What are some advantages and disadvantages of franchising?
Ten advantages of franchising
- The risk of business failure is reduced by franchising. ...
- Products and services will have already established a market share. ...
- You can use a recognised brand name and trade mark. ...
What are the costs associated with franchising?
While costs range from less than $10,000 to upwards of $5 million, the majority of franchises run from about $50,000 or $75,000 to about $200,000 to get started.
What to consider before franchising?
When factoring your initial and ongoing investment in your new franchise, consider the following:
- How much will you need to cover the initial startup fees (e.g., real estate, licensing, equipment)?
- How much liquid capital do you need to maintain to cover the franchise until you break even or see a positive return on investment?
- What are the ongoing franchise fees?
- What are the royalty expectations?
What are the benefits of franchising?
Top 5 Benefits to Franchising Your Business
- Less Capital Investment Needed. Once your business is successful, it is natural to want to look into expanding it. ...
- Dedicated Business Partners. It makes sense that a business partner is going to feel more invested than just an employee because their own money is on the line.
- Rapid Expansion. ...
- A Less Risky Move. ...
- Strong Profit maker. ...
What is franchising in business?
Franchising is one of the only means available to access venture investment capital without the need to give up control of the operation of the chain in the process. After the brand is carefully designed and properly executed, franchisors are able to sell franchises and expand rapidly across countries using the resources of their franchisees, earn profits commensurate with their contribution to those societies while greatly minimixing the risk and expense that would be inherent in conventional chain operations.
How does franchising work?
Successful franchising necessitates a much more careful vetting process when evaluating the limited number of potential franchisees than would be required in the hiring of direct employees who may have experience in the concept sector. An incompetent manager of a directly-owned outlet can easily be replaced, while, regardless of the local laws and agreements in place, removing an incompetent franchisee who owns the tangible assets of the business is much more difficult.
What is franchise provision?
The provision to the franchisee by the franchisor of initial training in the operations of the franchised business – this is perhaps stating the obvious for the franchisee would not be able to carry on the franchised business without such training.
What are the disadvantages of franchising?
For franchisees, the disadvantage of franchising is a loss of control. While they gain the use of a system, assistance, training, marketing, the franchisee is required to follow the system and get approval for changes from the franchisor. For these reasons, franchisees and entrepreneurs are very different. A franchisee “is merely a temporary business investment where he may be one of several investors during the lifetime of the franchise. In other words, he is “renting” the opportunity, not “buying a business for the purpose of true ownership.” Additionally, “A franchise purchase consists of both intrinsic value and time value. A franchise is a wasting asset due to the finite term: the franchisor is only obliged to renew the franchise if it chooses to contract for that obligation.”
What is franchising in retail?
As practiced in retailing, franchising offers franchisees the advantage of starting up a new business faster based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch. A well run franchise would offer from site selection to lease negotiation, training and ongoing support and statutory requirements and troubleshooting.
Why are franchisees more profitable than direct employees?
Franchisees are said to have a greater incentive than direct employees to operate their businesses because they have a direct stake in the start up of the branded business and the tangible assets that wear the brand name. The need of franchisors to closely scrutinize the day to day operations of franchisees is greatly decreased. Franchisors can increase their profits on the gross sales of the franchisees and avoid the operational expenses for the physical units that wear their brand names. Franchisors can decrease their risk and therefore increase their profits as their franchisees bear the expense of operating the units and the expense of being employers.
How important is franchise investment?
The franchisee will have to make a capital investment in their business. This is very important. The franchisee must have their own resources at risk. The investment they make must be sufficiently significant in relation to the franchisee’s total resources for the person to be worried that they might lose it. Conversely they will find motivation in their ability to increase the value of their investment in addition to producing a profit annually. A well-motivated franchisee with their own resources at stake will invariably conduct the business far better than any manager would, to the mutual advantage of themselves and the franchisor.
What does a franchisor receive?
Finally, the franchisor receives ongoing royalties or a percentage of the operation's sales. A franchise contract is temporary, akin to a lease or rental of a business.
What Is a Franchise?
A franchise is a type of license that grants a franchisee access to a franchisor's proprietary business knowledge, processes, and trademarks , thus allowing the franchisee to sell a product or service under the franchisor's business name . In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual licensing fees .
What Are the Risks of Franchises?
Disadvantages include heavy start-up costs as well as ongoing royalty costs. By definition, franchises have ongoing fees that must be paid to the franchisor in the form of a percentage of sales or revenue. This percentage can range between 4.6% and 12.5%, depending on the industry.
How Does the Franchisor Make Money?
Typically, a franchise agreement includes three categories of payment to the franchisor. First, the franchisee must purchase the controlled rights , or trademark , from the franchisor in the form of an upfront fee. Second, the franchisor often receives payment for providing training, equipment, or business advisory services. Finally , the franchisor receives ongoing royalties or a percentage of the operation's sales.
What is franchise contract?
Franchise Basics and Regulations. Franchise contracts are complex and vary for each franchisor. Typically, a franchise agreement includes three categories of payment to the franchisor. First, the franchisee must purchase the controlled rights, or trademark, from the franchisor in the form of an upfront fee.
How long does a franchise contract last?
It does not signify business ownership by the franchisee. Depending on the contract, franchise agreements typically last between five and 30 years, with serious penalties if a franchisee violates or prematurely terminates the contract.
When a business wants to increase its market share or geographical reach at a low cost, it may franchise its product?
When a business wants to increase its market share or geographical reach at a low cost, it may franchise its product and brand name. A franchise is a joint venture between franchisor and franchisee. The franchisor is the original business. It sells the right to use its name and idea. The franchisee buys this right to sell the franchisor's goods or services under an existing business model and trademark .
Why do franchisors charge a franchise fee?
A parent company that begins franchising to expand their business will view the franchise fee as a necessary vehicle for income as they prepare to support each new franchisee. The amount a franchisor sets as their franchise fee varies from industry to industry, and even among franchisors in the same industry.
How much does a franchisee have to pay to the franchisor?
The franchisee makes a payment to the franchisor of at least $500 (annually adjusted) either before or within six months of opening the business.
What is the FTC rule for franchising?
The Federal Trade Commission definition (“the FTC Rule”) that defines franchising throughout the United States, states that a business relationship qualifies as a franchise if three criteria are met: The franchisor licenses its trademarks, service marks, trade name, logo, or other proprietary marks to the franchisee.
What is the FTC rule?
The Federal Trade Commission definition (“the FTC Rule”) that defines franchising throughout the United States, states that a business relationship qualifies as a franchise if three criteria are met:
When setting initial franchise fees, should franchisors attempt to calculate the anticipated financial returns from each of their franchisee?
When setting initial franchise fees, franchisors should attempt to calculate the anticipated financial returns from each of their franchisees, and make sure that level of return is sufficient for both the franchisee and the entire franchise system to achieve the desired financial results.
Who licenses trademarks, service marks, trade name, logo, or other proprietary marks to the franchisee?
The franchisor licenses its trademarks, service marks, trade name, logo, or other proprietary marks to the franchisee.
Do new franchisees have to pay a franchise fee?
New franchisors without a base of existing franchisees may initially ask a larger franchise fee in order to provide what is needed. After obtaining several franchises, they are in a better position to spread the costs out and underwrite new franchise support from both initial franchise fees and ongoing royalty payments.
