A franchise is a type of business model where a person or group (the franchisee) is given the right to operate a business under a larger company’s (the franchisor’s) established brand name and business model. This right is given in exchange for an initial start-up fee and ongoing royalties or a percentage of the franchise’s profits.
In a franchising relationship:
- Franchisor: This is the original or existing business that sells the right to use its name and idea. The franchisor maintains control over branding and marketing strategies but also provides support to franchisees. This support often includes training, operating procedures, and marketing resources.
- Franchisee: This is the individual or business that buys into the original company by purchasing a franchise. The franchisee owns and operates their franchise location(s), but they must follow the operational guidelines set by the franchisor.
Franchising is popular in many industries, including fast food, retail, health and fitness, cleaning services, and many more. Famous examples of franchises include McDonald’s, Subway, and Hilton Hotels.
One of the major advantages of a franchise for franchisees is the ability to start a business with a recognized brand and proven business model. This can significantly reduce the risk and uncertainty that comes with starting a business from scratch.
However, franchisees must also consider the cost of franchising fees and the lack of control they may have over the business’s operations and policies, which are typically determined by the franchisor. Furthermore, the success of the franchisee’s business is also dependent on the overall health and reputation of the franchisor’s brand.
Example of Franchise
Let’s take McDonald’s as an example, which is one of the most well-known franchises in the world.
McDonald’s Corporation is the franchisor. They own the brand, the logo, the “Golden Arches”, the proprietary recipes, the operating systems, and the marketing strategies. When someone wants to open a McDonald’s restaurant, they can’t just do so on their own. They have to become a franchisee of McDonald’s Corporation.
So, let’s say you want to open your own McDonald’s restaurant. You would apply to McDonald’s Corporation to become a franchisee. If you are accepted, you would pay an initial franchise fee (which, as of my knowledge cutoff in September 2021, is $45,000). This gives you the right to use the McDonald’s name and operating systems.
However, that’s just the beginning. You would also need to invest in the physical restaurant itself. McDonald’s requires franchisees to have significant non-borrowed personal resources. Roughly, this might mean you need at least $500,000 in non-borrowed resources.
Once you open your restaurant, you’re not just running it independently. McDonald’s Corporation provides training, operational standards, and marketing support. You also pay McDonald’s Corporation a monthly fee, which is a percentage of your sales (usually about 4% as of 2021), and rent (which varies based on a number of factors).
In return for these fees and following the operating standards, you get the benefits of McDonald’s globally recognized brand, its popular product lineup, corporate marketing support, and the collective buying power of the McDonald’s network, which can help lower your costs for ingredients and supplies.
While this is a simplified version of the process, it illustrates the basic principles of how a franchise works.