Considerations for a Family Business Franchise

Posting by Geoffrey D. Brown, CPA

There are many reasons to start a family business. Sometimes it’s just to provide a forum for family members to work together no matter what the product or service is. In the case of a franchise, there are some compelling arguments for a family to opt for this type of business model.

What is a franchise? A franchise is the agreement or license between two legally independent parties which gives:

  • A person (franchisee) or group of people (franchisees) the right to market a product or service using the trademark or trade name of another business (franchisor);
  • The franchisee the right to market a product or service using the operating methods of the franchisor;
  • The franchisee the obligation to pay the franchisor fees for these rights; and
  • The franchisor the obligation to provide rights and support to franchisees.

The franchisor owns the trademark or trade name, provides support (advertising and marketing, training, possibly financing), and receives fees from the franchisee. The franchisee then may use the trademark or trade name, expand the business with franchisor assistance, and pay the fees, including often a large (non-borrowed) initial franchise fee. The International Franchise Association is one of many sources that can provide more information about becoming a part of a franchise.

Are you a good fit for running a family business franchise? If you are considering starting a family business (or adding one), and you find buying a franchise appealing, make sure your business wants and needs can be met. Foremost is the independence factor. If you do not like taking orders, following someone else’s plan, or having to report to another person or entity, then a franchise may not be a good choice. Some entrepreneurs leave the corporate road to do things their own way, and discover with a franchise that they may be required to do it someone else’s way – the way that has proven successful for the franchisor.

If, on the other hand, you enjoy the guidance and structure a franchise can provide while allowing your family to thrive on the local level, this may be the perfect choice. Is there pride in your family name and a desire to carry that on? At first look, it may seem a franchise would put the spotlight on the primary name of the franchise (like McDonald’s). However, in many cases a family may own several franchises in a region, so the franchise may prominently display the family’s governance of those locations.

Look at some of the other instant benefits to reap as a franchisee: instant brand awareness, a “plug-and-play” operating system, economies of scale when getting supplies as part of a bulk rate agreement for the whole franchise, marketing and advertising presence, faster ROI from built-in client base, training provided, input and assistance from franchisor and fellow franchisees, and better protection if reselling the business (a franchisor is likely to buy the franchise if no one else does in order to prep it for the next owner).

Additionally, running a family business franchise is an education in itself, and may help teach your family at a faster rate how to successfully run a business. You can then create your own independent family business from scratch in the future, having already dipped your toe in the business-ownership water.

Financial considerations for a franchise. Regarding start-up funds, you’ll likely need to provide a larger initial sum to purchase the franchise rights than you would for your own independent business costs. (A lack of capital may make the decision for you.) A family business franchise that proves successful may open doors to greater opportunities down the line. There may be potential for growth if a single-unit franchise (i.e., being granted the right to open and operate one franchise unit) is allowed to convert to a multi-unit franchise by the additional rights purchased for operating additional single-unit franchises, usually within a specified region. If given the exclusive rights to a territory for opening additional franchises, it may be considered an area development franchise. Being given the right then to sell franchises to others (known as sub-franchises) within the territory makes the business a master franchise.

In a sense, a franchise can be very much like a family business, where all employees are asked to understand and follow the mission of the company and act in its best interest. There are the commonalities that bring the franchisor and all the franchisees together, working as a team for everyone’s success. And there are also bound to be rivalries among franchisees as with siblings, or defiance of a growing franchisee toward the franchisor, much like a rebellious child and parent. These very challenges may be why family businesses should consider the option of becoming part of a franchise. Family businesses can even become franchisors, helping other family businesses to fulfill their dreams, as well.

When considering options for your family business, take a look at franchising. Opening a franchise may be a strategic way to build your family business legacy and develop lasting business success.

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