Reviewed by Aug 27, 2020| Updated on
What is a franchise?
A franchise is a form of license acquired by a party (franchisee) to allow them access to the proprietary knowledge, processes, and marks of a business (franchisor) in order to enable the party to sell a product or provide a service under the name of the business. The franchisee normally pays the franchisor an initial start-up and annual licensing fee in exchange for gaining the franchise.
How do franchises work?
If a company wishes to increase its market share or expand its geographical scope at minimal cost, it may create a franchise for its product and brand name. A franchise is a franchisor-franchisee joint venture. The franchisor is the original or current business that sells the right to use its name and concept. The franchisee is the person who purchases the original company by buying the right under the existing business model and trademark to market the franchisor's goods or services.
Franchises are a very popular way of starting a business for people, especially those who desire to function in a highly competitive industry such as the fast-food industry.
One of the biggest advantages of owning a franchise is that you have access to the brand name of an established business, meaning you don't need to invest any additional resources to get your name and product out to consumers.
Pros and cons of a franchise
Investing in a franchise has many benefits and there are also disadvantages. The widely acknowledged advantages of purchasing a franchise include a ready-made process. A franchise comes with an integrated business formula that includes products, services, even uniforms for employees and well-established brand recognition such as McDonald's.
The franchisor company can offer assistance in preparation and financial planning, or even with licensed vendors, depending upon the franchise. There is no guarantee whether this is a formula for success.
The disadvantages include high open-up costs and ongoing costs of the royalties. The average total amount of money it costs to start a McDonald's franchise varies from $1 million to $2.2 million.
Other disadvantages include lack of territorial control or ingenuity with your own company, as well as a major dearth in the franchisor's financing options. Other factors affecting all businesses, such as poor location or management, are opportunities too.