What is Franchising? (It's Not Just McDonald's) - 3 Business Models Explained

This post is adapted from Episode 9 of The Franchise Champion Show. Listen to the full episode on Apple Podcasts, Spotify, or YouTube.

Today we're getting down to the fundamentals. We're going to answer the question: What is franchising?

I think this will be useful for anyone interested in potentially becoming a franchisee or buying a franchise, or for those who already have an independent business and are thinking about how to expand—is franchising the right route for me?

So let's dive in.

How Franchises Begin

A franchised company is one that used to be an independent company. At one time there was just one location—one business that was grown from nothing. Someone started it, might have been out of a garage, and slowly over time it just grew and grew and became profitable. Someone made money at it.

After some period of time, this person said, "Well, I've got this business. It's doing really well. People love it. And I would love to expand this. I want to grow this thing."

Now, why would I want to do that? Obviously, if this were my company, hey, maybe I want to make more money, right? But I really believe in the brand, and I want to grow it and serve more people. Ideally, that's the situation. Hopefully it's not just about the money, but certainly money's going to be a part of it.

Typically, people have a concept they're just on fire about, and they're like, "Wow, I could really see this thing going nationwide or maybe all across the world." Wouldn't that be amazing to take this thing that I built and spread it like wildfire?

So the question is: How do I grow this thing? What are the different options?

We're going to go through three different ways of growing the brand.

Three Ways to Expand Your Brand

Option 1: Remain Independent

The first option is to remain independent. I have this brand and I really care about maintaining control over it, and I want to do it all myself. That's the independent route. I'm going to stay independent.

Maybe it's working well in my city right here, and I could see this working perfectly in the neighboring city. I could have another location, say, five miles away or ten miles away. So I'm going to take what I've learned here, build out my own systems and processes, and then replicate that in another location.

Well, that could work really well, especially if it's nearby. And if I have things in place for the first location—let's say I have my management in place and it's generally running on its own pretty well—I can take what I've learned here and start another location.

Again, it's a lot easier if it's pretty close to me and I'm the one that can start it, because of all the things I've learned. I know what I'm doing. I can apply those learnings. I'm sure I failed at some things, but I've learned from this first one and I'm now going to apply that to the second. And hey, maybe a third, right? Why not build a third one? Maybe it's another ten miles away. I can do it again.

Now, each of these locations clearly is going to take time to build out. It's going to take money, especially if there's any kind of retail component to this—a brick-and-mortar component where I have to build out a store. So that's going to cost money.

But it is certainly a way for me to grow and scale. Now you can see, if it's just me doing this, it's going to take time to do. I could hire people. I could hire a manager or someone else to try opening a location. But if I hired someone that wasn't being paid a lot, are they going to treat that opening of a brand new business the same as I would do? Probably not.

So I'd either have to do it myself or I'd have to pay someone a lot more money—make it a really good salary so that they care about it. Or maybe they need to have some equity. Maybe I have to give up some of my equity or some profit sharing or something like that, so it's worth it to them to spend the effort to open this brand new business for me.

With that model, this kind of growing independently, you basically have a lot more control over everything, and you have to do everything. Site selection, build-out, hiring, managing—all those sorts of things you're doing yourself. And of course, anything related to the brand—the marketing, sales, all these other things—you're doing all of these things yourself or with the team that you build.

So you have a lot more control, but I'd say it's a pretty high cost to do that, especially if you're having to build out every single location. It's going to take a lot of money potentially to do that. And then if you think about trying to do that on a big scale—like outside of your hour commute, trying to do that in other areas of the state and other states and other places across the country or beyond—that now is going to cost a lot of money and take a lot of time to do.

Example: In-N-Out Burger

A good example of this, of a successful independent business, is In-N-Out. If you know them, you're on the West Coast or one of the places lucky enough to have them in your area. I love In-N-Out, by the way. Double-Double animal style, of course, is my go-to. And the fries—oh my gosh! I know the fries can be hit or miss with people. Some people say they're too soggy. But for me, when you put a potato in the machine and you pull it down and the potato comes out into fry pieces, and then they put that directly into the fryer—to me it's just so natural, so appealing, and it tastes great to me. I don't care if they're a little limp. That's all right!

But I digress. With In-N-Out, they are a privately held company. It started in 1948, I believe, and they now have around 424 locations. I'm not sure how many states that's in—maybe around six states, maybe seven or eight, somewhere in that area.

So for that amount of time to have 400-plus stores, it's not that many stores compared to other franchises. But they've held—they have complete control over every single one of their stores. And there are reasons that they have for wanting to build it out that way. Control is a big part of it.

I know quality, for example—they want to be able to control the quality. And I believe logistics have another big part of this, as well as where they source the components for their products. So the food, where they source the hamburgers, the hamburger meat and all the produce and the potatoes and all that—they want to have really, really strict control over where those come from so that things come in fresh and not frozen.

So that makes sense that they'd want to maintain that as a private company and not a franchise. Although I wish there were some available in my area in Seattle. But that's okay—it makes traveling to other locations, like in California and Arizona, more exciting because I get to go visit In-N-Out!

Option 2: Dealership Model

The second method is a dealership. Most people have heard of a car dealership, and there are other types of dealerships that you may not have known are dealerships.

The model is essentially: the first company that started—that was independent—they have a product. Let's say they provide doors or windows that are custom. Let's say they have basically a manufacturing facility. And instead of opening shops to sell their product—you know, they have a shop in their own territory, which they probably started with because they're manufacturing their own product—they're like, "Hey, we want to open a lot of stores that could sell this product."

Instead of opening their own stores and keeping it private and independent, they decide to open a dealership, or it's a dealership model in which they will sell their product to another business. And that business could use the same name as this first company to sell it under their brand, or they could just have whatever name—Joe's Door and Window Company—and they could sell the product of the first company through them.

They'll get training and they'll get product support and all those other things from the dealership. But there's a lot less control that goes along with this. They could sell other products in addition to doors and windows.

Example: Home Story Doors

I'm going to use an example with a company called Home Story Doors. They sell doors and windows, and most of them—most of the dealers—are going under this brand of Home Story. They'll buy product from that main company and then they'll resell it under their business. Again, it could be under the same name brand, or sometimes they'll do it under their own brand name or their own company name—Joe's Doors and Windows.

And again, they're doing this—they're getting this product training, marketing support, and other things. But typically there's no royalties. So that's the advantage here—they're not paying these ongoing royalties.

In some cases, the company that's selling the product—the dealer, the dealership—could have products that are private labeled. So maybe they said, "You know what? I want to create kind of my independent business, which is a dealership." They will buy the product from the main company, but then they'll have the main company put their logo on it. So they could say, "Hey, this is Joe's Doors and Windows. This is my Joe's Doors and Window product."

So that's a way for them to, again, sell the product, make it look like it's their own, but really it's from another company—they're just putting their name on it.

So again, the advantage of this for that first company that actually manufactures this product is that they're able to sell it to grow and scale beyond their local location. They can sell it all across the country, all across the world or wherever. But there's a lot less control. There's less cost than if they were to open all these stores themselves, of course. And they can do it in a shorter timeframe as far as scaling, because they can find other people to get things up and running on their own and then simply sell their product basically at wholesale to these dealers, and then the dealers resell it at a retail cost.

Option 3: The Franchise Model

Now we'll talk about the franchise model.

Most people think of McDonald's when they think of franchising, and rightly so, because you see them all over the place. Every single city, you're driving on any kind of Main Street, and within 5 or 10 minutes you see a McDonald's. So it's very natural for people to think about McDonald's.

There are lots of other types of franchises, which we'll get to. But essentially, the franchise model is for aspiring entrepreneurs—business owners, aspiring business owners—that want to get into business. And they have an opportunity to license this system from the franchisor.

Understanding the Terms

In franchising, a franchisor is the company that started this, created this business model, created this system, and they are the ones that are licensing their model and all of the things that come with it to franchisees.

So if you hear the word "franchisor" (with "-or" at the end), it stands for the franchise company. If you hear the word "franchisee" (with "-ee" at the end), it stands for the person who purchases the license and gets to use this business model and start it up in their own location.

How the Franchise Model Works

In the franchise model, they are getting people that are invested in the brand to scale it with their money. And so this is one thing that makes franchising very different than, let's say, an independent location—because an independent company is using their own money to start up every single location.

Whereas in a franchise system, the person who's buying the license is not only paying a fee to license the business model and all the things that come with it, but they're also using their own money to build out the store, to pay for marketing, and all of those things that are required to invest in a business.

What Franchisees Get

So in exchange for the franchise fee and ongoing royalties, what a franchisee is getting in return is:

• This business model
• All the systems and processes that go along with it
• The branding
• The support for things like site selection and then the build-out
• Opening day support
• All the training for hiring people, for managing people
• Marketing and sales and operations

They're basically getting a playbook on how to do all these things and the support that goes with it.

And with this ongoing royalty, they're also getting ongoing support as well as updates along the way. A franchise business typically is not static. Over time, just like any independent business would want to grow within themselves and adapt to changes in the market and changes in consumer demands and things of that nature, same with the franchisors. When opportunities open up, they could provide new products, create new product offerings, new services, as well as marketing materials and other things to accommodate and grow with the business over time. So that's a beautiful thing.

The Power of Community

Also, one of the really cool things I think about a franchise system is that you also have this community of other franchise owners that are available to you. So as you need support, you don't just have to rely on the franchisor, but you can get it from all these other people that are doing essentially the exact same thing as you, except in different markets.

I think that's a really powerful tool, because you're going to have some people that have been doing this for several years more than you—could be decades longer than you. And some that just started a year ago. If you're just getting started, they were in your shoes a year ago, and usually they're more than happy to help you out and provide some guidance.

And then of course, as you become more experienced, you're able to help the people that have started after you, which is really cool—to give back.

Scale Comparison: In-N-Out vs. McDonald's

So back to the McDonald's example. I mentioned In-N-Out was a little over 400 stores nationwide. McDonald's has over 44,000 locations worldwide. In the US, that's closer to 13,500, but that's a lot of stores. It's pretty amazing.

With this expansion, the ability to expand, they're basically able to have less control than an independent store, but more control than a dealership. It's going to cost less than an independent store, but it will cost more than a dealership. It's really in between being the dealership and the independent.

Same thing with the time frame. They're going to be able to scale it faster than an independent, but maybe not as much as a dealership.

My Personal Experience: From Dealership to Franchise

By the way, the franchise that I was a part of for 14 years was a dealership model before it turned into a franchise. It had been called Shelf Conversions before, and it was around for a few years before they decided to change it to a franchise model.

So why did they do that? Well, they wanted to have more control over how the brand is represented.

As I mentioned before, with the dealership model, you really can't control what that business is doing. You can provide support and the training and all that stuff, but at the end of the day, they're not really legally bound to do everything in the exact way that you want them to do it. Because they have the ability to use your product, but also sell other companies' products as well.

And so when ShelfGenie changed over to the franchise model, there was a lot more control. They could tell you, "Hey, we need you to spend at least a certain amount of money on marketing every month. We want you attending our annual conventions," and this and that. And all for good reasons, of course, because they wanted the franchise owners to succeed.

And they knew that left to their own devices, not everyone is going to follow what you suggest. But in a franchise system, if you're really requiring that everyone follow the model, then there's probably going to be more people that follow it and therefore more people that are successful. At least that's the idea.

Franchise Industry Regulation

The franchise industry is regulated by the Franchise Trade Commission, the FTC. And that's a good thing. This industry is regulated so that it's protecting the consumers—the people that are purchasing the franchise licenses—to make sure that there's a certain amount of information that's available to those people so that they understand what they're getting into.

They know the history of the leadership team, the founders. They can see how much it's going to cost to start, what the ongoing fees are, maybe some information on financial performance, and all these other things.

We'll talk about the Franchise Disclosure Document in another episode. But essentially, they're trying to even the playing field between franchisors so that they're providing some amount of information to the consumers, and then consumers can make an educated decision on whether or not they want to buy that franchise license.

Franchising Beyond Food

By the way, franchising is a lot more than just food.

Again, everyone thinks of McDonald's when they think of franchising, and I think that's fair because they're all over the place. But food-based franchises represent only about a third of franchises in the United States. The rest of them really span just about every industry.

That can be:

• Automotive
• Business to business
• Children's services
• Health and wellness
• Home services
• Lifestyle and entertainment
• Pet services
• Real estate
• Consumer goods
• Senior care
• And more

There's so many things. It could be a tire shop, a kids' soccer camp, house cleaning, house painting, pet waste removal, and even biohazard cleanup is a franchise.

Which Franchise Is Right for You?

So which franchise is right for you? Well, it depends. There's really not a simple answer to that.

The questions that I would ask are:

• What are your skill sets?
• What are your interests?
• What are your income goals?
• What are your lifestyle goals?
• What kind of investment level are you able to make?

It really is an individualized thing as far as what the right franchise is.

Working with a Franchise Coach

Working with a franchise coach, such as myself, is smart—especially working with someone that has experience, someone who's been through this process.

Before I bought my first franchise business, I went through this exact same process. I worked with a coach, and it was a really interesting process. I went through a really thorough interview, and I was presented options that I had no idea could have been franchise businesses.

I went through and I explored each one and then found one that really meshed with me. And I can tell you, it was not the first one that was on my list. It was the last one on my list, actually. But after going through the process and working with the coach and talking to owners and all those things, I figured out which one was the best one for me. And I'm glad I did.

Fourteen years later, I really enjoyed what I did, was the top performer in my system, and eventually sold it for a really nice exit.

So I encourage you—work with a coach, whether it's me or someone else. Don't do it on your own because there's a lot out there. And the best part? It's a free service. There's really nothing to lose. So give it a shot.