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What Is A Franchise?
In its simplest terms, a franchise is an agreement between you (the franchisor) and another person (the franchisee). This agreement allows the franchisee to sell a product or service under a system -- a set of terms you set for the franchisee.
In other words, a franchise occurs when a business reaches a point where it can produce its success in other areas. The business then opens other locations operated by franchisees. Each franchise is independent but operates under a set of terms, privileges, and restrictions set by the franchise owner. The franchise owner is also responsible for providing support and products to the franchisee. Throughout this book I will consider a service offering to be a product.
Franchise Models
There are three basic business models based around the concept of a franchise. They are:
Distribution Models: A distribution model grants the franchisee the right to sell a licensed product. Car dealerships are great examples of distribution models: each dealership is independently owned and operated, but relies on an outside source for its supplies. The outside source can provide restrictions and regulations regarding how its merchandise should be sold.
Brand Name Licensing: Again, this type of business model refers to an independently owned and operated business that has permission to market a certain brand. For example, if you produce a prestigious brand of cloths, you could grant a business brand name licensing rights, allowing them to hold the exclusive rights to sell your product in their area.
Business Model: Most small businesses looking to expand into the franchise world will stick with this model. Under the business model, a franchisee purchases the right to operate a branch of an established business. The franchisee receives royalties based on their sales, and the franchisor is responsible for providing support, training, marketing, and other assistance. McDonald’s would be a great example of a business model franchise: each franchise is owned by a franchisee, but McDonald’s (as the franchisor) dictates the company policies, prices, and so forth. In exchange, they provide a high level of support and service to their franchisees.
Why Franchise?
* Franchising has many benefits for both the franchisee and the franchisor. For franchisees:
* Franchising offers a lower-risk business opportunity, allowing them to work with a
pre-established brand rather than trying to form their own business
* Franchising offers a high level of support and guidance, which is especially useful for those
who may not have a great deal of business experience.
* Failure rate for franchisees is very low
* Franchisees can benefit from franchisor’s marketing strategies and experience
For franchisors:
* Franchising allows them to expand their businesses without taking on a suicidal workload
* Franchising increases their brand name recognition
* Guaranteed royalty rates allow them to ensure they will continue to be the primary
beneficiaries of their hard work
* Franchising allows them to maintain control of their products, how they’re marketed,
and how they’re sold
* Contracts are determined in advance, meaning there should be no unpleasant surprises
once they expand into the franchise business
In other words, there are many benefits to franchising for both franchisees and franchisors. But are you ready to become a franchisor? As you can see, the title implies a significant amount of responsibility, and the decision should not be made lightly. The next chapter will help you decide if you are ready to become a franchise owner!
How
To Franchise Your Business Info Guide
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