How Does Franchising Work?

Key Takeaways:

• Franchises can be a strong investment option because they offer proven business models, higher success rates than independent startups, and built-in training and operational support.
• Home services franchises are especially attractive thanks to recession-resilient demand, steady year-round work, and growing needs for home maintenance, repairs, and improvements.
• With lower startup and operating costs, established brand recognition, and ongoing franchisor support, the right franchise investment can deliver scalable growth and long-term financial stability.

Franchising has become a popular business model in recent years, with many companies choosing to franchise their businesses. The franchise model has seen significant growth across different industries, enabling entrepreneurs to leverage established brands and expand their reach. In fact, there are more than 750,000 franchises in the United States employing more than 8 million people. The reason franchising has become so popular is because franchises provide a proven system for businesses to establish themselves quickly in a competitive marketplace.

Yet despite the growth in franchising, there is still some confusion around how franchising works and how everyday people can be a part of this growing industry. Read on to learn facts about franchising, including how it works and how entrepreneurs can tap into it.

How Does Franchising Work?

A franchise is a business model that allows businesses to expand their reach by selling trademark licenses to individuals or businesses who want to open and operate their own franchise locations under the franchisor’s brand name. Most commonly, a company (commonly known as the franchisor) licenses its brand name and operating methods to a person (the franchisee or franchise owner) who agrees to operate their business according to the terms of the franchise agreement. The franchise company sells the rights to use its brand and business model, and the franchise owner sells the franchise company's goods or services.

In other words, franchising is a business model where an individual establishes a locally owned and operated location of a larger, more established brand. The franchisor, in exchange for a fee and ongoing royalties, provides the franchise owner with many of the things they need to open and run their business - from the brand name and logo to marketing resources and day-to-day operational procedures. The franchisor's support typically includes comprehensive training and ongoing support for new franchise owners, helping them with system implementation, marketing, and customer service. The franchise agreement establishes a mutually beneficial relationship with the franchisor, allowing the franchise owner to use their systems and capitalize on their existing brand awareness.

Understanding the Purpose of Franchising

To be successful in a franchise system, it is important to first understand not only what franchising is, but what the purpose is for the franchise owner and franchisor.

For business owners, franchising works to provide a path to business ownership that offers support and industry knowledge that you may not receive when starting a company from scratch - which can contribute greatly to your chances of success. This is due to the proven business models and support provided by the franchisor, allowing franchise owners to become their own boss and operate their own businesses with greater confidence.

For the franchisor, licensing their brand and business model helps expand awareness and grow market share. The strength of franchising is found in numbers. For example:

1. The more services that are delivered under the same brand name, the greater the consumer awareness.
2. Greater brand recognition means that consumers are more likely to consider the brand when they have a need.
3. The more likely consumers are to use the brand for a needed service, the more market share is captured.

To continuously meet customer expectations, it is important for the franchisor to maintain a level of consistency when it comes to their services and brand name. They do this through consistent application of the same operating system, whether a franchise is located in Florida or Alaska. When each franchise location is following the operating system, customers know they can expect to receive the same quality and service, no matter which location they visit.

A clear growth plan is essential for both franchisors and franchise owners, as it outlines future expansion and development strategies, and business owners benefit from the franchise system by leveraging established support and reduced risk.

Hear from a few of Neighborly®’s franchise owners on the power of a franchise model:

Who Has Control in a Franchise?

One of the most common misconceptions about franchising is that the franchise owner is an employee and has no control over the business. The franchise owner is not an employee of the franchisor. The reality is that the franchise owner is an independent business owner who has control over their day-to-day operations.

However, the franchisor’s system will not cover all aspects of the business, so franchise owners have substantial flexibility and control in how they manage and operate their business. While the franchisor does outline specific rules for the franchise owner to follow, these rules apply to maintaining the integrity of the brand and business model that makes it successful in the first place. For example, the franchisor may require employee uniforms to ensure brand consistency and a cohesive presentation across all locations. In addition, the franchisor may provide training, guidance, and information on best practices. But the franchise owner is solely responsible for hiring, compensation, scheduling, and setting employment standards and practices.

The Franchise Agreement: Your Legal Foundation

At the heart of every successful franchise business model is the franchise agreement—a comprehensive, legally binding contract that sets the stage for the entire franchise relationship. This crucial document outlines the rights and responsibilities of both the franchisor and the franchise owner, serving as the foundation for how the franchise business will operate.

The franchise disclosure document (formerly known as the uniform franchise offering circular or uniform franchise) is a critical disclosure document regulated by the Federal Trade Commission under the franchise rule. This document provides potential franchise owners with essential information about the franchise opportunity, including investment risks, fees, and legal obligations, ensuring transparency and compliance with franchise law.

Beyond the financial aspects, the franchise agreement covers important elements such as the length of the contract, the use of the franchisor’s trademarks and business model, and the level of support and training provided. It also sets guidelines for day-to-day operations, marketing requirements, and standards that help maintain consistency across all franchise businesses.

Because the franchise agreement governs every aspect of the franchise relationship, it’s vital for prospective franchise owners to review it carefully—ideally with the help of a franchise attorney—before signing. This ensures that you fully understand your obligations and the protections in place, setting you up for a successful business journey within the franchise system.

The Rewards of Franchise Ownership: Explore Franchising Opportunities with Neighborly

The real bottom line is that franchising can be a great way for many prospective business owners or investors to start or scale a business while reducing some of the risks inherent in getting started. However, it is important to understand the startup costs, franchise fees, and initial investment required, as well as the need for sufficient money, liquid assets, and net worth to qualify for and sustain a franchise. With the right franchisor they can help guide you in understanding the ins and outs of franchising and well as support you in your journey of franchise ownership.

This is certainly true at Neighborly®. The Neighborly family of franchise brands offer a plethora of training, support, and opportunities for those who want to explore entrepreneurship through franchising. If you’d like to learn more about how franchising works or whether Neighborly could be the right fit for you, start by downloading the free franchise ownership guide or reach out to us today!