From fast-food chains to retail shops, franchisees play a crucial role in the success of franchise systems. Franchisees are individuals or entities that purchase the rights to operate a business under an established brand, following the franchisor’s proven business model and operational guidelines in exchange for fees and/or royalties. Franchises have already tested their systems, procedures and products, which cuts down on the trial and error independent startups often go through. Becoming a franchisee presents an opportunity to operate your own business while enjoying the advantages of a recognized brand.
Data shows that franchises generally have a higher success rate than independent businesses. According to industry reports, the statistics reveal that 92% of franchises remain in business after two years, and 85% are still operating after five years. On the other hand, independent businesses have a success rate of 80% after the first year, but only 50% survive five years, with two-thirds failing by the 10-year mark.With her previous experience as a franchisee of two different franchises and her perspective on franchise ownership, Poole College of Management Lecturer Jenn Woodhull-Smith explains the key points to consider when deciding to become a franchisee.
How involved does a franchisee need to be in the day-to-day operations of the business?
When considering becoming a franchisee, it’s important to understand the level of involvement the franchisor expects. Some franchises require heavy involvement, especially in the beginning, where you’re front and center, handling day-to-day operations, making sales and being the face of the business. In my experience owning a franchise called Fun4RaleighKids, it was crucial to be involved in sales and building relationships with local business owners and the community. You’re the one driving revenue, often without the luxury of hiring a full sales team, especially in the early stages. Other franchises, however, may offer a more passive role where you can hire people to handle the daily operations.
Additionally, consider how well you know the industry. If you have prior experience, you may feel more comfortable taking a step back once things are established. However, if you’re new to the industry, being hands-on might be beneficial to gain the necessary knowledge and skills.
If you’re not planning to run the business yourself, think about who will take the reins. Do you have a trusted partner or manager who can handle daily operations? Ensuring that you have the right person in place is crucial for maintaining the franchise’s success in your absence.
From my perspective, being present during the first year is critical. This is when you learn the ins and outs of the business and gain a deeper understanding of the operations. As things become more predictable, you can decide what roles to delegate and where your time adds the most value.
What should one consider when it comes to funding and evaluating startup costs?
When you’re considering different franchises, the franchisor will provide you with an estimate of the startup costs, often presented as a range. This estimate depends a lot on factors like the business location, equipment costs and hiring needs. Franchisors may also specify how much of those funds need to be unborrowed, meaning you’ll need to have some of the money saved up rather than relying entirely on loans. It’s important to understand these unborrowed fund requirements as part of your startup fees. Once you’re up and running, you’ll have ongoing costs for day-to-day operations, like rent, utilities, employee wages and restocking inventory.
The big question is: where will the money come from? Do you have enough personal capital to get started? Some people, like myself, become a franchisee with savings. Others may turn to loans — whether personal, small business, or through organizations like the Small Business Administration. But remember, taking on debt means you’ll have to pay it back, and it’s risky if you’re relying on credit cards.
On the other hand, you might explore equity investments, which could involve getting funds from angel investors, venture capitalists, or participating in an accelerator program. However, equity investments often come with the trade-off of giving up partial ownership of your business. So, you’ll need to decide: do you want to retain full ownership and owe people through debt, or are you willing to give up a share of your business in exchange for the funds you need? Or, you could wait until you’ve saved enough to fund the venture entirely on your own. Each option comes with its own risks and rewards, so it’s important to weigh them carefully.
There are also a variety of fees that come along with owning a franchise. The franchise fee is a one-time payment to the franchisor for the right to use their brand and business model. After that, you’ll usually pay ongoing royalties, which are a percentage of your gross sales. Many franchises also have a marketing fee that helps fund national or regional advertising efforts.
What can a franchisee expect in terms of revenue and profits?
It’s important to evaluate your revenue and profit potential as a franchisee and one good indicator is to examine what other franchisees are making in terms of average revenues and profits. These numbers can really vary depending on the brand and your location. It’s a good idea to ask about growth potential as well to set your expectations accordingly.
Typically, in the first year, many franchisees often see lower revenues because they’re just starting to build their customer base and covering initial costs. However, as they get more established and gain experience, it’s common for revenues and profits to grow in the following years. Understanding potential revenue helps you determine whether the business can support your lifestyle, pay off initial investments and provide a satisfactory return on investment. Aligning this with your personal financial goals ensures that your role as a franchisee not only meets your immediate financial needs but also contributes to your overall financial strategy, including savings, retirement and future investments.
What type of training does the franchisor offer?
It’s essential to look into the training and support offered by the franchisor. First, ask about what the training program entails. A comprehensive training program should cover everything from operational procedures and customer service to marketing strategies. It’s also good to know how long the training lasts — some franchises may offer a few days, while others could provide several weeks or months of training.
Another key question is whether you need to be fully trained before you can open your franchise. Many franchisors require you to complete training to ensure you’re well-prepared, but specifics can vary.
After opening, ongoing support is beneficial. Find out what kind of resources are available to you — this might include marketing assistance, regular check-ins from a support team, access to online training materials and help with troubleshooting any issues that arise.
What makes a franchisee successful?
The reality is, what you put in is what you get out. The more time you spend working on the business, the more likely you are to see results — especially in a franchise model with proven success. If you follow the established model, you should see the intended results. Familiarity with the industry is beneficial — it gives you an understanding of the market and how to navigate its challenges. Understanding your customer base is also crucial, as it allows you to tailor your approach to meet their needs. Beyond that, a strong commitment to the business makes a big difference. Franchisees who invest time and energy into their operations and maintain consistency are generally more likely to succeed.
Becoming a franchisee offers an exciting opportunity to own a business with the support and established reputation of a larger brand behind you. If you’re interested in building something with a proven model, a ready customer base and the resources to guide you, franchising could be an ideal route. With dedication, market insight and enthusiasm for your role, you can pave the way to a successful franchise journey.
If you’re considering becoming a franchisee or have any inquiries regarding the process, contact Jenn Woodhull-Smith via email at jwoodhu@ncsu.edu.
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