Franchising is an arrangement in which the buyer of the franchise purchases the right to sell a product or service from a seller, which is the franchiser. The right to sell the product or service is called a franchise. These businesses are usually easily recognized and come with a brand already established. There are two basic types of franchises. Product and trade name franchises involve the distribution of a product through dealers. Auto dealerships are a good example of this because they sell products, namely vehicles that are produced by the franchiser. Business format franchises tend to include everything necessary to start a business in one easy package. These types of franchises actually provide a product to sell, as well as trade names, guidelines for operating procedures, overall quality assurance standards, management consulting support, and they usually offer facility design as well. Business format franchises are businesses like fast food and chain restaurants, or convenience stores and gas stations.
The reason that buyers are attracted to franchises is because the best ones tend to have proven themselves to be successful already, and the business comes with a pre-set brand name, experience, and economies of scale provided by the well-established corporate franchiser. The truth is, well established and well run franchises tend to have a better track record of success than normal small businesses.
Advantages
A reputable franchise is a proven business method; it is difficult to fail when everything is laid out for you and the franchiser often offers more in support than any small business would normally expect. The brand recognition is also advantageous. A well-known brand can bring customer to the business and provide a competitive advantage. The training and support offered by the franchiser are other advantages. cost savings on inventory items are passed on to the franchisee from bulk purchases of inventory made by the franchiser company, which provide beneficial economies of scale. Franchises offer direct operational training, which can be invaluable to those who don’t have much previous business experience, and the marketing packages make marketing a much easier process because you don’t have to do the market research or most of the legwork yourself. The franchise can survive initially off the financial strength of the franchising company, but is expected to take up the slack as soon as possible. Franchisers will assist in obtaining financing for the franchise, usually by providing business plan templates and often have vendor relationships with prospective lenders already set up in advance. Franchisers will also assists in site selection.
Disadvantages
Franchise fees can be expensive and are required to be paid at the inception of the agreement between the franchiser and franchisee. Fees can range from a few thousand dollars to hundreds of thousands of dollars, depending on the franchise. The cost of the franchise also includes a monthly royalty fee based on a percentage of the franchisee’s sales or income, and this payment is required whether the business is profitable or not. The franchise agreement also dictates how the operation is to be run; if you find that idea less than ideal then franchising is not a good option for you. As the franchisee, you must adhere to standards that are set in the franchise agreement, leaving you little operational control. In order to maintain a uniform appearance, you may be required to purchase certain materials. The franchiser also retains the right to terminate the franchise agreement and offer your location to another franchisee.
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