Franchises

By:

Arti

Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.

Reviewed by:

Idil Woodall

... read more.

Updated:  Jun 14, 2024

Ad disclosure

Invezz is an independent platform with the goal of helping users achieve financial freedom. In order to fund our work, we partner with advertisers who may pay to be displayed in certain positions on certain pages, or may compensate us for referring users to their services. While our reviews and assessments of each product are independent and unbiased, the order in which brands are presented and the placement of offers may be impacted and some of the links on this page may be affiliate links from which we earn a commission. The order in which products and services appear on Invezz does not represent an endorsement from us, and please be aware that there may be other platforms available to you than the products and services that appear on our website. Read more about how we make money >

5 min read

3 key takeaways

• Franchises allow individuals or businesses (franchisees) to operate under an established brand and business model provided by the franchisor, leveraging the brand’s reputation and operational systems.
• The franchisor provides support, training, and guidelines to ensure consistency and success across all franchise locations, while the franchisee pays fees and royalties for the rights to operate the business.
• Franchising can offer a lower-risk opportunity for entrepreneurs to start a business, though it involves strict adherence to the franchisor’s standards and operational procedures.

What are franchises?

Franchises are business models where the franchisor licenses its brand, operational methods, and support to a franchisee, who in turn operates a location or unit of the business. The franchisee typically pays an initial franchise fee and ongoing royalties to the franchisor in exchange for the rights to use the brand and receive support. This relationship enables the franchisee to capitalize on the franchisor’s established brand recognition, marketing, and proven business systems.

Importance of franchises

Brand recognition: Franchisees benefit from the established brand name and reputation of the franchisor, which can attract customers and facilitate business growth.

Operational support: Franchisors provide extensive support, including training, marketing, and operational guidelines, to help franchisees succeed and maintain consistent quality across all locations.

Market expansion: Franchising allows franchisors to expand their market presence and reach without bearing the full financial risk and operational burden of opening new locations.

How franchises work

Franchise agreement: The franchisor and franchisee enter into a legally binding contract that outlines the terms and conditions of the franchise relationship, including fees, operational standards, and support provided.

Initial fees: The franchisee pays an initial franchise fee to the franchisor for the rights to open and operate a franchise location.

Royalties: The franchisee pays ongoing royalties, usually a percentage of sales, to the franchisor as part of the agreement.

Training and support: The franchisor provides initial training and ongoing support to the franchisee, including marketing assistance, operational guidance, and product or service updates.

Brand standards: The franchisee must adhere to the franchisor’s established standards and procedures to ensure consistency and maintain the brand’s reputation.

Examples of franchises

McDonald’s: One of the most well-known franchises globally, McDonald’s allows franchisees to operate restaurants using its brand, menu, and operational systems.

Subway: Subway franchises offer sandwich and salad options, with franchisees benefiting from the brand’s marketing and operational support.

7-Eleven: This convenience store chain operates through franchising, providing franchisees with a well-known brand, inventory management systems, and operational support.

Advantages of franchises

Reduced risk: Franchisees benefit from an established brand and business model, which can reduce the risks associated with starting a new business from scratch.

Training and support: Franchisors provide comprehensive training and ongoing support, helping franchisees navigate operational challenges and improve their chances of success.

Brand recognition: Operating under a recognized brand can attract customers more easily and facilitate business growth.

Economies of scale: Franchisees can benefit from the franchisor’s bulk purchasing power, reducing costs for supplies and materials.

Disadvantages of franchises

Initial and ongoing costs: Franchisees must pay initial franchise fees and ongoing royalties, which can be substantial and impact profitability.

Limited autonomy: Franchisees must adhere to the franchisor’s standards and procedures, which can limit their ability to make independent business decisions.

Potential conflicts: Disagreements between franchisors and franchisees can arise over operational standards, fees, or support, potentially leading to conflicts.

Dependency on the franchisor: The franchisee’s success is closely tied to the franchisor’s brand and business model, making them dependent on the franchisor’s overall performance and reputation.

Managing a franchise

Due diligence: Prospective franchisees should conduct thorough research and due diligence on the franchisor, including reviewing the franchise agreement, financial performance, and support systems.

Compliance: Franchisees must adhere to the franchisor’s standards and procedures to maintain the brand’s consistency and reputation.

Ongoing training: Franchisees should take advantage of the franchisor’s training and support programs to stay updated on best practices and operational improvements.

Communication: Maintaining open and transparent communication with the franchisor can help address issues promptly and foster a positive working relationship.

Related topics

To further understand the concept and implications of franchises, consider exploring these related topics:

• Business Models: The various structures and strategies businesses use to generate revenue and achieve their goals, including franchising.
• Entrepreneurship: The process of starting and managing a new business, including the opportunities and challenges of franchising.
• Franchise Agreements: The legal contracts that define the relationship between franchisors and franchisees, including rights, responsibilities, and obligations.
• Marketing Strategies: The approaches businesses use to promote their products and services, including brand management in a franchise system.
• Small Business Management: The principles and practices of managing a small business, including franchising as a growth strategy.

Franchises offer a unique opportunity for entrepreneurs to start and operate a business with the support of an established brand and proven business model. Exploring these related topics can provide a deeper understanding of the mechanisms and implications of franchising in the broader business landscape.