What comes to mind when we think about the term “franchise business”? No doubt, familiar names like Dunkin’, 7-Eleven, and McDonald’s would pop up. Go around any city or state in the U.S. and you will be sure to find a branch. These brands are just some of the more familiar franchises that we have come to know and grown accustomed to. In this article, let’s take a look at what exactly a franchise business is.
What is a franchise business?
A franchise business is a kind of business owned by an entrepreneur or a group (known as the franchisor) that gives the license and rights to sell its products and services to (and use its proprietary business model, trademark, and business name) to a franchisee. In return, the franchisee pays the franchisor the required licensing fees, franchise fees, and sales profits. These fees vary depending on the industry and agreement between the franchisor and the franchisee.
How does a franchise business work?
Having a franchise business entails more than paying a lump sum and then going off and selling products. On the part of the franchisor, it is also much more than accepting fees and giving your company secrets for use.
On the contrary, a franchise business works as a partnership and venture shared between the franchisor and the franchisee. Before signing a written contract, both the franchisor and franchisee conduct due diligence. The franchisees thoroughly examine the Franchise Disclosure Agreement. This is a required document that indicates essential information on fees, expenses, risks, benefits, performance indicators, and all details set by the franchisors. On the other hand, the franchisors also review the credentials and other documents of the franchisees. Overall, both must decide if they will join hands.
Each franchise contract is unique. Details will depend on the kind of business the franchise is and the industry it belongs to. Generally, a franchise contract is not permanent. The typical duration ranges between five to 30 years.
What are the benefits of a franchise business?
Franchise businesses offer many benefits. The primary advantage is that it already knows the formula that works for the market. The brand, products, services, packages, business model, marketing strategies, and campaigns are not new. The target is already familiar with the brand and products they offer. If you are a franchisee, you do not have to start from scratch and come up with every single detail on your own. The franchisor has already done that for you. Additionally, the franchisor can assist in each aspect of the business, one step at a time. Franchisors generally guide the following business aspects:
Arranging equipment and product suppliers
Facilitating local and federal requirements
Providing product manuals and campaign strategies
Keeping track of business and promotions
For franchisors, the main benefit of having a franchise business is the opportunity to expand in many locations with capital requirements mostly shouldered by the franchisees. As their franchise businesses scale, so will the brand recognition continue to expand and strengthen which can lead to an increase in profits.
What are the potential drawbacks of a Franchise Business?
The main disadvantage of having a franchise business is the expensive franchise fees and royalty costs. Franchisees need to shell out heavy capital requirements to start the business partnership. While the franchise business may already have brand and product recognition by the market, the success and longevity of the franchise business are not guaranteed. In today’s increasingly dynamic and highly competitive business space, the possibility of business surviving long-term remains a challenge.
As in each business venture, a franchise business has its benefits and drawbacks. It is up to the investor to weigh these factors and make an informed business decision.
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