How Franchising Works : Mcdonalds Franchise Example

Summary

In this informative video, Tark Johnson, a multi-million dollar franchise owner, explains the fundamentals of franchising. He covers what a franchise is, the roles of franchisors and franchisees, and the process of opening a franchise, including initial fees and setup costs. Johnson also discusses ongoing royalty fees and the benefits of franchising for both parties. He offers a free 23-page guide, '7-Step Blueprint to Business Profits in 60 Days,' to assist aspiring franchise owners in achieving success.

Takeaways

• 😀 There are over 750,000 franchises in the United States, employing more than 8 million people.
• 👤 Tark Johnson, the speaker, built a multi-million dollar franchise business with locations in California and Florida.
• 📚 A franchise is a business system where the franchisor grants the rights to own and operate a business location to a franchisee.
• 🍔 McDonald's is used as an example, where McDonald's is the franchisor and the owner of a specific location is the franchisee.
• 💰 Opening a franchise involves an initial franchise fee, which grants the rights to operate the business, and additional costs to set up the location.
• 🏢 The cost to open a franchise can vary greatly, from a few thousand dollars to over a million, depending on the brand and location.
• 📈 Franchise owners are expected to pay royalties, which can include a percentage of sales and marketing fees, to the franchisor.
• 🤝 Franchisors benefit from the capital and effort of franchisees, allowing them to expand without bearing all the costs themselves.
• 💼 Franchisees are more invested in the success of their business compared to corporate-owned locations, increasing the likelihood of success.
• 🛠 The franchisor focuses on the overall brand, marketing, and securing the best suppliers and technology for the franchise system.
• 📈 Johnson offers a free 23-page guide called 'Seven-Step Blueprint to Business Profits in 60 Days' for those interested in franchising.

Q & A

How many franchises are there in the United States and how many people do they employ?

There are 750,000 franchises in the United States alone, employing over 8 million people.

What is the role of a franchisor in a franchise business model?

A franchisor, like McDonald's in the script example, issues the rights to own and operate a franchise location to a franchisee, providing a system and guidelines to be followed in running the business.

Who is a franchisee and what is their relationship with the franchisor?

A franchisee is an individual or entity that signs an agreement with the franchisor, acquiring the rights to own and operate a specific franchise location, such as a McDonald's restaurant.

What is the initial cost one might incur when starting a franchise with McDonald's?

The initial cost includes an initial franchise fee, which for McDonald's could be around $30,000, and additional costs to get the location open, which can range from a million dollars to two million dollars.

What does the franchisee receive for the initial franchise fee?

The initial franchise fee, such as the one paid to McDonald's, gives the franchisee the rights to own and operate the franchise system, but does not cover the costs of opening the actual location.

What are the ongoing costs a franchisee must pay to the franchisor?

A franchisee must pay ongoing costs such as a royalty fee, which is a percentage of sales, and potentially a marketing fund fee to contribute to the franchisor's marketing efforts.

Why might a franchisor require franchisees to purchase supplies from specific suppliers?

A franchisor may require purchases from specific suppliers to ensure consistency in product quality and to potentially earn a percentage of the sales, contributing to the franchisor's revenue.

What are some benefits of owning a franchise rather than a corporate-owned business?

Owning a franchise comes with benefits such as having 'skin in the game,' which can lead to more motivated and invested business operation, as opposed to corporate-owned businesses where managers may not have the same level of personal investment.

Why do franchisors choose to expand through franchising instead of opening more corporate-owned locations?

Franchisors may choose to expand through franchising to leverage the capital of franchisees to open new locations without the need for massive loans or giving up ownership of their company, while also benefiting from the franchisees' personal investment in the business.

What is the role of the franchisor in supporting franchisees?

The franchisor focuses on the overall brand, marketing, securing the best suppliers, negotiating pricing, and investing in technologies and systems to support franchisees in running their businesses efficiently and profitably.

What additional resources does the script's speaker, Tark Johnson, offer to those interested in franchising?

Tark Johnson offers a free 23-page guide called 'Seven-Step Blueprint to Business Profits in 60 Days,' which provides a detailed blueprint for operating and running a successful business or franchise.

Outlines

00:00

😀 Introduction to Franchising

Tark Johnson introduces the concept of franchising, highlighting the prevalence of franchises in the United States with 750,000 locations employing over 8 million people. He shares his experience building a multi-million dollar franchise business and outlines the video's agenda, which includes defining franchising, explaining how it works, and discussing the potential for making money through franchise ownership. Johnson also mentions well-known franchise brands and encourages viewers to engage with the video by liking, commenting, and subscribing.

05:01

📘 Understanding the Franchise Model

This paragraph delves into the specifics of the franchise model using McDonald's as an example. It explains the roles of the franchisor and the franchisee, with the franchisor granting the rights to operate a business under their brand and the franchisee running the business. The paragraph covers the initial investment required to open a franchise, including the initial franchise fee and the costs associated with setting up the location. It also touches on the varying costs of different franchises and the importance of the franchisee's commitment to the business's success.

10:02

💰 Financial Aspects of Franchising

The financial obligations of owning a franchise are discussed, including the ongoing royalty fees that franchisees must pay to the franchisor as a percentage of their sales. This fee supports the franchisor's provision of support and marketing efforts. The paragraph also explores the franchisor's potential to profit from supplying equipment and supplies to franchisees. It explains the benefits for the franchisor of expanding through franchising rather than corporate-owned locations, such as leveraging the franchisee's investment and commitment. Additionally, it addresses the responsibilities that remain with the franchisee, such as hiring staff, securing a location, and managing payroll.

🤝 Benefits of Independent Franchise Ownership

The benefits of independently owned franchises are highlighted, emphasizing the personal investment and dedication of the franchisee, which can lead to greater business success compared to corporate-owned locations. The paragraph also discusses the franchisor's role in focusing on the brand's overall growth and support for franchisees, including securing the best suppliers and investing in technology to improve business operations. The video concludes with an invitation for viewers to ask franchise-related questions, a call to action for likes and comments, and a promotion of a free 23-page guide to business profitability.

Keywords

💡Franchises

Franchises are business arrangements where a parent company, known as the franchisor, grants a license to a third party, known as the franchisee, to use its business model, brand, and systems. In the video, the speaker mentions that there are 750,000 franchises in the United States alone, employing over 8 million people, emphasizing the significance of franchises in the economy.

💡Franchisee

A franchisee is an individual or entity that enters into a franchise agreement with the franchisor to operate a franchise under the franchisor's brand and system. The script uses the example of McDonald's, where an individual would sign an agreement with McDonald's to become a franchisee and operate a McDonald's location.

💡Franchisor

The franchisor is the company that grants the rights to a franchisee to operate a business under its brand. McDonald's is used as an example in the script, where McDonald's is the franchisor that issues the rights to own and operate a franchise location to a franchisee.

💡Initial Franchise Fee

The initial franchise fee is the upfront payment made by a franchisee to the franchisor to secure the rights to operate a franchise. The script mentions that this fee, such as a $30,000 fee to McDonald's, gives the franchisee the rights to own and operate the system but does not cover the costs of opening the location.

💡Royalty Fee

A royalty fee is an ongoing payment made by the franchisee to the franchisor, typically a percentage of the franchise's sales. In the script, it is explained that this fee, such as 10% of sales for a McDonald's franchise, pays for support from the franchisor and contributes to marketing efforts.

💡Marketing Fund Fee

The marketing fund fee is a separate percentage of sales paid by the franchisee to the franchisor for marketing and advertising efforts. The script mentions this as a specific contribution to the ads that McDonald's does, in addition to the royalty fee.

💡Skin in the Game

The phrase 'skin in the game' refers to having a personal investment or risk in a venture, which can drive greater commitment and effort. The script discusses how franchise owners have more 'skin in the game' compared to corporate-owned locations, which can lead to greater business success.

💡Capital

In the context of the script, capital refers to the financial resources required to start and operate a franchise. The speaker explains that franchisors often lack the capital to expand rapidly and thus seek franchisees who can invest in opening new locations.

💡Corporate-Owned Locations

Corporate-owned locations are businesses that are owned and operated directly by the parent company, as opposed to being owned by a franchisee. The script contrasts these with franchise-owned locations, discussing the differences in motivation and investment between the two models.

💡Investment in Business

Investment in business refers to the funds spent by a company to improve or expand its operations. The script gives an example of McDonald's investing $300 million in a company for app development and AI, illustrating how franchisors may choose to invest in technology rather than new locations.

💡Operational Responsibilities

Operational responsibilities are the tasks and duties required to run a business day-to-day. The script emphasizes that even with a franchise system in place, the franchisee is still responsible for hiring staff, finding a location, signing leases, and managing payroll, akin to assembling furniture from an IKEA kit.

Highlights

There are 750,000 franchises in the United States, employing over 8 million people.

Tark Johnson built a multi-million dollar franchise business with locations in California and Florida.

A franchise is a system to operate a business, exemplified by McDonald's.

Franchisors issue rights to own and operate a franchise, while franchisees sign agreements to gain these rights.

Franchisees must follow the franchisor's rules and system, akin to assembling furniture from IKEA.

Opening a franchise involves paying an initial franchise fee for the rights to operate the business.

Franchisees pay additional costs for location setup, including lease, construction, and equipment.

The cost to open a franchise can vary widely, from a few thousand to millions of dollars.

Franchise owners are responsible for hiring staff, finding a location, and running payroll.

Franchisees pay royalties to the franchisor, which supports the brand and contributes to marketing efforts.

Franchisors may also profit by requiring franchisees to purchase supplies from specific vendors.

Franchisors benefit from franchisees having 'skin in the game', increasing the likelihood of business success.

Many franchisors lack the capital to expand on their own, so they sell franchise rights to raise funds.

Franchise owners have more personal investment and commitment compared to corporate-owned locations.

Tark Johnson offers a free 23-page guide called 'Seven-Step Blueprint to Business Profits in 60 Days'.

Franchisees are responsible for assembling and operating their business, despite having the tools and system.

Johnson encourages viewers to engage with the video by liking, commenting, and subscribing for more franchise insights.

Transcripts

welcome so there are 750

000 franchises in the united states

alone and those franchises employ over

8 million people if you're new here my

name is tark johnson i built a

multi-million dollar franchise business

with locations in california and florida

and in this video

we're going to talk about how

franchising works

so we're going to talk about what is a

franchise

how does a franchise work and then we'll

even go into

how you could even make money owning a

franchise so here are some brands that

are franchises that you may or may not

know

so you got brands like mcdonald's

baskin robbins taco bell

kfc one of my personal favorites

five guys burger king

711 subway and even marriott

is a franchise now before we get started

if you like learning about business

or you're a small business owner

yourself or want to be a business owner

please make sure to hit the little like

button below it helps the youtube

algorithm

show this video to more and more people

also drop me a comment below and tell me

what your

favorite franchise brand is or

any franchise questions that you have so

make sure to hit the subscribe button as

well so that way you make sure to not

miss out any

on any of the other videos that i post

all right so what is a franchise

very simply a franchise is a

system in which to operate a business

so for this video we're going to use a

very easy example that

everyone will have heard of no matter

where you live which

is mcdonald's so mcdonald's is

a franchise company the first thing we

need to know are two different terms

number one is the term franchisor number

two

is franchisee so in this example

mcdonald's is the franchisor

they're the ones that issue the rights

to own and operate a mcdonald's location

a franchisee is that person that

signs an agreement with mcdonald's and

gets the rights to own and operate

a mcdonald's franchise location so if

let's say for example

you and your your family and some of

your buddies

all pooled some money together and

decided that you wanted to open up a

mcdonald's

you would be the franchisee and you

would sign an agreement with mcdonald's

who's the franchisor so when you sign an

agreement with mcdonald's they're

basically

they give you a guide and a system

to own and operate your own mcdonald's

franchise

now in that system you gotta follow

their rules

you got to use their system it's kind of

like if you went to ikea

and you bought a piece of furniture from

ikea

you're basically buying this box in that

box you have all of the parts

you have the manual you have the tools

and they're saying here's the box

now you have to do the work in order to

put

the furniture together so similar to

mcdonald's

they're going to give you the box

they're going to give you the tools

they're going to give you the blueprint

all the parts and then it's your job to

actually put it together with their

support with their instruction manual

and so the way that that works is that

when you're opening a franchise

you have to pay money in order to get

those rights so as an example with

mcdonald's

you will first pay let's say your

initial franchise fee

so you might pay a 30 000

fee to mcdonald's and all that fee

gets you is the rights

to own and operate the system so in that

case

if we're going to ikea and we're

planning on buying this piece of

furniture

you would pay this fee just for the

right to

have that piece of furniture that

doesn't even actually buy you

all of the tools and everything yet and

then so secondly after you pay that

initial franchise fee to sign the

agreement and to get the right

to operate a location now you got to pay

all the money

to get that location open so

you got to sign a lease you got to put a

deposit on that lease

you got to find a place to own and

operate the business

you have to hire a contractor to build

your location or if you already are

have a location you got to go in and

hire the contractor to make it look like

the actual business

so as an example when my wife and i

bought our first franchise

we leased the space and then we had to

pay a couple hundred thousand dollars to

have it all built out

and make it look like the franchise

brand

so with the mcdonald's that can range

from a million dollars all the way to

two million dollars

with other franchise locations you can

own a franchise for as little as

a few thousand dollars just depends on

what kind of franchise it is

so when someone hears hey wow a steak n

shake you can get a steak and shake

franchise for only ten thousand dollars

well hold on a second that ten thousand

dollars is just the fee

to get the business open then you still

have to

get a loan or figure out a way to come

up with the 300

400 500 000 a million dollars to get

that business open

depending upon what kind of business

that is so the example of

my wife and i my wife and i it took

300 000 to get our business open so

first we paid our initial franchise fee

which was 25 000 and then after paying

an attorney to review the lease placing

the deposit

for the lease deposit with utility

companies

permitting all of the equipment paying

for the general contractor

our initial order for all of our food

supplies

and wind up coming out to about 300 000

is what it cost us to get our franchise

open

now what worked out great for us is that

we went up doing over thirty thousand

dollars in sales our second month in

business until we were able to get that

profitable our second month in business

uh if you want to learn how we did that

i created a whole

23-page blueprint and guide that you can

use

because i love helping people which is

why i make these videos

but i created that guide called my

seven-step blueprint to business profits

in 60 days

so that you can use it as the blueprint

to create

your own successful business or your own

successful franchise

so leave a link to that below in the

description of the comments or something

like that

or you can just go to my website

johnson.com and get it for free

but let's move on so then once you have

the business open

so let's say you have the mcdonald's

open you will pay

the franchise and mcdonald's

a percentage of all of your sales

so that you maintain the rights

to own and operate that business so as

an example if your mcdonald's is doing

two million dollars a year in sales

you might have to pay ten percent in

what's called

a royalty fee to mcdonald's

and that royalty fee pays for the

support that you get from mcdonald's it

pays for different marketing that they

do

you might have to pay a separate

percentage called a marketing fund

fee specifically to contribute for

all of the ads that mcdonald's does

and so those are what's called the

royalties and the royalties or what you

pay to the franchisor

that is mostly how the franchisor

makes money the franchisor can also make

money

by making you purchase your food

your equipment or any of your supplies

from a specific supplier and so the

franchisor

may sell you those things directly and

then they get a percentage

of it so that's very common it's very

normal some franchisees don't like it

but at the end of the day the franchisor

has to make money as long as they're not

bending you over and you know really

charging you a lot of money for it then

it makes sense it's a win-win the

franchisor

makes money they continue to reinvest in

the system and make things better

and then you make money and you are able

to profit and support your family

and what your dreams are so here's a

question that you might ask and thinking

about okay now i'm starting to

understand how a franchise works

why wouldn't mcdonald's the franchisor

why wouldn't they just open up locations

themselves well one mcdonald's does so a

lot of franchisors

have corporate owned location and france

franchise zone locations

that are independently owned and

operated most franchise companies

start out first corporate

and not necessarily corporate as in like

big

but a lot of franchises start with

someone like you or myself

having an idea to create a business we

open a business and then we open

four or five or six or ten and those

businesses become successful and then we

go wow

i really want to grow this brand

into a much larger concept and so what

they'll do

is because they don't have the money or

the capital to go out and open a hundred

more locations

and instead of going and getting massive

massive loans

or giving someone ownership of their

company to raise

money they say you know what we're gonna

package this

into a franchise we're gonna go out and

sell the right so that other people can

own these franchises

there's a couple of benefits in doing

that one

franchise owners have skin in the game

have you ever been to a business

where you go in let's say it's like a

food business that maybe is a chain or

corporate owned and the employees are

just like on their

phone they don't care they're not doing

anything they're just like

hi how can i help you today well

a lot of times some of those businesses

are corporate owned and so the benefit

of a

independently owned business is that you

have the owner

there helping to operate and run the

business they have

more skin in the game and so that

increases the likelihood

of that business succeeding as opposed

to paying

a manager that's just hired by corporate

and you're paying them 40 or 60 000

a year to run that business that they

don't necessarily care about and they'll

kind of leave at any time

now i know that's not fair to say for

anyone who's an employee

and who may be a manager who operates a

business i'm generalizing here the point

is not to try to disrespect you but

generally speaking those independently

owned and operated businesses

the franchisors want people that have

skin in the game number two is

capital right so i i mentioned this

before is that a lot of the time

these franchisors they don't have the

money to go out and open another 50 or

100 locations so

they're going out there finding people

that have the money

to open up those locations and then

they're going to support

those owners by making the system

as best as they can and so what the

franchisor does is they

focus on the overall brand

going out there and marketing the brand

getting the name out there

they focus on making sure they get the

best suppliers

possible for the franchise owners

negotiate the best

pricing for

those vendors as an example mcdonald's

in 2019

the company bought another company for

300 million dollars

and that was just for

mcdonald's to have a stake in several

companies that develop

apps and mobile payment systems and

utilize

artificial intelligence so instead of

mcdonald's spending 300 million dollars

and opening up

new locations what they do they spend

the 300 million dollars

in investing in the business to make the

business be able to run

profitably and efficiently and so at the

end of the day there are

hundreds of thousands of franchises

there are over 700 000

franchise locations and when you open a

franchise or when someone opens a

franchise location

you still have to hire the staff the

hire the staff

is employed by you not the franchisor

you still have to find the location you

still have to sign the lease

you still have to run payroll so as a

again as

the ikea example although you're buying

the box that has

all the pieces of the furniture it has

all the tools it has the wrenches it

might have a screwdriver it's got all

the nuts and bolts

it's got the directions and instructions

you still have to do the work and

actually

put the piece of furniture together so

it's the same thing with the franchise

you might be buying a box with all the

tools and the resources and the kit

but at the end of the day you still have

to do all of the work

and get that business open and then run

and

operate that business so drop me a

comment below with any of the franchise

questions that you have i do my best to

respond to all the comments personally

also make sure to hit the little like

button for the youtube algorithm it

shows this video to more and more people

and if you're interested in franchise

ownership or starting your own business

or if you even

have one already make sure to head to my

website

get my free 7-step blueprint to business

profits in 60

days and again it's a great 23-page

guide and blueprint

that shows you exactly how to operate

and run

a successful business and

guys i'll leave a playlist here about

some other franchise

videos or it's on one of these sides

here

but i have a lot of other videos on

franchising

how it works what questions you should

ask how they make money basically

everything you want to know about owning

a franchise i really hope you got value

out of this video my intention

is to serve you and to help you and i

look forward to seeing you on the next

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