search Nothing found
Main Dictionary F

Franchise

Franchise can be called a kind of license, which is given to franchisees, and supplies them with franchisor’s proprietary expertise, schemes and commercial name. This approach, in turn, allows a franchisee to trade goods and services, being under the owner's trademark. In return for these facilities, a reservation fee and annual license taxes are provided from a franchisee to the proprietor. 

Concept of Franchise

If the enterprise is willing to expand its market share or geographical focus at a low cost, its trademark can be distributed thanks to creating franchising companies. Franchise is considered to be a joint business, where the founders are franchisors with the presence of their own proprietary product. Meanwhile, the franchisees just repurchase their ideas and goods, so that they are entitled to release products and services under the name of a franchisor. 

Franchise is a well-known method to institute a business, for instance, if a franchisor is willing to belong to the fast-food field. Anyway, the tremendous benefit of being a part of such a system is an acquisition of the famous trademark, brand. Therefore, the resources for establishing your own business aren’t required.

The Franchise model in the U.S. has steeped in legends. The definition dates back to the 19th century. The enterprises - the McCormick Harvesting Machine Company and the IM Singer Company - exploited institutional and controlling systems and were considered franchisor's forefathers. These innovative schemes were put together, in order to come up with the demands of mass-production operations. The above-mentioned model enabled trading processes of  reapers and sewing machines. 

A primary franchise of food items was cultivated in the 1920s. 1925 was exactly the year of the A&W Root Beer franchise running. Next was the creation of the Howard Johnson Restaurants in 1935. Their catering services have grown rapidly, and nowadays it still guides the U.S. fast-food industry. 

The number of American franchising venues reaches more than 785,000. It brings $500 billion to the economic development of the country and includes such businesses as: The UPS Store, RE/MAX LLC, Sonic Drive-In Restaurants, Dunkin' Donuts, McDonald’s, and many others. 

Notice. Before investing in franchising business, the Buyer ought to look carefully through the Franchise Disclosure Document. The paper provides the data about the initial fee for entering a franchise, expenses, effectiveness forecasts, and other important conditions.

Franchise framework and its regulations 

Franchising contracts are extremely complex and different for every franchisor. As a rule, there exist three categories of charges. Initially, a prepayment is provided by a franchisee for the acquisition of rights and a trademark. Then, a settlement for training, equipment or giving guidance is frequently guaranteed. In conclusion, a franchisor obtains constant royalties or a commission from sales. 

These contracts are considered temporary. It doesn’t mean that franchisees have business in their possession. The duration of contracts varies from 5 up to 30 years, and there are huge fines in case of contract’s infringement or its early termination. 

The U.S. franchising businesses are controlled on a state level. The 1979’s Federal decree was set up by the Federal Trade Commision (FTA). It is a lawful data disclosure, which should be accessible to the potential buyers. The information includes all fees and costs, judicial proceedings (if any), financial expectations, benefits and implications of the acquisition, etc. In 2007, the document was renamed, and nowadays it’s known as the Franchise Disclosure Document. 

Franchise advantages and disadvantages

There exist tons of perks of being a franchise part, along with the downsides. Speaking about pros, a business formula is ready to be used, in tandem with the products and services, that passed testing and are loved by certain customers. And, of course, the acquisition of a franchise gives you the right to utilize the brand's name. In case you’re a McDonald’s franchisee, all the solutions are already made by a proprietor’s company. Others suggest individual training activities, budgeting or catalogs of providers. Although, being a part of the franchise doesn't ensure successful business. 

Considering the cons, there exists the presence of initial high expenditures and following royalties. Going back to the above-mentioned example, the sum, amounting from $1 million to $2.2 million, is needed to join a McDonald's franchise. Also, constant fees are collected by the proprietor. The payment varies from 4.6% to 12.5%.

There are professionals, who create an unwanted reputation for popular brands, in order to reduce the cost for entering the franchise. In addition, creativity and total inspection lies in the hands of a proprietor.  Some factors, dealing with inconvenient location or poor management, are also present. 

Franchise or Startup

In case you don't have a desire to be a part of a franchise, there are opportunities to establish your own business. Of course, it’s a risky practice, though a financial and personal payoff is guaranteed. However, engaging your practice gives food for thought, whether your business is a worthy investment. 

According to the statistical data, a chance to fail is rather high. Approximately 20% of new business ideas filed as a history. 50% of startups make it till the 5th year, even though only 30% still exist in the 10-year perspective. You’re the only person who is able to develop your business. Working long hours is needed to achieve success. In case the expertise you have is not enough, then everything turns against you. In that case, franchise is a perfect way for you to start. 

Success stories of various franchisees may stimulate individuals to obtain a franchise. It’s a stable and verified version of business development. Startups, on the other hand, allow one to set a practice, in case of a person's proficiency in all the hidden pitfalls of a business. It provides a kind of individual and financial independence. Anyway, it’s up to you to decide which model is more convenient for you personally. 

Subscribe to our newsletter and stay up to date with all the news!