A franchise business is a type of company that licenses and gives a franchisee access to a franchisor's confidential company information, procedures, and trademarks. This allows the franchisee to market goods or services under the franchisor's brand name.
“Franchisor” is the business owner, and the “franchisee” is the legal license owner to run a franchise.
The franchisee typically pays the franchisor an initial start-up cost and yearly licensing fees in return for obtaining a franchise.
For example, McDonald’s, KFC, 7-Eleven, etc., are some of the retail chains that operate via franchises and have built successful franchise businesses.
What is the Expense of a Franchise Business?
The cost to start and run a franchise business varies considerably based on the firm and the industry.
Franchise businesses can easily charge franchisees thousands of dollars depending on their brand value, potential for growth, employee size, and financial profitability.
Let’s take KFC, for example.
KFC is a big valued brand that doesn’t need to be marketed as fiercely because of the brand name. So, if someone wants to get a KFC franchise business, the brand might charge millions of dollars. On the other hand, less well-known or relatively new brands may not demand that high price from the franchisees.
But the later costs cannot be predicted accurately. The profits vary significantly depending on the industry and the magnitude of the sales, but usually it is between four and twelve percent.
Additionally, when a franchisee starts operating, there are typically additional costs for things like equipment, training, and expert guidance. These have the potential to drive up costs significantly.
Moreover, franchisees need to provide steady and continuous royalties to the franchisor, generally in the form of a percentage of monthly sales.
How Does a Franchise Business Start?
Starting a franchise business is a challenging task. It involves many legal and technical criteria that both parties must address.
Even before a contract is made, the franchisor and franchisee build a professional relationship, get to understand each other, and assess whether or not they are suitable for each other.
After that, there is the legal agreement that needs to lay out several things, including the following three absolutely indispensable points.
The franchisee must pay an upfront fee to the franchisor to obtain the controlled rights or trademark.
The franchisor will frequently get compensated in exchange for offering education, tools, or consulting services.
The franchisor must get regular royalties or a share of the business's sales.
This initial agreement is generally only valid for 5 to 30 years and must be renewed. Otherwise, the franchisee will lose the business.
Once an agreement is made, the franchisors provide franchisees with a reliable, tried-and-true method of operating a business.
Numerous franchisors also provide franchisees with strong consumer appeal, but there is no guarantee of success as many franchisees are new and small.
What are Some Common Pros and Cons of Franchise Business?
Every business has its advantages and disadvantages. Here are some pros and cons of a franchise business:
Partnering with a well-established and recognized brand can give a franchisee the advantage of having a ready-made business plan.
Products of the franchisor are already market-tested and recognized.
Marketing is not needed as the brand name sells itself.
High initial cost and continuous royalty payments to the franchisors.
Franchisees can lose location and creativity control of the business.
Franchisees can incur a heavy loss by investing in a poor management system.
How Does a Good Franchisor Support Franchisees in Franchise Business?
A well-known and good franchisor assists its franchisees in every step of the business, mainly at the initial stages. They help a franchisee avoid many cons of the franchise business.
Assistance from franchisor may include the following:
Arrangement of extra funds
Assistance in selecting a professional and profitable location
Managing and designing the business layout
Helping acquire necessary equipment and supplies
Assisting with setting up operating manuals and enhancing brand quality
Administering initial bookkeeping
Assistance in complying with the federal and local business requirements
Help train the staff as well as the franchisee
However, some franchise businesses also support the franchisees after the store opening and throughout the partnership journey. They provide the franchisees with the following amenities:
Systematic monitoring of the process of business
Help maintain quality control
Suggesting growth plans
Providing business continuing ideas
Assisting in market campaigns
Promoting the brand in more locations
Helping to create new and advanced products and services
Who Benefits Most from Franchise Businesses?
Businesses that wish to open more sites or enter new markets can consider a franchise business model. The model is the most beneficial to them because they may accomplish their goal of expanding their business with lower capital expenditures, which franchisees cover.
Does a Franchisee have the Option to Own More than One Franchise Business?
A franchisee can buy more than one franchise business. In fact, many franchisors sell area franchises inside a particular geographic region. These expansive areas can be expensive, and the franchisors can be picky when choosing a franchisee. However, most franchisors will be happy to offer additional regions if a franchisee owns one franchise and is successfully running it.