Franchising is a great way for new entrepreneurs to establish themselves as business owners. Even for seasoned investors, franchising allows them to grow their business portfolio to span across multiple industries and protect their investments. Learn how the franchise business model works with our comprehensive guide.
What Is a Franchise?
Good question! Essentially, a franchise is a licensing relationship. There are two main kinds of franchises:
- Business format franchises, where you use the franchisor’s trade name, provide their services, and receive training on how to execute their business model. Most franchise brands you’re aware of, including Lightspeed Restoration, are business format franchises.
- Product distribution franchises, where you distribute the franchisor’s products under their name. Gas stations and car dealerships are often product distribution franchises.
This concept is mutually beneficial for both the franchisee and the franchisor. Franchisees get direct access to a proven business model and are able to grow their network with like-minded entrepreneurs. Franchisors can expand their brands without spending a large amount of capital to open multiple locations themselves.
Understanding Franchise Roles and Responsibilities
When you’re awarded your franchise, the first thing you’ll do is sign your franchise agreement. The legal basis of your relationship with the franchisor, this document outlines franchisor vs. franchisee responsibilities. Since your franchise agreement is a contract, violating its terms can have serious consequences, including the loss of your franchise.
Every franchise agreement is a little different, but you can usually expect to find sections regarding:
- Initial training
- Ongoing support
- Initial and ongoing fees
- Term and grant
- Marketing
- Brand manual
- Development schedule
- Indemnification and disputes
- Termination
If you are not an attorney, it’s a good idea to have one look the agreement over before you sign.
Will I really be my own boss?
Franchising offers a great deal of freedom to business owners. You’ll have control over much of the day-to-day operations of your franchise, often determine where you work, and in time, set your own schedule. In exchange for providing you with this flexibility, the franchisor expects you to follow their systems and procedures to the letter. As long as you stay within this framework, you can tailor your franchise to your goals and values.
How Do Franchise Fees Work?
There are multiple different types of franchise fees. And while they may seem daunting to a new franchisee, all of these fees provide support from the franchisor that make business ownership a bit easier.
- Initial franchise fee: Contrary to popular belief, the initial franchise fee is not a royalty. It covers much more than that. This fee grants the franchisee the rights to use the franchisor's brand name, products, and services. It typically covers the cost of securing the franchise agreement and any additional expenses associated with getting a new location up and running, including franchise training and support.
- Royalty fees: These are ongoing payments made by a franchisee for the life of their agreement. Royalty fees are typically calculated as a percentage of the franchisee's gross sales and are usually paid on a regular basis – often monthly. For example, a franchise might charge a 6% royalty fee. So, if a franchisee has monthly sales of $100,000, they will pay $6,000 as the royalty fee. These fees compensate the franchisor for the continued use of their brand, products, and support services.
- Ad royalty fees: A subset of royalty fees, ad royalty fees are contributions made by franchisees to a collective advertising fund managed by the franchisor. Also calculated as a percentage of gross sales and paid regularly, these fees are used to finance regional or national marketing and promotional campaigns for the franchise brand. This ensures consistent advertising efforts across the entire system.
- Other fees: In addition to the above fees, franchisees might incur additional costs such as renewal fees, franchise training fees, and software or technology fees. These can vary widely based on the specific franchise system and might be related to periodic updates, ongoing training, or system upgrades essential for franchise operations.
How Does a Franchise Owner Make Money?
With multiple fee types to consider, you may be wondering, how does a franchise work in terms of profit? In other words, how does a franchise owner get paid? It's important to note that profit isn't guaranteed, and success depends on factors like location, management, and market demand. However, a reputable franchise brand should have resources to help you find the best site for your business so you can make the most of their opportunity.
To calculate your earnings from your business, subtract your operating expenses (like utilities and payroll), franchise fees, and any other business-related costs from your total revenue. The remaining amount is your salary.
When will I break even?
It’s hard to say. There are too many factors that go into when and whether you turn a profit, including the kind of franchise you open and the territory you open it in. The term of most franchise agreements is 5-10 years, which should allow most franchisees the chance to recoup. With reputable franchisors like Lightspeed Restoration, you’ll receive business coaching and goal setting assistance geared toward helping you meet KPIs. Lightspeed Restoration offers franchisees other benefits to help you succeed, including:
- IICRC-certification training for franchise owner and team members at no additional cost
- 24/7 in-house national call center support, at no cost to the franchise owner, to book your appointments
- Training on the ins-and-outs of working with insurance carriers, to streamline the water or fire damage claims process
- Loans to keep your cash flow going during catastrophic events (with no re-credit check!)
How Does a Franchise Work with Lightspeed Restoration?
Once you sign your franchise agreement, you are partnering with a leading water restoration franchise dedicated to your franchise success. All our franchisees receive hands-on, in-depth training inside our IICRC-approved flood house, provided by our team of industry professionals. We don’t require any previous experience – we will train and support you from day one. As a Lightspeed Restoration franchisee, our goal is for you to quickly become the trusted name your community calls when disaster strikes.
To learn more about our restoration franchise opportunity, inquire now. One of our franchise advisors will be in touch to discuss all of our franchise benefits.