How Does Franchising Work?

Ever consider investing or owning franchises? Well, you will need to know exactly how this type of business works before you take the plunge. Keep reading to find out everything you need to know about how franchising works.

What Exactly Is A Franchise?

The International Franchise Association (IFA) defines franchising as:

“…simply a method for expanding a business and distributing goods and services through a licensing relationship.”

In practice, that means a franchisee gets to run a business under the umbrella of the franchise brand. This brand gives them (the franchisee) access to their resources, marketing, systems, and reputation. This business model makes franchising a very attractive opportunity for many.

An excellent example of franchise success is KFC, as each restaurant is owned and run by different individuals. Yet they all sell the same products, offer the same experience, and use the same systems.

What Are The Benefits Of Franchising?

There are numerous benefits to choosing franchising as a way to run a business.

The first of these is that you won’t be going at it alone. In fact, the franchise that you buy into will be a result of a great deal of working trial and error experience by the franchisor. This means you get to skip out on all the experimental stuff and have a viable, turnkey business from the get-go. This could lead to more financial prospects you will have because a big brand is supporting you. This also makes sourcing the outside funding you need a lot simpler.

The other main advantage of franchising over any other type of business model is that the risk associated with it can be much lower than starting a business from the ground up. Again this is because you have the might, experience, and financial backing of a well-established brand behind you. All these factors mean it is much more likely that you will be able to succeed.

What Are The Roles Of The Franchisor And A Franchisee?

Of course, before investing in or opening a franchise for yourself, you need to be very clear on the role of all parties involved. That is you, the franchisee, and the company you buy the licensing from, the franchisor.

A franchisor has a responsibility to provide the franchise with several things that basically add up to robust business infrastructure. These include well-established systems, support, training, a successful business model, and usually a trademark.

The specific responsibilities that are involved for a franchisee are managing the franchise on a day to day basis and paying fees to the franchisor.

What Fees Do Franchisees Typically Pay To The Franchisor?

There are several fees that the franchisee is required to pay the franchisor. The first is usually a one-off set up cost, which can be anything between $15,000 (for home-based or remote-based franchises) to over $100,000. Additionally, franchisees will be required to regularly pay a percentage of their profits to the franchisor in the form of a royalty fee.

Then there is the fee that the franchisee will need to pay for inventory. That is the licensed stock that the franchise will sell to their customers.

Finally, the last thing that the franchisee may need to pay directly to the franchisor is the cost of supplies they require to successfully operate their business. An example of this for fast-food franchise chain McDonald’s: Where franchisees must purchase branded cups, straws, takeaway boxes, and the like.

What Is A Transfer Of Ownership Of A Franchise, And How Does It Work?

Finally, before you get involved in investing or operating a franchise, is it vital that you understand how the transfer of ownership works. If you are unclear on this, you can run into some significant challenges later down the line.

In particular, if you want to sell your franchise, things are not as simple as they would be if you owned a regular business. This is because of the transfer clause that most franchises employ. The terms of this clause often include the franchisor’s right to the first refusal of buying the franchise business.

In simple terms, this means that as a franchisee, you may have to offer to sell your business to the franchisor before you can transfer or sell it to anyone else. This is something that you will need to know before you choose to invest your money into this type of venture. Not all franchisors include this clause in the franchise terms, but it should be something that potential franchisees should be on the lookout for.

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