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Franchising allows a franchisor to expand their business without the cost and liability of building chain stores. A franchisee can invest in an existing business, leveraging an established brand, with relatively low start-up costs. The franchise model works best for profitable companies that can be easily replicated.
A franchisor is an entrepreneur who allows another party, called a franchisee, to operate a branch of his company while retaining sole ownership of the rights and trademarks. Through a business model called franchising, a company owner allows a franchisee to use his name, brand, and associated elements of his business in exchange for a commission and a portion of the gross revenue. In most cases, it’s a win-win for both parties. If the franchisee successfully runs his branch of the company, both he and the franchisor benefit from increased brand recognition and increased customer loyalty. For the franchisor, this can also lead to expansion of the company as more and more people look to become franchisees and start their own business.
A franchisor can use the franchise business model as a way to expand their business without the significant cost and liability of building chain stores. It allows him to access venture capital without having to give up control of his business through a takeover by another company. Using the dollars he earns from franchisee fees, a franchisor is able to sell more franchises – both domestically and internationally – pretty quickly. Relying on an already tested brand and replica formula drastically reduces its risk.
A franchise is an attractive option for the person who wants to invest in a business but, perhaps, lacks the time and money to develop a brand and the infrastructure to start their own company. It allows him to oversee a branch of an existing business while leveraging the popularity of an already established brand. An added incentive is that most franchises require a relatively small investment, and some require only a few thousand United States Dollars (USD) in start-up franchise costs.
Typically, a franchiser contracts with a franchisee to serve a particular territory for a specific amount of time, perhaps five to 30 years. The franchisor supports both the investor and the brand by providing the franchisee with training, advertising and other services to drive sales. If he invests the required franchise fee, a franchisee can manage several branches of the company. He should be aware, however, that he will most likely incur serious consequences if he cancels his franchise agreement early. While franchises are considered temporary business investments that only involve renting or leasing a brand rather than owning it, early termination of such an agreement is considered a breach of contract.
The franchise model works best for companies that have a strong history of profitability and can be easily copied. The United States has led the world in the number of franchises since the launch of fast food franchises in the 1930s. By the turn of the 21st century, the franchise model was used in nearly 100 industries and generated over $1 trillion in sales annually through more than 700,000 establishments. While fast food restaurants continue to be among the top franchises in the United States, other types of franchises that rank near the top include convenience stores, hotels, and janitorial companies.
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