With over 76,000 franchises across the country, franchising is a business model that is widely successful in Canada and throughout the world. A franchise can provide immediate benefits to a first-time small business owner that they would otherwise not receive.
The simplest way to explain franchising is to compare it to following a recipe from a cookbook. In this case, however, these recipes are extra special. These recipes are limited to an exclusive few, are beloved by an established following, and will even provide help directly from the chef that made them in the first place!
How does franchising work? Follow this guide to learn all about the franchise model, and how it can benefit you.
What is a franchise?
A franchise is a type of business under which third-party operators are given permission to use a business’s name, branding, and model in exchange for fees or royalties. In this agreement, the third-party operators will receive ongoing support and advice in return for adhering to the business’ established franchise guidelines and paying fees.
Who is involved in a franchise relationship?
There are two sides in a franchise relationship:
- Franchise owners (franchisees): the small business owner/entrepreneurs that operates the franchise location
- Parent company/corporate brands (franchisor): the company that allows entrepreneurs to own and operate one or more of the brand’s locations
The franchise model is based on an agreement between these two parties. Under this contract, both sides agree to specific terms that they are required to fulfill:
The franchisee owns and operates their own location using the franchisor’s brand name, logo, products, services and other assets. Meanwhile, the franchisor retains ownership of their brand and all associated intellectual property, and provides guidance and support to each of its franchisees.
How do you become a franchise owner?
Franchises provide many benefits to new franchise owners, but not everyone has the chance to join this exclusive group.
Becoming a franchise owner requires an application process through which applicants will be judged on their suitability and ability to secure funding. Throughout the process, franchisees will work with the franchisor’s development team to determine costs and financing options.
Once a franchisee is approved, the two parties then work together to get the location operational. To facilitate this, the franchisee pays an initial fee that varies with each franchise while the corporate brand helps find a location, negotiate a lease, and provide other support to help the franchisee get the location operational.
How much does a franchise location cost?
As part of the agreement, a franchisee is required to pay fees that come in two forms: start-up costs, and ongoing monthly royalties.
Start-up costs will vary greatly depending on the franchise, ranging from $10,000 to well over $1 million. Similarly, each franchise has its own expectations of what their franchisees should pay in ongoing fees to the parent company. Typically calculated as a percentage of gross sales, these can range from 5 percent to as much as 50 percent for high-performing franchises.
What do you have to do when you join a franchise?
An important part of this process is the franchise agreement, an important document that clearly defines the relationship between the franchisee and the franchisor. This contract spells out all the responsibilities of each party, and explains what each side is expected to do.
This means that the franchisee agrees to adhere to the franchise’s guidelines for branding. In addition to offering brand-only products and services, the franchisee agrees to parent company rules on appearances and marketing. Guidelines can also limit the sources from which a franchisee can purchase products or supplies for their business, and include fees associated with franchising, royalties, and advertising.
These rules can become very strong and detailed according to the franchise. As well, franchisees may face penalties if they don’t comply with brand guidelines.
What is it like to work with a franchisor?
Although prospects face heavy responsibilities when becoming a franchise owner, they also stand to gain a lot. That’s because the relationship between a franchisee and a franchisor is one where each side benefits the other. As a symbiotic relationship, both sides cooperate to bring mutual gain for everyone.
Each side does their part. A franchisor is responsible for supporting their franchisees by providing product development, marketing and ongoing training. On the other hand, a franchisee is responsible for paying a percentage of their monthly sales; this helps pay for franchisor support, thereby creating an ongoing dynamic that leads to sustained growth.
As such, this relationship provides benefits to both sides:
- The franchisee gets to run their own business with the support of a strong brand behind them.
- The franchisor gets to expand their footprint and grow profits without having to take on associated costs.
What type of support can a franchise owner expect from a franchisor?
Working with a franchisor is a lot like having your own built-in support network. Given that other franchisees have gone through their franchising process before, franchise owners have the benefit of relying on other people that have experienced similar problems as you. With this support, franchise owners will know how to stay clear of common franchise pitfalls.
Franchise support can include things like real estate development, construction, design, and eventually operations, training, and advertising.
Each franchise is different in the support they give, but are the same when it comes to the benefits of having successful franchise locations.
How do I know which franchise to join?
Joining a franchise is a complicated process that takes time and effort. You’ll need to perform a lot of research to find out which franchise is right for you.
Be sure to ask questions like:
- What’s the market like for this franchise?
- Is this franchise reputable? Will it be profitable?
- What are the laws governing franchising for my area?
Are you interested in operating your own restaurant or bar? Are you looking to join a strong and established brand with 70+ locations across Canada?
St. Louis Bar & Grill is expanding, and we need talented people that are passionate about the service industry to help us achieve our goals. Check our website to find out our available opportunities!