How Do Franchises Work?
Franchises are some of the most common types of businesses in the United States. Even if you do not know what they are or how they are operated, chances are that you have seen them in your city. Of course, each franchise system is unique in some ways, but all franchise arrangements do have some general similarities. Generally, any franchise agreement involves an existing company, commonly known as a franchisor, allowing another party, also known as a franchisee, to run a business under the name of the franchisor. In exchange, the franchisee pays an initial franchise fee in addition to annual license fees and future royalties, among other fees.
The concept of franchising dates back to 1731 when Benjamin Franklin signed the first franchise agreement with Thomas Whitman. Therefore, franchising has passed the test of time. Even when other business models were suffering contraction during the recent recession, franchising continued to grow and expand. Today, there are more than 800,000 franchise establishments spread across over 120 industries in the United States. These franchise establishments employ more than 9 million Americans. Therefore, franchising is a leading creator of small independently-owned businesses in the country. Indeed, if you want to live your American dream as a small business owner, then buying a franchise is one of the most viable routes to take.
What Is A Franchise?
As noted above, a franchise is a business arrangement between a franchisor and franchisee. The two parties sign an agreement so that the franchisee can operate a business under the name of the franchisor. The franchisor is usually a company with a well-known brand and a huge loyal customer base. As such, when the agreement is signed, a franchise owner can open a business and immediately start to enjoy from an already existing customer base as opposed to starting from scratch. In exchange, the franchisee pays an agreed franchise fee, annual franchise license fee, future royalty fee, and other applicable charges.
More: What is Franchising? Learn the Basics of This Popular Business Method
What It Takes To Own A Franchise
On average, a franchise in the United States costs about 35,000 dollars. However, depending on the specific franchise you are intending to buy, the franchise fee can be as high as 100,000 dollars or even more. Other fees such as training fees, auditing fees, and royalty fees can push the initial start-up cost even higher. The good news is that even if you do not have this cash, there are a number of financing options that you can pursue. But of course, having the necessary amount of money to buy a franchise is not all that is required. You have to meet certain conditions and show your commitment to the franchisor's vision. Therefore, you have to undergo an interview during which the franchisor will try to understand your background. As a prospective franchisee, you will have to take this opportunity to prove that you have a clear financing plan and that you are trustworthy.
What Is The Role Of A Franchisor?
In addition to allowing franchisees to operate under the franchisor's brand name, there are a number of roles that a franchisor plays under the franchising arrangement. One of the responsibilities of franchisors has to do with offering business support in many forms. For instance, the franchisor may help with issues such as branding and even training. It is important to note that franchisors do not take any part in the day-to-day management of franchise businesses. However, franchisors can and they do take control of some franchisees' operations to ensure that their franchisees are adhering to their guidelines.
When it comes to human resource management, franchisors only provide guidance on the best practices. However, the franchisee is free to hire, schedule, compensate, set employee standards, and even discipline members of their staff without involving the franchisor, as long as the quality of products and services are not compromised. As such, the franchise owner is an independent business owner and not a joint employer with the franchisor.
Responsibilities of the Franchisee
In addition to paying the necessary fees to the franchisor and running the day-to-day franchise business activities, there are several other responsibilities that are imposed on the franchisee through the franchise agreement. For instance, for the good of both the franchisor and the franchisee, the franchisee has the responsibility to keep the trade secrets confidential. Many states already have trade secret laws that can enable the parties to a franchise agreement to determine which parts of a franchise system could constitute a trade secret.
In order to protect their trademarks and proprietary information, the franchisors can also establish restrictive rules that their franchisees may have to observe. For instance, the franchise can restrict the franchisor from doing any other business that may seem to be competing with the franchisor's company. In such a case, the franchisee will have the responsibility to adhere to the rules.
Franchise Ownership Transfer
Under a franchise agreement, transferring ownership can be quite a daunting task. This is because ownership is split between the franchisors and the franchisees. For instance, although the franchisee may own all the physical and financial business assets, the brand and the trademarks belong to the franchisor. All in all, the terms and the process of franchise ownership transfer are usually set out in the franchise agreement, but franchisors usually have the powers to approve the next franchise owner.
Benefits Of Franchising
Clearly, although a franchise owner is an independent business operator, franchise agreements come with quite a number of restrictions and responsibilities. So, what exactly are the benefits of franchising to the franchisor? Why are so many people trying to buy franchises?
One of the greatest benefits of owning a franchise has to do with minimizing risk. This can be explained by the fact that starting a business from scratch carries the risk of failure. In other words, starting a business from scratch can cost a lot of money and time, and you can never be sure that your brand will ever be accepted in the market. On the other hand, buying a franchise enables you to take advantage of a brand whose credibility is already established. Therefore, royal customers will easily recognize your business and start streaming in almost immediately.
Exit Strategy
Franchise agreements are usually not blind to the fact that a franchise owner may decide to close the shop at some point. Therefore, they include what should be done at the end of the term. Most franchise systems have the option of renewal. If the franchisor decides to deny a renewal request for reasons not set out in the agreement, the franchisee can decide to take them to court, especially if the franchisee is in a state that has laws that govern the relationships between franchisors and franchisees.
The Takeaway
Overall, it is apparent that buying a franchise is quite a smart way of becoming a small business owner. However, franchises are quite unique business models. This is because although the franchisee maintains some autonomy, the franchisor still exercises some control as elaborated in the franchise agreement and operating manual. However, the franchisee benefits in the sense that he or she does not have to take the risk of starting a business from scratch and taking many years trying to establish a reputable brand.