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Franchising


 


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.



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.


 

You may also be interested in:


Enterprise

Joint Venture

C-Corporation


 


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.



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?

What is the importance of franchising?



Related Term

Brand Equity

Related Term

Profit Margin

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