What is a Franchise Business?
A franchise enables companies to expand their business by supplying independent business owners with an established business, including its name and trademark. Franchisees pay a franchise fee and get a format or system developed by the company (franchisor). They also have the right to use the franchisor's name for a specified period of time.
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UPDATED: Jun 1, 2021
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A franchise business is a business in which the owners, also called franchisors, sell the rights to their business logo, name, and model to third-party retail outlets in what is called a franchise agreement. These are franchises and are owned by independent, third-party operators, called franchisees.
Franchises are an extremely common way of doing business since there are different types of franchising. In fact, it’s difficult to drive more than a few blocks in most cities without seeing a franchise business. So, what is a franchise example? Prominent examples of well-known franchise business models include many food chain restaurants, such as McDonald’s and Subway. Other examples of franchise opportunities are businesses like UPS and H & R Block. In the United States, there are franchise opportunities available across a wide variety of industries.
If you are wondering if franchising is a good investment and how to start a franchise business, contact a franchise attorney. Just enter your ZIP code below.
How do you invest in a franchise business?
To invest in a franchise, the potential franchisee must first pay an initial franchise fee for the rights to the business, initial training, and the equipment required by that particular franchise. Once it is in service and operating, there is often an ongoing royalty payment, either on a monthly, quarterly, or annual basis paid to the franchisor. This payment is usually calculated as a percentage of the franchise operation’s gross sales.
After the franchising agreement contract has been signed, the franchisee will open a replica of the franchise business, under the direction of the franchisor. The franchise owners will not have as much control over the business as he or she would have over their own business model, but may benefit from investing in an already-established, name brand due to customer recognition.
Read What’s in a franchise agreement? to learn more about these contracts.
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Why would you franchise a business?
When a company wants to grow its market share or geographical reach at a low cost, it may decide to franchise. Franchising the product and brand name is a relationship between the franchisor and franchisee. Franchises are a popular way for those who want to start a business while entering a highly competitive market. One of the advantages of a franchise is getting access to an established company’s product and brand name. Moreover, the risk of business failure is much lower compared to starting a company from scratch. A franchise provides the opportunity to have total independence of a small business while operating from a concept that has proven to be successful. Furthermore, you’ll have the support of a parent company with an established reputation, management, and work practices.
Do you have control of the franchise?
Generally, the franchisor will require that the franchise model stay the same. For example, the franchisor will require the franchisee to use the uniforms, business methods, and signs or logos particular to the franchise. The franchisee should remember that he or she is not just buying the right to sell the franchisor’s product, but is buying the right to use the successful and tested process used in other profitable franchises.
The franchisee will also usually have to use the same or similar pricing in order to keep the advertising streamlined. For example, if you saw an advertisement for $75 tax preparation from a well-known tax preparation franchise, you would expect to find this deal at the franchise operation closest to you. Aside from using the business model determined by the franchisor, the franchisee will otherwise remain an independent owner of the franchise.
While there are many advantages of a franchise investing in an already-successful franchise business model, there are drawbacks as well. As with any investment you make, you should do your research thoroughly before you make any franchise purchasing decisions. If you are considering buying into a franchise, you should contact an experienced franchise attorney for further assistance.