The Paleta Bar, a retail store specializing in “fresh gourmet Mexican pops,” started in a small strip mall in Albuquerque. Several years later it boasts 33 stores selling Mexican ice pops in 7 states. The company’s rapid growth can be traced to an aggressive plan to open its own stores in addition to selling franchises — stores owned by others that use the company’s name and retail business model.

The franchise model isn’t the only way for a business to grow, but its appeal is obvious. A franchisor can recruit talented go-getters who want to run a business with a built-in market, name recognition, and institutional support. And they can do it without draining their capital budgets, as franchisees typically pay much of their own startup costs.

The franchise model increases the business’s revenue exponentially and quickly — and for lots less money than the franchisor would pay to open and run numerous stores on its own. The franchisor gets a royalty and other ongoing fees — say, for advertising — from individual stores in return for letting the franchisee use its marketing and operating strategies and brand name.

A Quick Way to Business Ownership

For the franchisee, there are multiple benefits. Many franchises offer turnkey operations that lower the risk of failure for owners with little business experience. Lower risk helps the franchisee obtain startup financing.

Franchise contracts differ, but the franchisee is usually trained in store management and receives ongoing support and bulk rates on franchise-specific supplies and goods. Some franchises build the store’s exterior — especially when the building is essential to brand recognition — and leave the interior setup to the franchisee. Most evaluate proposed locations for probable success, and many offer corporate advertising seen nationally or regionally.

While franchise businesses can be more profitable than other new businesses, franchise fees are ongoing. And if the franchise is not well known, the risk can be just as high as opening a non-franchise business.

Franchise agreements vary widely, and potential franchisees are encouraged to research and compare the benefits and limitations of each under consideration.

The Federal Trade Commission offers “A Consumer’s Guide to Buying a Franchise.” The business development organizations WESST, SBDC, and SCORE offer low-cost webinars and workshops to help potential franchisees determine if and how to proceed.

Existing businesses looking to grow rapidly through the franchise model are also encouraged to consult Federal Trade Commission guidelines and obtain assistance from a franchise attorney.