WHAT IS A FRANCHISE: Types, Tax & Advantages

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Franchises exist for many well-known brands all throughout the world. These franchises offer an intriguing business concept that could enable anyone to start their own businesses using a tried-and-true business strategy. Understanding franchises and how they can help you is important if you’re interested in buying one. In this post, we examine what a franchise is all about, which includes its types, advantages, tax, and the 5 five franchise businesses in the USA.

What Is a Franchise 

In essence, 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. Even access to intellectual property rights may be included in these rights. 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. A business marketing approach to capturing the largest possible market share is franchising.

Characteristics of Franchising

First of all, this agreement allows the franchisor to authorize the use of the franchise’s intellectual property rights, such as patents and trademarks.

Second, the franchise pays a fee (or royalty) to the franchisor in return and might even be required to split some of his profits. Instead, the franchisor gives the franchise its products, services, and support.

The franchising agreement is the last document both parties sign. In essence, this agreement is a contract that specifies the terms and conditions that apply to the franchise.

What Is a Franchise Tax 

A franchise tax, also referred to as a privilege tax, is a fee that some businesses must pay in order to operate in certain states. It enables companies to be incorporated and run their operations inside the specified state. Franchise taxes are distinct from taxes imposed on franchises and from taxes levied by the federal or state governments. Corporations, partnerships, and other corporate entities like limited liability companies are subject to franchise taxes. non-profits, Fraternal organizations, and some limited liability corporations, however, are exempt from franchise taxes. Franchise taxes are levied in the states where businesses that operate in multiple states are registered.

How States Determine Franchise Taxes

Considering the brief reference above, every state bases its franchise tax on a separate set of standards. The longer list that follows is as follows:

  • Income
  • A stock’s, shares, or authorized shares’ par value
  • Total assets
  • One-time charge
  • Net value
  • Deposited funds
  • Real estate and personal property, or investments in the tangible personal property after taxes
  • Gross revenue

Franchise Tax vs. Income Tax

The distinctions between an income tax and a franchise tax are numerous. Franchise taxes do not take into account firm profits, whereas income taxes do. Franchise tax must be paid by a company whether or not it makes a profit, in contrast to income tax, the amount of which is determined by the organization’s earnings for the year. Also, businesses that receive money from the particular states mentioned above must pay income taxes even if their operations are outside of those states’ borders.

What Are Types of Franchise? 

Five general types of franchise can be used to categorize franchises. Let us study them below.

#1. Job-Franchise Types

A job franchise is one of the types of a franchise that is intended to be owned and operated by only one person, or with a small number of extra employees. It is usually a low-risk investment option, and it is often a franchise that the franchisee can run from home or on the go. The name comes from the fact that the franchisee purchases the business to give them a job and a source of income. The franchisee will provide their clientele with services or offer them goods.

#2. Investment Franchise Types

On the other end of the spectrum from an employment franchise is an investment franchise. It’s a big operation that will cost a lot of money in the capital. Most of the time, the franchisee won’t be involved in the day-to-day operations of the firm at all, and the franchise will always need a sizable professional management team to run it. The franchisee is most typically a corporate investor with extensive business expertise in the same or a closely related industry.

#3. Distribution Franchise Types

Also, one type of franchise is a “distribution franchise”. In the case of a distribution franchise, the franchisor gives the franchisee the authority to sell or distribute their goods to clients. With a distribution franchise, the franchisee often operates and sells the franchisor’s goods under their own brand rather than utilizing the franchisor’s name and operational procedures.

#4. Business Format Franchise Types

When most people think of franchising, the business format franchise is the first model that comes to mind. With a business format franchise, the franchisor gives the franchisee everything they need to start and run their firm, including the premises and any equipment they might need, as well as training, operational processes, supplier contracts, marketing tools, and support.

#5. Conversion Franchise Types

Not to mention the conversion franchise model, which allows a franchisee to join the franchisor’s network after already having a standalone company in the same sector. The current organization is changed into a franchise division. In addition to giving the franchisee the advantages of joining a well-known brand and all the operational and financial benefits of being a member of a network with training and assistance, this enables a franchisor to rapidly build a network.

Advantages of a Franchise 

If you’re seeking to launch a business, one of the decisions and self-examinations you need to make is whether you want to launch a franchise or an independent firm. Both for franchisees and franchisors, franchising has a number of benefits in addition to drawbacks.

Advantages of Being a Franchisee in a Franchise

A franchise might be an enticing choice for a business structure. It offers a variety of benefits, making it a popular alternative for people wishing to launch a new company without taking the dangers of going it alone.

#1. A Well-Established Company

One of the advantages of operating under the name of an existing company is provided by a franchise. Once each franchisee assumes the reins, the concepts, the brand, the operational procedures, and much more have already been tried and proven and are in place, ready to be applied repeatedly at new locations.

#2. A Reputable Brand

By operating under a franchise, a franchisee can benefit from the company’s already well-known brand. As a result, there will (in principle) be far less effort (and expense) put into attempting to construct and strengthen the company’s brand.

#3. Smooth Operational Funding

Franchises also benefit from the ease with which businesses can obtain financing. Investors are much more likely to put money into a company that has a strong network, a reliable brand, and efficient support systems. In some cases, the franchisor may provide financing, which would make things even easier for the startup company.

#4. Professional Connections

The franchisee can also profit from the numerous commercial connections that the franchisor has already built. Most likely, you’ll already have established and manageable connections with suppliers and distributors. The advantages of already existing franchise connections with marketers and advertising may also be advantageous to a new company’s launch. Cooperation and Safety

Franchises have the benefit of a system for assistance and security. Franchisers frequently provide training programs and assistance with tasks like account management, sales, promotion, and more. These kinds of expenses might be covered by the franchises fee.

#5. More Likely To Succeed

The common misconception is that 95% of businesses fail during the first five years. Franchisors that want to get new members into their network frequently promote this (wrong) claim. The franchise’s security can provide the perception that the business will collapse less frequently.

#6. You’ll Earn More Cash

Individuals frequently believe that owning a franchise has some advantages for increasing their income. They believe that having the support of a well-known figure and a well-known brand will increase their consumer base and revenue.

Disadvantages of a Franchise

There are drawbacks to opening a franchise, just like with another company strategy. People frequently hold the false assumption that the benefits outweigh the drawbacks, but this is because they are frequently deceived by the possible dangers of launching a brand-new company from scratch.

#1. Zero Control

The fact that a franchisee has no control over the company or how it is handled is the franchise’s first and biggest drawback (or very limited control). The franchise agreement contains the already defined corporate regulations.

#2. Hazards Posed by Others

Another significant drawback of a franchise is the possibility that someone else could harm your company’s reputation. As a franchisee, you would rely on the company’s reputation to attract clients.

#3. Connected to Suppliers

If you were running a business, you probably wanted to minimize expenses. Choosing the cheapest providers will help you cut costs and increase earnings. Yet, using the franchise supply network is a requirement of belonging to a franchise.

#4. Franchisor Fees

The prices are a significant drawback for most franchises. Frequently, a franchisee will be required to make an initial investment to get into the franchise agreement. They will subsequently be paying ongoing fees for the assistance and instruction given by the franchisor as part of the ongoing franchise agreement.

#5. Hard to Close a Business

A business sale might be difficult. Selling a franchised firm may include extra risks because any prospective buyer is subject to the conditions that were agreed upon by the franchisor at the time the franchise was given.

5 Franchise Businesses

Let us consider the 5 topmost franchise businesses in the world. They are as follows:

#1. McDonald’s

McDonald’s, which was established in 1948 by the two brothers Maurice and Richard McDonald, today operates more than 38,000 restaurants in 119 different countries. Potential franchisees must have previously managed or owned a McDonald’s restaurant, had a minimum net worth of $1,263,000, and have liquid assets totaling at least $500,000 in order to qualify for membership in the company’s renowned franchises system.

Yet, the franchise’s popularity among potential investors continues to be high despite the expensive investment amount and thorough profile the franchisor is pursuing, especially given that McDonald’s was placed #1 in QSR Magazine’s top 50 of 2019.

#2. Block & H&R

Henry W. Bloch and Richard Bloch, two brothers, founded H&R in 1955. It is among the most well-known tax preparation firms in the country. The business provides a number of services, such as online tax preparation and electronic filing, consumer tax software, and payroll and business consulting. All of these services are offered through their website and enable both businesses and consumers to better manage their finances and adhere to tax regulations.

The liquid cash needed to launch a franchise is $2,500, which is one of the requirements to become an H&R Block franchisee. Also, it costs between $31,557 and $157,898 to open an H&R Block franchise as a whole. There are different royalty rates, and franchisees don’t have to pay any marketing costs to the parent company. In the 2023 Top Global Franchises Ranking, H&R Block was placed #49 and topped the tax services category.

#3. Burger King

In 1953, Keith J. Kramer and Matthew Burns established Burger King, an American chain of fast-food restaurants focused on hamburgers. Insta-Burger King was its original name, but David Edgerton and James McLamore changed it to Burger King after buying the business in 1954. With more than 19,250 locations worldwide, Burger King is currently the second-largest fast-food hamburger brand in the world. Additionally, there are 7,105 locations in the United States overall.

The minimum net worth and liquid assets needed to open a Burger King franchise are $1,500,000 and $500,000, respectively. The total investment required to open a Burger King franchise varies from $230,000 to $4,194,700, and once the business is operational, franchisees are required to pay the franchisor royalties and marketing fees based on gross sales of 4% and 4.5%, respectively.

#4. Domino’s Pizza

In 1960, Tom and James Monaghan bought DomiNick’s, a Michigan pizza shop, for $500. Five years following the concept’s growing popularity, franchising got underway, and now, Domino’s has more than 17,000 locations spread over six continents and more than 60 countries. Additionally, there are 6,597 locations in the United States overall.

Candidates for a Domino’s Pizza franchise must meet a number of criteria, including a willingness to personally supervise daily business operations, a baseline net worth of $250,000, and a minimum of $75,000 in cash assets.

#5. Bimbo Bakeries

The Mexican international baking corporation Grupo Bimbo, the largest in the world with operations in 33 nations, has an American subsidiary called Bimbo Bakeries. There are 6,026 locations in the US altogether. The minimum total investment needed to open a Bimbo Bakeries franchise ranges from $15,425 to $607,850, and franchisees are not required to pay royalty fees or marketing fees based on gross sales. The biggest industrial baker in the US is called Bimbo Bakeries. Therefore, making it among the top 5 franchise businesses in the US.

What is a Simple Definition of a Franchise? 

It is a technique of selling goods or services that involves a franchisor who creates the brand’s trade name and business model and a franchisee who pays a royalty and frequently an upfront fee to have the right to use the franchisor’s name and system.

What Is a Franchise Tag in the NFL 

The non-exclusive variant is typically meant when people talk about the “franchise tag.” This is a one-year tender for the larger average of the top five wages for the player’s position over the previous five years or 120% of his prior salary.

What is a Franchise Example?

A business arrangement known as franchising involves two parties sharing the right to sell one other’s goods and intellectual property. 

What Makes a Business a Franchise? 

Franchisees license the company’s operations, commodities, reputation, and skills for a price. The company that issues franchisees with licenses is known as the franchisor.

What Does Having a Franchise Mean?

A franchise is a technique of selling goods or services that involves a franchisor who creates the brand’s trade name and business model and a franchisee who pays a royalty and frequently an upfront fee to have the right to use the franchisor’s name and system. 

What are the 5 Characteristics of Franchise Businesses?

5 Principal features of franchise businesses:

  • 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.


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