What is franchising?
Franchising is an arrangement in which a proprietor (known as the franchisee) receives the rights to a brand’s (the franchisor’s) trademark and business model in exchange for operating a branch on the company’s behalf.
Under a franchise model, the franchisee pays a fee upfront to acquire licensing rights to a business’ branding, training, and access to other internal systems. In addition to this initial investment fee, they will pay royalties to the franchisor on a yearly basis.
In simple terms, franchising is a person paying for the rights to open up a branch of a larger chain. In an ideal situation, the parent company essentially provides a ‘business model in a box,’ and the new business owner uses their management skills to turn that plan into a profitable local enterprise.
History of franchising
The concept of franchising is believed to date back to the Middle Ages when monarchs granted exclusive rights to individuals to operate specific trades or services within their territories. In the United States, franchising emerged in the 19th century with the establishment of Coca-Cola's bottling system by John Pemberton. Today, franchising has evolved into a sophisticated business model used by a wide range of industries.
Main components of a successful franchise model
To succeed a franchising model should include the following;
A well-defined brand and business system
Franchise agreements outlining roles and responsibilities of franchisor and franchisee
Initial training and ongoing support for franchisees
Standardized products or services
A fee or royalty structure for franchisees
On top of these components, franchisor should also:
Establish clear brand standards and guidelines and monitor compliance with these
Select franchisees carefully based on their skills and experience
Regularly updates business systems as well as products/services in order to stay competitive
Establishes and maintains open communication with franchisees to take advantage of opportunities and to address concerns
The main benefits of franchising
The franchise model can benefit both the franchisee and the franchisor in several ways.
Benefits to the franchisee:
Minimize risk: For entrepreneurs looking for their next venture and to start a new business, franchises can provide an outlet for them to flex their business-minded muscles without all of the financial risk associated with launching a start-up. By researching franchises, franchisees can make a decision by examining the ones that have already demonstrated high profitability and financial stability.
Leverage established brand reputation: Franchisees purchasing the rights to a well-known brand receive the immediate benefit of national marketing efforts and name recognition, making it easier to attract customers right away.
Benefits to the franchisor:
Outsource expansion: Promote growth while not having to be intimately involved in the details.
Expand territory: Develop into new geographic areas, aided by the local market knowledge many franchise owners hold.
Keep in mind, however, that drawbacks to the franchise model exist, as well. For the franchisee, that could mean a rigid business model or type of business that prevents implementing creative or localized solutions, for example. And for the franchisor, a disadvantage might be the public relations risk involved in trusting the brand’s reputation with so many different entities.
Challenges with the franchising model
Potential challenges associated with franchising include maintaining consistent brand standards across multiple locations and potentially varied geographic locations including international locations, managing relationships with franchisees, and balancing the interests of the franchisor and franchisee
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How to choose the most profitable franchise to open
What a franchisee considers to be the most profitable, or worth their while, will depend on several factors. Namely, the entrepreneur should consider the initial investment fee and the required annual royalty percentage to the franchisor. Furthermore, it’s good practice to survey past successes - and failures - of other franchises started for the company, as well as whether the selected local market could support a franchise of this sort.
For more information on starting a business check out:
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Franchising FAQ (Frequently asked questions)
What are some famous examples of franchises?
McDonald's is perhaps one of the most famous examples of a franchise. Others include Subway, 7-11, Pizza Hut and KFC.
What are the main types of franchises?
Job franchise, product franchise, business format franchise, investment franchise, guardian franchise.
What is the importance of franchising?
Franchising can help both the independent business owner looking to set up and run a franchise, and the wider parent company. They help the parent company grown into new states and countries, often by someone who knows the local market well enough to make the business a success. They also benefit franchisees by providing important marketing and resource support to get their business off the ground.