How Does Franchising Work?

You’ve probably heard of the term “franchise,” but did you ever wonder how exactly it works? A franchise is a way of structuring a business. Generally, it involves the owner of a business (known as the franchisor) licensing to a third party (known as the franchisee) the right to operate a business or distribute goods and/or services using the franchisor’s business name and systems for a specified amount of time. What are the risks and benefits for everyone involved? Let’s take a deeper look.

How does it work?

There is a master franchisee agreement. They agree to buy all of the materials, from the business sign to the food, needed to run the business. The franchise also agrees to pay to franchisor an ongoing fee, equal to the agreed upon agreement. The franchisor also agrees not to open another store too close to their store in order to limit competition.

Benefits for Franchisor

There are a multitude of reasons that franchisors go into business. For one, expansion isn’t dependent on the franchisor’s capital but the resources of the franchisee. Secondly, a franchisor can see improved performance because a franchisee’s investment in the business is likely to make them more committed to success than a corporate manager. Franchisors also look forward to the speedy growth of the network, not being tasked with handling the day-to-day operations of each business unit. Overall, there is less capital risk in becoming a franchisor as opposed to flat out owning and operating a business.

Benefits for Franchisee

Becoming a franchisee has many benefits as well. The franchisee has access to a well-known brand and the buying power attached to a bigger operation to start. This is an advantage you can’t find anywhere else. The franchisee then has the ability to choose a location and set up the business where they desire. In a good franchising model, the franchisee receives ongoing support and training from experienced professionals.

Franchising is a way for successful businesses to expand rapidly. They should have a concept that is easily repeatable. Then, other entrepreneurs, or franchisees, become the owner of the new location.

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