Franchising is a very popular business model that solves problems for both the franchisor and the franchisee. For entrepreneurs who don’t have a firm plan for their own business in mind, owning a franchise gives them a business to run that’s already been planned out for them.
For franchisors, franchising their business allows them to more rapidly expand into new markets than they would be able to otherwise. When the new location succeeds, it benefits both parties. Thousands of entrepreneurs operate franchises, with the vast majority of them being fast-food outlets and fast casual eateries. But franchises exist in many areas of business, from hotels to real estate offices to gyms.
The Franchising Business Model
Franchising a business requires a franchisor who has an established, successful business and a franchisee who is willing to work with them to expand the business. Typically, the franchisee will pay a licensing fee to the franchisor, which grants them the right to use the trademarks and products of the business.
The agreement between both parties will include details like who is responsible for owning and maintaining the physical location, how the new franchise will get the products it needs to do business, and how employee training will be handled. These agreements usually last from five to ten years at a time, which gives the new franchise time to get up and running and start turning a profit.
Franchising has pros and cons for both the franchisor and the franchisee. For the owner of a company, franchising allows them to expand into new locations with less financial risk and grow their brand faster while increasing revenue. However, it also usually requires the business to surrender some amount of control over how the location will be operated, and if the franchisee doesn’t operate the business with the same standards as the franchisor, it can reflect badly on the brand.
Franchisees benefit from franchising because they don’t have to start from scratch to build their business: They can use an established brand and model for how the business should be run. They can also take advantage of training and support from the franchisor and leverage the purchasing power of the franchisor to save money on supplies and marketing.
However, running a franchise also means that you don’t have full control of the business, and if the franchisor does something to damage their reputation, it will hurt your operation as well.
Licensing vs. Franchising
While franchising involves licensing a brand’s name and trademarks, it also goes far beyond that to include the use of an entire business model, including what the business sells, how the products or services are offered, and how the business is marketed. There’s much more of a partnership between the franchisor and franchisee than there would be between a business and another business that licenses its property.
Licensing on its own typically involves allowing the use of specific intellectual property by another, separate business; for example, movie studios will license popular characters to be made into toys or printed on T-shirts, and software companies license businesses to use their software.
Different Types of Franchise Business Models
There are three main types of models used for franchising businesses, which vary based on who owns the specific location and who runs the daily operations of that location. The most common model is franchise-owned and franchise-operated, meaning that each franchisee owns their own business property and runs it on their own. The franchisor provides the branding and the business model to follow (such as the menu and recipes for a franchised restaurant), and the franchisee handles everything else.
Another possible model for franchising is franchise-owned and company-operated; with this model, the franchisee owns the business location and takes care of maintenance and renovation needs, but the company manages the day-to-day operations of the business. The third and least common franchise model is the opposite, company-owned and franchise-operated, in which the franchisor invests in the business property but the franchisee is in charge of actually running the business.
The Franchising Process
Typically, when a company decides to expand through franchising, potential franchisees will be vetted to ensure that they’re a good fit with the franchisor’s values and standards for the business. Then, the two parties will sign a franchise agreement outlining each side’s responsibilities, including the amount of the franchise fee, how long the agreement will last, and how the new franchise will be operated.
The franchisor provides training and access to anything that the franchisee will need, such as proprietary knowledge, supply sources, and marketing plans. Once the new franchise opens, a portion of its profits will be paid to the franchisor.
Glossary of Franchising Terms
Advertising Fee: An amount paid by the franchisee to help cover the franchisor’s advertising costs
Approved Products: Products that the franchisee must purchase to use for their business
Approved Site: A business location approved by the franchisor
Area Franchise: A group of franchise locations operated by a single franchisee
Broker: A third party who sells franchises on behalf of the franchisor
Conversion Franchising: The conversion of an independent business into a franchise of another business
Exclusive Territory: An area in which one franchisee has the exclusive right to operate franchises
Field Representative: A representative of the franchisor who checks franchises to ensure compliance with the franchisor’s standards
Franchise Agreement: The legal document establishing a new franchise and outlining the responsibilities of each party
Franchise Fee: An initial fee paid to the franchisor to become a franchisee
Key Supplier: A supplier that provides products integral to the operation of the company’s franchises
Market Introduction Program: A marketing campaign used to launch a new franchise
Retrofranchising: When a franchisor offers to sell a location that it currently operates to a new franchisee
Royalty Fee: A percentage of a franchise’s profits paid to the franchisor
Successor Agreement: An agreement extending operation of a franchise after the initial agreement expires
Turnkey: A business location that’s all set up and ready to open
What is franchising?
Franchising is a contractual business model where a franchisor allows a franchisee to use its branding, business model, and intellectual property in exchange for fees and royalties.
What are the benefits of franchising?
Franchising offers several benefits, including working with an established brand name, reduced risk compared to starting a business from scratch, access to quality suppliers, and support in advertising and marketing.
How do franchisors benefit from franchising?
Franchisors benefit from franchising through expansion to new locations, additional revenue in the form of royalties, and expanded advertising power.
What is the franchising process?
The franchising process involves gathering background information, contacting the franchisor, negotiating, and signing a formal agreement.
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