You may be wondering what to make of franchising and whether it's something you should pursue. But if you don't have a solid indication of what franchising is, even the basic concept can be overwhelming. Here's a guide to everything you need to know about franchising.
What Is Franchising?
Franchising, or a business franchise model, is a contractual business model or relationship whereby an established brand, known as the 'franchisor,' allows an independent business owner, or franchisee, to use its branding, business model, and other intellectual property. In return, the franchisee agrees to pay an upfront franchise fee, plus ongoing royalties to the franchisor.
There are dozens of different types of franchise arrangements, but three of them are the most common. They include:
- Business format franchise: This is the most common type of franchise arrangement. In this model, the franchisor allows a third party to do business using their trademarks and business model in exchange for fees and a recurring percentage of sales revenue. Franchisees under this model are run according to the parent company's guidelines and rules.
- Product franchise: This is the oldest form of a franchise arrangement. Under this model, the franchisees exclusively distribute or sell franchisor's products.
- Manufacturing franchise: Within this model, third-party manufacturers obtain exclusive rights to produce and distribute products using the franchisor's trade name and trademark.
Advantages of Franchising For Entrepreneurs
Ongoing support from the franchisor is not the only benefit of franchising. Here are a few benefits associated with franchise businesses:
- You'll work with an already established brand name: A strong brand will inspire customer loyalty, lead to more sales opportunities, and lend a competitive edge to your business.
- Reduced risk: If you work with a top franchisor, the risk of your business failing is very low compared to starting a business of your own.
- Simplified procurement processes: Another added advantage of franchising is you'll get access to quality suppliers and better deals.
- You don't have to worry about advertising or marketing: Your business will benefit from ad campaigns and promotions managed by the franchisor. The franchisor will also conduct market research on the best potential locations and share the findings with you.
- Quality leadership and lower operating costs: The franchisor will train you and help you identify the best strategies to manage your business operations effectively while keeping your costs low.
What Does the Franchisor Get Out of This Arrangement?
On the opposite end, there are a variety of incentives for businesses to adopt the franchise model. Here are some benefits of franchising for the franchisor:
- New locations and desirable market: Franchising is a source of capitalized expansion to new and desirable locations. Rather than franchisors putting their own money into market research, franchisees invest their funds to establish a business in a desirable location.
- Additional revenue: Franchisors benefit from ongoing royalties.
- Additional advertising: Franchisors also benefit from expanded advertising power through franchisees.