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A yearly licensing fee and start-up fee are usually paid by the franchisee to the franchisor when they acquire a franchise.

In technical terms, the contract that binds the two involved parties is called the “franchise.” However, the term is usually used to refer to the real business which the franchisee runs. Franchising, thus, is the creation and distribution of the franchise system and the brand.

One can identify two kinds of franchising contracts- the business format is the most common one and easily identifiable by everyone. In this format, the franchisee is provided with the products, services and trade name. In addition to that, they also get the entire system needed to operate the business. This means the franchisee will get support for selecting and developing the site, operating manuals, quality control, brand standards, food handler’s certification training, business insurance, advisory support as well as a well-planned marketing strategy. All of this will be provided by the franchisor.

Product distribution or traditional franchising is considered to be larger when it comes to total sales. Examples of traditional franchising include automotive, gasoline, bottling and so on.

How does a franchise work?

In case a business is looking to expand its geographical reach and increase its share in the market at a reduced cost, it might opt for franchising. Remember that the actual business belongs to the franchisor and it sells rights for using its idea and name. The rights are bought by the franchisee for selling the services or goods of the franchisor. This is done under the existing trademark and business model.

Why do entrepreneurs opt for franchising? The reason is that it is a popular method for starting a business, particularly when they wish to enter a very competitive industry like fast food. A huge advantage of buying franchises instead of starting a business from scratch is that one gets access to a brand name that’s already established. So, the franchisee would not have to spend any money on making the customers aware of their product or name.


Advantages and disadvantages of franchising

If you’re wondering whether franchising is right for you or not, here are some pros and cons that might help you make the right decision.

Franchising has several advantages, but it has its drawbacks too. Some of the well-known benefits of franchising include an already available business formula, market-tested services and products, brand recognition in the market, and so on. For example, if you’re a franchisee for McDonald’s, all decisions related to the store layout, designing the uniforms of employees etc. are already in place. You don’t have to decide or come up with anything new in such a scenario. There are franchisors that also offer financial planning and training as well as a list of approved supply companies. However, even then, one cannot guarantee success.

The disadvantages of starting a franchise include massive start-up costs along with recurring royalty costs. Let’s take the McDonald’s example again. The total investment in starting a franchise for McDonald’s could range from anywhere between $1 million and $2.2 million. Franchises also have certain ongoing fees, which need to be given to your franchisor. This is usually a certain percentage of revenue or sales. The percentage could start from 4.6 per cent and go all the way up to 12.5 per cent, depending on which industry you’re working in.

Is franchising right for you?

You may have this belief that for opening a franchise, you don’t exactly need to passionate about the business. For instance, you don’t need to love burgers to open a franchise burger shop. Also, you don’t need to be responsible for everything related to operations.

For running the store, you can hire employees for delivering the services or selling the products. You’re simply the owner of the business, and there is no need to do everything on your own. The success of your franchise depends on how efficiently you run the business with these employees. You need to be the guide and train your employees, explaining to them the nuances of the business.

Having said that, not everybody is meant to run a franchise and to be successful in somebody else’s system. Prior to purchasing a franchise, you need to ask certain important questions to yourself. For instance, do you have the required personality to do the job? Everybody is different, and that goes for franchises too.

Therefore, it would be a huge mistake if you buy a franchise without assessing your personality type and whether or not you’re compatible with that particular business.


7 Things You Need To Know Before Becoming a Franchise Owner, Gordon Tredgold, Keynote Speaker, Executive Coach and Leadership/Business Consultant, viewed February 12

What is a Franchise? IFA, viewed February 12

Franchise, Investopedia, Adam Hayes, viewed February 12

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