What is a Franchise?

With a franchise, you can reap the benefits of business ownership without starting from scratch. So should you look into it? Learn about the pros and cons.

What is a Franchise?

Franchises allow you to reap the rewards of business ownership without having to start from scratch. A franchise gives you the opportunity to get support and tools from other businesses that have an interest in your success.

Do you think it is worth looking into buying a franchise? This article will explain what franchising is, which types it is, and why you shouldn't invest in one. If you are in a hurry, these jump links will get you to where you need to go.

A franchise allows an individual or group to legally sell the company's products or services. The individual would not be permitted to sell any commercialized products unless he or she has signed a formal franchise agreement.

In exchange for recurring royalties, a franchise is a mutually beneficial partnership in which the franchisor (company), offers support to the franchisee. This relationship allows the franchisee (individual), to expand the reach of the parent company and sell more commercial products to more customers.

Franchising is sometimes referred to as a hybrid business model. It can be broken down into two main forms.

Franchising in Product Distribution

Traditional franchising is also known as product distribution franchising. This arrangement grants the franchisee the rights to purchase its products and use its trade names. This allows a single manufacturer to be connected with a network distributors.

Let's say you are a car dealer and wish to sell Jeep vehicles. To sell Jeep cars, you will need to enter into a product distribution agreement. You also have the right to use the Jeep trademark for advertising and promotions.

Franchising in Business Format

Franchisees who are interested in business format franchising will receive the training, advertising and support they need to get started. The franchisor earns most of its revenues from royalties and fees through this franchise model.

If you are looking to open a McDonald's restaurant, you will need to sign a business agreement. After you have paid an initial fee and signed a contract, McDonald's will help you get started by providing training, support, and guidance once you open your franchise.

Both models offer the same benefits and disadvantages, regardless of whether they are used for product distribution or business-formatted franchise agreements.

Franchises: The pros and cons

The benefits of Franchising

Brand recognition

A lack of brand awareness is one of the most common complaints people have about starting a business. Oversaturation can prove to be a major obstacle for new entrepreneurs. It can also make it difficult to stand out from the rest of the pack. A franchise agreement gives credibility to the franchisee and draws loyal customers to the brand.

A helping hand

A franchisor usually provides extensive training and financial planning to franchisees. Many entrepreneurs may not have the resources to establish trust with customers if they don't have these resources.

Long-term Return

The products and services of a franchisor are usually market-tested and can last. Entrepreneurs who are concerned about the longevity of their business can invest in them.

Cons of Franchising

High Start-up and Fees

This is because the initial investment can be a barrier to entry. The royalty fees typically range from 4% to 12 percent of the revenue, but some companies charge a flat monthly cost.

Lack of control

Although a large company may grant you the right to do business under its name, it will eventually dictate what you can do and cannot. If there is a business need, a franchisor may even force you to move and put you in another territory.

Possibility to be Over-Promised

While big businesses may boast about their success and how beneficial it would be for them to open franchises, there is often misinformation. Even though parent companies are often highly rated and lucrative, it is possible for individuals to invest in companies with very little or no franchise value.

Select the right business model for you

Entrepreneurs can look at many business models depending on their interests and goals. Independent ventures are more lucrative but more secure than franchise business models. Franchising might be a good option if you like the tradeoff.