It’s a hot summer day in the park and sweat begins to drip from your pores. Suddenly, a cool place is sounding like a good escape from the heat right about now. Then you spot it up ahead. The familiar letters “HD” prominently displayed in the cerulean sky. Hanks Delight’s delicious milkshakes consumes your mind and your body involuntarily marches closer to the fast food eatery.
As does dozens of other thirsty people combating scorching temperatures in Arizona, Brazil, Ecuador and China. All of them longing for relief with HDs signature ice cream shake. The ice cream store is providing a needed product to the masses in the right place at the right time.
HD is a company, but how is it able to be in so many places at once? That’s because HD has evolved into a franchise.
What is a Franchise?
Put simply, franchising is the expansion of a business by distributing its goods and services through a licensing relationship. Franchisors are the original business owners that grant a license to third-party franchisees, giving them the right to use the brand trademark of the business.
HD operates just that way. However, the brand’s humble beginnings began in Dallas, Texas where it rose to popularity with its soft-serve formula. Winning the mouths of the people in 1960, HD knew it needed to expand to keep up with national demand. In 1961 HD enlisted in the help of franchisee partnerships.
Imagine that you like ice cream a lot. But there are no ice cream stores around where you live. You have the genius idea of opening up a new ice cream store in the area, because surely there are others craving cool refreshing popsicles, malts and custard delights. There’s only one problem… you have no idea how to run a business.
After consulting with your network and doing some online research, you find a few franchises that might be the answer to your dilemma.
How Franchising Works
Franchising is a way for individuals to invest in a current business model and gain a competitive advantage in operating their own business. They receive:
- An existing proven business model
- Established reputable brand
- Set operating systems & processes
- Marketing resources
- Training and ongoing support
The end result is a faster return on investment (ROI) that would take a lot longer to earn if the franchisee were starting from scratch. Franchisors accelerate the process!
But there’s also an incentive for franchisors to recruit franchisees instead of just hiring new employees to expand their business.
- Lower costs
- Simpler management
- Faster expansion
- Better market penetration
- Greater commitment
- Lesser recruitment
Franchisees want to be business owners who control their own location, have some capital to start, but might be lacking in another area of expertise. The one thing they can leverage is their knowledge of the local market to implement the franchise in the area.
You decide to reach out to HD. It’s a globally recognized ice cream brand with a belief system you can get behind. You know you want to bring ice cream to everyone in the area and make a profit to boot. You make the call to learn more about what to do next.
Nothing is free and the best things are earned through hard work. Franchises require an initial investment to purchase the licensing rights to its trademark brand. The initial payment can also include a variety of key items to get a new business up and running including:
- Property renovations
- Real estate
- Working capital (rent, utilities, employee wages, ect.)
- Professional fees
There are also regular ongoing fees to cover royalties, advertising, and miscellaneous transactions like renewals. Royalties are usually collected on a monthly basis based on your revenue ranging from 4% to 12% or more.
There’s a lot of money on the line so this is a big decision-making process both parties need to scrutinize seriously. Franchising at its core is about relationship building and there’s no better place to put that in writing than the Franchise Disclosure Document (FDD).
This document outlines franchisor and franchisee contractual obligations to each other over a set period of time for the partnership. It gives the franchisee the license to operate the franchise brand. It outlines the monetary costs and the terms of the contract.
Terms vary depending on the franchise, sometimes with options to renew. 3, 5, 10 years or longer.
One of the most important parts of the FDD are the rules and regulations the franchisee is expected to abide by. In following the rules, the franchisee is pursuing the same proven model that made the franchise a success in the first place. The rules also serve as a safeguard for the franchisor to protect the brand identity.
You’ve spoken with a sales specialist at HD and decided this is the company for you. Signing the FDD was the last step to make it an official partnership and now you are filled with apprehension and excitement for the future.
You know you’ve got the brand and its support to help your business endeavors. Your success now lies in your ability to control and manage the business. There will be bumps in the road, but effective communication with your franchisor and a great attitude for the business you know you will go far.