A franchise is a business model in which a company licenses its trademarks, trade name, and other intellectual property to another party for the purpose of allowing that party to use those assets to operate a similar business. In exchange for this license, the franchisor typically collects a royalty or other fee from the franchisee. The terms of a franchise agreement will be governed by a contract and may provide a franchisee with limited ability to make decisions on how the business operates, such as local advertising and price points. Franchising is a common business model around the world, but it is not used in all industries or countries.
Today there are more than 382 major franchisors of about 525,000 franchised units in the U.S. According to the United States Census Bureau franchised businesses are growing at a much faster rate than all other forms of business. The total retail sales for franchised companies is $1 Trillion per year and growing fast.
Many franchises offer their “deal” or “price” using an introductory price, which is then increased as the business becomes more successful.
A company looking to expand its operations may do so by acquiring an existing franchise, starting a new franchise, or licensing its trademarks and other intellectual property to another party. The company granting the license is known as the franchisor, while the party that uses the licensed trademarks and other intellectual property to establish and operate a business is known as the franchisee.
The traditional form of the latter (abandoned by most modern franchises) was for the franchisor to train and authorize an individual or company to run a restaurant, which operated using its designated recipes, trademarks and trade dress. Franchising in this instance is structured as a “closed” system; the person who owns the restaurant does not own ingredients, utensils and equipment used in preparing and serving the food.
The franchisor also controls any aspects of running a franchise that would affect its brand. It generally determines how much support (e.g., training and assistance) it provides to franchisees, which depends on the level of franchisee commitment and investment. It also sets out restrictions on how franchisees can run their business (e.g., price control, leasing requirements). By owning a franchised business, the investor is able to realize some tax benefits as well as capital gains than if he were working for someone else. Franchising may also lead to a certain level of standardization across businesses in a given industry or country.
Is franchising a good idea?
When it comes to franchising, there are a lot of pros and cons to consider. It can be a great way to get your business off the ground. It can provide you with a proven business model to follow, as well as access to support and resources from the franchisor. Use effective strategies such as digital marketing for franchises to make sure your business succeeds.
On the other hand, franchising can also be expensive and risky. Before you decide if franchising is right for you, here are some things to consider:
1. Cost
Franchising can be expensive, particularly if you need to purchase a franchise fee, equipment, and/or training. In order to recoup your investment, you’ll need to establish a thriving business.
2. Risk
Franchising can be risky because your success is dependent on other businesses and the success of their customers. If you don’t have enough customers, it may not be worthwhile to open a franchised location at all. Also, if the franchisor has financial problems or closes its doors, there may be little recourse available for you.
3. Control
If you go the franchising route, it’s important to remember that you will still need to abide by your franchise agreement and comply with any rules set forth by the franchisor. This includes paying royalties as well as following certain standards and practices as outlined in your agreement.
4. Government Regulations
Franchising is regulated by state and federal laws, such as the Federal Trade Commission Act (FTCA. The FTCA requires franchisors to give you a Franchise Disclosure Document (FDD) that includes details about the company and the franchise opportunity.
5. Time Commitment
In order to be successful, you’ll need to be willing to put in the time and effort required to make your franchise a success. This may include working long hours, weekends, and/or holidays.
6. Training and Support
One of the benefits of franchising is that you’ll have access to training and support from the franchisor. This can be helpful in getting your business up and running and help you avoid common mistakes. However, it’s important to make sure that the level of training and support offered is appropriate for your needs.
7. Branding
When you open a franchised business, you’ll be operating within the framework of an established brand. This can offer several benefits, including name recognition and increased marketability. However, it’s important to consider whether switching to a franchise opportunity fits with your long-term plans for your company.
Franchising is very popular in the U.S., but many new businesses are choosing not to franchise their company. This may be because starting your own business gives you more freedom and control over your company.
However, franchising can be a great way to get your business off the ground, and it has several benefits, including access to support and resources from the franchisor, name recognition, and increased marketability.
