FRANCHISE: What It Is and How It Works

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Given the lower risk involved compared to starting your own firm from scratch, some people may view franchising as the best business model. On the other hand, some business owners might prefer more autonomy. Let’s look more closely at franchise advantages and disadvantages, how to buy them, and the costs associated with operating one.

What is Franchise?

Basically, franchising is a right that producers or firms grant to others. The beneficiaries of this privilege may offer for sale goods or services produced by these manufacturers or their parent companies. These rights may include access to intellectual property rights as well. The person or company that grants a franchise the right to operate is known as the franchisor, and the franchise is the one that benefits from the right. Also, a business marketing approach to capturing the largest possible market share is franchising.

What Is Franchising?

A business arrangement known as franchising involves two parties sharing the right to sell one other’s goods and intellectual property. For instance, several fast food restaurants, like McDonald’s and Domino’s, operate in India through franchising. In this agreement, the franchisor (one party) gives or licenses certain franchisee rights and authorities (another party). Franchising is a well-known method of marketing a business and help it grow.

In addition, there is a legal contract between the franchisor and the franchisee. The franchisor gives franchisees permission to sell their products and use their brand name and trademark. These franchisees also behave like dealers. In exchange, the franchisee gives the franchisor a one-time payment, commission, and a portion of the profits. Franchisees have the benefit of learning about business practices and not having to spend money on employee training.

Now, we have learnt about the definition of franchising, let’s take a look at it examples!

Franchise Examples 

Franchises are very popular because they make it easy for businesses to grow quickly. Some of its examples include:

  • Circle K
  • Wendy’s
  • Taco Bell
  • Baskin Robbins
  • Burger King
  • 7-Eleven
  • Pizza Hut
  • Subway
  • Dunkin’ Donuts
  • Marriott International
  • McDonald’s
  • Starbucks
  • Dominos
  • KFC

How to Buy a Franchise 

Franchisees often need to go through an application process and receive funds before investing in a franchise site. As with the amount of money franchisees must put up individually, the cost of launching a franchised firm varies considerably amongst companies. So, if you decide to start a franchising business, be careful to discuss pricing and financing possibilities with the franchisor’s development team.

The two parties also collaborate to open the site once the brand has given the franchise owner approval. The franchisee pays the franchisor a start-up fee at the outset of the business relationship to assist defray the startup expenses. In return, the corporate brand assists the franchisee with location selection, lease negotiations, business operations training, and startup assistance.

Relationship Between Franchisee and Franchisor

The brand benefits from the success of individual sites through franchising, and vice versa. In order to assist franchisees in operating and expanding their businesses, the franchisor continues to offer a variety of support as long as the partnership lasts. Franchisees provide the franchisor a portion of their monthly revenue in exchange. By receiving these royalties, the corporate brand is able to continue offering assistance with things like product development, marketing, and ongoing training.

Furthermore, the owner and brand must work together harmoniously for franchisee-franchisor relationships to be successful. Franchise owners have the advantages of owning and operating their own company as well as the backing of a recognized brand. Franchisees get to increase their market share and profitability without having to cover the full expense of opening new sites.

The advantages don’t end there, either. Customers who get the same variety and quality of products from a franchise as they would from a big national brand also benefit because they get the personalized care and one-on-one attention of a small business.

How Does a Franchise Work? 

In franchise business licensing, a company grants others a license to use its trademarks and tested business techniques in return for a one-time payment, a set fee, or a portion of gross sales. A franchisor is a business that sells rights to use its trademarks and business practices. A franchisee is a person who pays to use a franchisor’s processes and trademarks. Franchisees establish clones of the franchisor’s businesses and operate them for a predetermined time period with the franchisor’s ongoing assistance.

The Franchise Agreement is the legal document that regulates the partnership between a franchisor and a franchisee. This agreement clearly lays out the rights, responsibilities, rules, limits, and other specifics of the deal. A franchise outlet or location refers to a company that operates under a franchise agreement.

The franchise agreement usually includes the first training, an Operations Manual, a start-up package, a defined area of operation, ongoing support, national and/or local marketing support, and a trademark license. The Agreement states that the franchisor has control over the trademark(s), how goods and services are shown and sold, and the quality and standards of the business. The franchisor is also entitled to a variety of payments and fees.

Franchising offers firms a profitable way to grow by enabling formerly inexperienced people to own and run a tried and true business. Both parties stand to gain significantly, as well as the economy as a whole.

What Are the Costs Associated with Operating a Franchise? 

Operating a franchise entails costs and obligations that independent business owners are not subject to. Read on to find the costs associated with operating a franchise:

#1. Travel Charges

This is one of the costs associated with operating a franchise. Travel will probably be your initial outlay for your franchise venture. You’ll probably receive an invitation to visit the headquarters for a Discovery Day because we discussed that. Although the franchisor might offer to foot some of the charges, those costs are your responsibility. Be ready to shoulder the full cost of your trip, including lodging, meals, and transportation.

#2. Franchise charges

When you sign up to become a franchisee, the franchise fee, also known as the initial charge, is a part of your upfront, one-time payment to the franchisor. The franchise fee is your entry ticket; it’s what you pay the franchisor in exchange for the right to use their name, logo, goods, and business model. It often also involves expenses for location development and early training.

#3. Costs of Construction and Building

This is also one of the costs associated with operating a franchise. You must construct your business location now that you are a franchisee. However, at this stage of the journey, you may have to pay for a real estate agent, zoning and construction fees and red tape, the cost of the actual construction, paint, decorations, furniture, signs, and anything else you need to make your room ready for business. Although your franchisor might help with logistics, it’s unlikely that your franchise fee will pay for most or all of the building expenses you’ll have to pay before even starting your business.

#4. Equipment Acquisition

This cost will be much higher for certain franchisees than for others. Your organization will require computers, keyboards, office chairs, desks, and any other furniture required for an office setting for franchisees operating offices. In other words, when opening a gym franchise, all of the gym-goers’ equipment must be bought in advance. This includes free weights, a variety of lifting machines, mats, power balls, and everything else. This cost is often forgotten when talking about franchise fees and legal paperwork, however, it shouldn’t be when you’re deciding which brand fits your budget the best.

#5. Royalty Payment

While the franchise price is a one-time payment, royalty fees are usually made on a monthly basis and can be compared to a membership fee that pays for your franchisor’s ongoing assistance. The most typical method of calculating royalty payments is as a percentage of gross sales, which typically ranges from 5 to 9 percent. Some companies have minimum dollar thresholds or percentages that change based on the volume of sales.

#6. Costs of Materials Sourcing

This is also one of the costs associated with operating a franchise. Since your franchise is a product-based business, purchasing raw materials for your products will be a regular expense. Many franchisors demand that their franchisees buy products from a select group of pre-approved vendors. When compared to what the franchisee could discover on the free market, those finest services are occasionally even more expensive. So, if the franchise you are thinking about is product-based, remind the franchisor where the materials come from and how much they cost.

Franchise Advantages

A quick approach to launching your own company without having to start from scratch is by purchasing a franchise. There are a lot of advantages of franchise, but there are also a lot of disadvantages to taking it into account.

Advantages of a franchise

They include:

#1. Awareness of Brand Names

This is one of the advantages of franchise. Well-known franchisors give you a brand and a system that have been shown to be successful and have an effect on the market:

  • Because of the franchisor’s expertise and the power of a well-known brand, you may be shielded from market conditions.
  • Customers who recognize your business or service may help you build a solid reputation.
  • With a well-established franchise, you can start bringing in consumers right away for absolutely no additional cost.

#2. Advertisement

This is also one of the best advantages of franchise. Here, an upfront franchise fee or recurring monthly fees paid to the franchisor may include the benefit of national advertising efforts. In comparison to the frequency and size of the franchisor’s promotional campaigns, the advertising charge that is often paid to the franchisor is quite minimal. For a tiny business, national advertising efforts would be unaffordable.

#3. Support and Training

Well-known franchisors will train you in everything from accounting to technology to taking money behind the counter. Also, this advantages also imply that the franchise model is substantially less risky than purchasing a standalone business or creating a new company from scratch because of training:

  • The majority of franchisors are ready to assist you in ensuring the franchisee’s success.
  • You have the chance to receive assistance from other, more seasoned franchisees.

#4. Marketing

A franchisor is more likely to be aware of market trends that prompt adjustments required to keep up with the times:

  • A well-established and tested system has a higher likelihood of withstanding turbulent economic situations than a newly founded company.
  • Compared to a single firm owner, the consequences of any failed attempts are much diminished.

#5. Negotiating Power

Lastly, this is another advantages of franchise. As a part of a trusted and established brand, you have more negotiation power. Additionally, you might be able to use the franchisor’s available bargaining and bulk purchasing power.

Disadvantages of Buying a Franchise

Purchasing a franchise has the following top 5 drawbacks:

#1. Fees and Costs

A franchise often requires an upfront franchise fee in addition to the cost of the building, the equipment, and the inventory. You must be conscious of the continuous costs. You must also pay the franchisor ongoing fees in addition to the initial franchise fees. Additionally, you should be aware that certain franchisors may ask you to renovate your franchisee store to conform to a shifting theme or image. These potential renovations might cost more than $150,000.00.

#2. Lack of Independence Is Number Two

The franchisor may impose controls and restrictions on areas such as items, pricing, staff, policies, territory, marketing, working hours, and other areas deemed crucial to the franchisor’s and franchised business’ overall performance. You won’t have much creative flexibility because practically every part of running the business will be regulated.

In other words, your choices for selling or giving the franchise business to someone else are likely to be slim. The sale or transfer of a franchised business is typically subject to specific limitations or requirements under most franchised systems.

#3. Guilt by Association

You will eventually struggle if the franchisor or other franchisees are the subject of negative press or have a negative public impression. Whilst Australia has several top-notch franchisors, not all franchise networks are reliable or well-managed. One should thoroughly investigate the franchisor and only sign up for franchise programs that have a proven track record of success in the market.

#4. Limited Growth Potential

The growth potential of a franchised business is scarce, while that of a stand-alone business is not. Occasionally, the franchisor will put limits on where you can do business. If you go over this line, there are frequently severe consequences.

#5. Restrictive Franchise Agreements

The franchisor typically benefits from franchise agreements. If you break specific terms of your franchise agreement, you could face severe repercussions, including the franchisor’s right to fire you and demand payment. No matter how respected the franchisor is, you should always get your own legal counsel before signing a franchise agreement.

What Are the 4 Types of Franchises?

Franchise agreements can be classified into 4 categories: Multi-unit, area development, single-unit, and master franchising.

Why Is It Called a Franchise?

The franchise is derived from the French verb franchir, which means “to free,” and from the noun franc, which means “free.”

What Makes a Company a Franchise?

In exchange for a franchise fee, the owner of a franchise licenses the company’s operations, along with its goods, reputation, and expertise. The company that issues franchisees with licenses is known as the franchisor. 

What Are the 5 Characteristics of a Franchise?

Principal Characteristics of a Franchise:

  • Strong concept
  • The business model for franchises that works.
  • An excellent franchise education program.
  • A recognizable brand image.
  • Franchises with a bigger network.
  • Franchisees and Clear Communication.

How Do Franchises Make Money?

Profits from sales will allow the franchisee to profit. The successful franchisee can earn a sizable sum of money by marketing the brand’s goods or services, even though they must pay a portion of this to the franchisor in royalty fees. 

Do Franchisees Get Paid?

The majority of franchise owners don’t get paid. Instead, after paying for overhead expenses to support business operations, you as the owner keep the excess money.

How Do You Start a Franchise

  • Research Franchises. 
  • Evaluate Opportunities
  • Evaluate Costs.
  • Draft a Business Plan
  • Get the Franchise License Agreement
  • Form a Business Entity
  • Choose Your First Business Space
  • Hire Employees.


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