Overview
Franchising is a business system in which an independent business owner (franchisee) uses the business philosophy, know-how, name, system, trademark, advertising, and concept of another well-established business owner (franchisor). The franchisee in return pays the franchisor a percentage of gross income as well as royalties. Many well-known businesses are operated as franchises. Examples include McDonald's, Burger King, Subway, Ace, Jackson Hewitt Tax Service and Coverall.
How a Franchise Works
For people who have money to invest in a business but do not necessarily want to develop an idea from scratch, buying a franchise from an established business is an attractive option. If you want to start a franchise, you typically pay a fee which can range from a few thousand dollars to hundreds of thousands of dollars, depending on the type of business.
The franchise will in turn provide you with all the materials and information you need as well as subsequent training and support to help you succeed in your business. Franchises are part of an established brand, and there are often strict operational rules put in place for franchisees to maintain the uniformity. A good example of this is McDonald's. Even though each McDonald's restaurant is owned and operated by an independent business owner, they all have the same feel, and the food, for the most part, looks and tastes the same.
Franchise contracts have a stipulated time during which a franchisee agrees to operate the franchise. This usually ranges from a few years to several decades. There are often very serious consequences attached to breaking a franchise contract, including loss of your initial investment.
Benefits and Drawbacks
The main benefit of franchising for the franchisee is the opportunity to piggyback on the growth and success of an already-established system, as well as having access to training and support. For the franchisor, it provides the opportunity to expand and grow the brand using other people's capital. Franchisors also get to work with a pool of motivated business owners who have made considerable investments to join the franchise, and so are more likely to work hard and succeed, leading to the overall success of the franchise.
Franchising is not without its drawbacks. For the franchisee, depending on the business chosen, buying a franchise is a costly endeavor. You also do not have complete control, as you have to keep to the standards laid out by the franchisor. Even with things like signage and the look of the business premises, you may not have the option of using less expensive materials. Most importantly, if the franchisor acts in bad faith and does not do his part in promoting the brand, the franchisee has little legal recourse. This is because most franchise contracts give the franchisor an upper hand. For franchisors, the main disadvantage is that there is a limited pool of qualified franchisees to choose from. Also, if a franchisee acts in bad faith, he can hurt the public goodwill toward a particular company and potentially ruin the brand.
