,000, including the start-up and buy-in fees.

Buy-in fees can often be less of an investment than starting a business from scratch. However, the entrepreneur should consider the decision and financial investment in detail.

You can choose from the investment cost using our franchise directory today.

Royalty Fees

Once a franchisee is up and running, they will be required to pay royalty fees to the franchisor. A royalty fee is an ongoing fee that a franchisee pays the franchisor. This fee could be paid weekly, monthly, or quarterly, depending on the agreement between the two involved.

These fees are commonly paid monthly and, in most cases, will be calculated based on a percentage of takings from the franchisee’s business.

Add on Fees

In some cases, a franchisor will charge additional fees to cover ad hoc items such as

  • Advertising – This is where a business or organisation communicates their products or services to potential customers through paid opportunities. It is one of the most effective ways to promote brand awareness.
  • Manufacturing – The process of creating a product. This involves costs for which a franchisor may require a franchisee to pay additional fees.
  • Ingredients – Certain industries, such as catering and food franchises, may require ingredients as part of their business which sometimes is charged by a franchisor.

For a franchisor, the buy-in and start-up fees, coupled with ongoing royalty fees, can provide a significant income; mainly when multiple franchises come into play.

A franchisor only makes money when the franchisee does. As such, it’s imperative to offer comprehensive training and support to ensure that the franchisee is successful.

How franchisees make money

How Franchisees Make Money

An entrepreneur has a lot to consider before buying a franchise. There’s no doubt that a franchisee will often be required to make a significant investment when purchasing into a franchise. The franchisee must pay this investment back to a bank or financial organisation.

While this is very much the case, the critical word here is ‘investment’ as significant income can come from a franchise business. When buying into a franchise, the franchisee will pay a lump sum of cash in the form of buy-in and start-up fees. These fees give the franchisee access to the company’s logo, branding, and all of the products, equipment, and support they need to get started.

For the franchisee, franchising can be highly lucrative. Here’s how:

Making Sales

Once a franchisee has their business up and running, they can take advantage of the brand’s established reputation and ongoing promotion, advertising, and support, making attracting customers much easier than it would be when going it alone.

The franchisee will make money through profits gained through sales. Although the franchisee will pay a percentage of this to the franchisor through royalty fees, the successful franchisee can make significant money by selling the brand’s products or services.

Of course,  the more sales the franchisee makes the more income. A franchisee can expect to work with the franchisor to ensure adequate investment in promotion and advertising.

Adding Franchises

When a franchisee has achieved success with their business and has proven their commitment to the brand, the franchisor will often encourage them to expand by buying other franchises.

Franchisors will always value hard-working, successful franchisees and offer incentives such as discounts to make it easier for the franchisee to expand. This is an excellent opportunity for the franchisee to maximise their profits and gain an increased market share within their community.

This expansion gives the franchisee additional financial freedom and the chance to build a nest egg for retirement.

In Conclusion: Tackle Franchises Today

The franchise industry continues to gain popularity, not just among ordinary folk. Many celebrities have tapped into this money-spinning industry, including Magic Johnson, Shaquille O’Neal and Chris Brown, who owns 14 Burger King restaurant franchises.

As with any business, there are no guarantees for a franchise’s success. Any business requires an investment of money, time,  and hard work. This works both ways:

For the franchisor – Ensuring your business is well established is vital before you even think about franchising your business. To make money from your franchisees,  arm them with the tools they need to succeed – offering plenty of training and support to help them get started.

For the franchisee – Investing in a franchise ticket isn’t buying a one-way ticket to the easy street; you’ll need to be prepared to put in long hours and a lot of hard work to get your business off the ground, including a focus on promoting your business.

What does Franchising offer me?

Are you on the hunt for a new business opportunity and want to learn more about the benefits of franchising or buying a franchise? Check out Franchise Local’s expert franchising advice and tips today.

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