From fast-food chains and retail stores to the home-services industry, franchising is one way you can start and grow a business with a broad network and established trademark. However, there are many things you should know before entering into a franchise agreement.
Read below for a quick guide on how this type of business works plus nine real-world franchise examples.
How does a franchise business work?
In a franchise arrangement, a business owner or "franchisor" licenses some rights to another party or "franchisee," including the right to use their trade name, likeness, and business model to produce and market a good or service.
The two parties then enter into an agreement. Typically, the franchisor will provide training, equipment, and access to intellectual property rights while the franchisee will pay an initial fee and dividends from later sales. Among the many franchise businesses out there, there are three types of franchise options to consider: product, manufacturing, and business format.
In a product franchise arrangement, manufacturers give retailers the right to sell products using their name, brand, and trademark. In addition to paying a franchise fee, franchisees may purchase products for distribution.
Similar to product franchises, in a manufacturing franchise, the franchisor gives a manufacturer the license to produce and sell goods using their brand name, trademark, and brand likeness. This is like a product franchise, but the franchisor can produce the items as well as sell them.
Business format franchises
Business format franchises are what you usually hear about. The franchisor supplies an established business and assists independent business owners in launching and managing their business.
In this type of franchising agreement, the franchisee often pays royalty fees and purchases equipment and supplies from the franchisor. Since this is by far the most common type of franchise opportunity, we’ll focus on business format franchise examples to give you a better understanding of how they work.
Since the early 1950s, McDonald's has led the way in franchising. The vast majority of their restaurants are franchisee-owned. The McDonald's franchise not only comes with a prominent name but provides franchise owners with hands-on training and resources to run a successful restaurant. Franchisees should expect to commit 12-18 months to complete the onboarding training as well as pay an initial investment of $45,000 and a total investment of $1,008,000-$2,214,080. Suffice it to say, this is not one of your cheaper franchises.
Founded in 1967, ServPro has grown into a disaster restoration franchise that provides cleaning and repair stores for commercial and residential properties. They specialize in repairing damage from water and fire disasters. Applicants pay a $50,000 franchise fee, with a starting investment around $160,075-$213,950. You can also expect royalty fees between 3% and 10%.
Franchisees may be eligible to receive financing support through ServPro's in-house program, covering franchise fees, equipment, and inventory. They're currently seeking new partnerships in the U.S. and throughout Canada.
3. Pizza Hut
Pizza Hut is a part of the Yum! Brands, Inc., the parent company to popular fast-food restaurants like Taco Bell and KFC. With an extensive network of brands and businesses, Pizza Hut offers a unique point of entry and support. Franchisees also benefit from performance improvement programs and a paid 12-16-week mandated training in a test restaurant. The initial franchise fee is $25,000.
4. H&R Block
H&R Block has been leading the way in tax preparation since 1955. This franchise option is excellent for those seeking an opportunity with relatively affordable startup costs. Franchisees may also receive financial assistance through a franchise equity line of credit and go through an extensive training program. Applicants must pay a franchise fee of $2,500-$2,500 and a starting investment of $31,557-$149,398, which includes the costs of a new tax office, equipment, and furniture. Franchisees may also consider purchasing a current H&R Block location instead of opening a new one.
MaidPro prides itself on being a unique franchising opportunity. As a home cleaning service, it's not the first franchise option you might think of, but their approach to franchising sets them apart. With a promise of steady recurring revenue, a flexible schedule, and affordable startup costs, MaidPro is the ideal option for candidates who interested in this industry. The franchise fee is $20,000, with the overall investment totaling up to $203,000. Veterans receive a $3,000 discount off their franchise fee and may also be eligible for a monthly credit.
6. The Grounds Guys
The Grounds Guys is a lawn care franchise with over 180 locations in North America. Franchisees benefit from the extensive network of the parent company, Neighborly, as well as the comprehensive franchise process, which combines a well-researched marketing strategy, hands-on training and support, and industry-leading lawn care services.
Franchisees may serve both residential and commercial properties and provide a range of services. These include everything from lawn and bed care, pest and weed control, and fertilization to outdoor lighting, irrigation, artificial turf, and gutter maintenance. While applicants receive training and support, this franchise opportunity is best suited for someone who has a home-service background or landscaping experience. Franchise fees are $31,026-$72,799 with a total investment of $81,220-$200,070.
7-Eleven’s franchise format provides independent business owners with multiple paths to success. In turn, franchisees receive a store, equipment, training, and mentorship. A unique feature with this franchise is their gross profit split, where both parties share profits instead of royalties. This approach ensures equal investment in the bottom line. The franchise fee varies by store, anywhere from $50,000-$750,000, but interested applicants should be prepared to pay a downpayment for store supplies, business licenses, insurance, permits, and similar expenses.
8. Hilton Hotel and Resorts
Hilton Hotels & Resorts has reported billions of dollars in revenue since going public in 2013, and franchisees can get a slice of that by opening their own hotel. Franchising has been key to the company’s growth with 40% of locations franchised. The franchise fee is a hefty $75,000 with overall investment totaling $29,162,700-$111,963,150. You can expect an ongoing royalty of 5% and an advertising royalty of 4%.
9. Garage Experts
Ranked as a top 500 franchising company by Entrepreneur Magazine, Garage Experts specializes in the installation of floor epoxy coatings, storage cabinets, and garage slat-wall. They guarantee a $750,000 return from your investment within the first three years of operations. Unlike similar options, Garage Experts' long-term support through their coaching program increases the franchisee's chances for success. Interested applicants must pay an initial fee of $15,000 with royalties starting at $500.
Advantages and Disadvantages of a Franchise Business
A franchise business provides franchisees with a reputable brand and network as well as access to business systems, training, and trade secrets. This approach not only saves you money but time, as you'll skip the testing phase and launch your business using established techniques.
You may also receive exclusive rights to sell the products and services within a specific area. All of which positions business owners for success that otherwise may take years to reach.
While there are many advantages to opening a franchise, there are also limitations. Franchisees must adhere to specific policies and requirements, which involves paying ongoing royalty and other regular fees. Business owners won't have much freedom to change the business model, branding guidelines, or company-wide practices.
As with any new business venture, there are risks involved. Interested franchisees should thoroughly research a potential franchise business opportunity to ensure you pick the best option given your region, experience, and investment income.
Thinking of Franchising? Consider Your Next Steps
Starting a business can be tough, and it may seem like it takes you forever to earn a profit and receive national brand recognition. If you’re interested in jumping into the world of franchising, read our recent article about how to start a franchise. You’ll get practical tips for your next steps on how to sustain profitability over the long term.
If these startup costs sound a little too pricey, consider an alternative to franchising where you get training, resources, and a proven business model but build and shape your own business. Main Street has no royalty fees or franchise investment. Here’s how it works.