Business Glossary

What is a franchise?

A franchise is a business model in which a franchisor licenses business assets to franchisees. A franchise agreement generally allows the franchise business the right to use the franchisor’s brand. It may also cover access to products/suppliers, operational processes, and general business support.

Franchises allow nascent business owners to benefit from an established and recognized brand and a wealth of experience shared with fellow franchisees, lowering the barriers to entry for newcomers.

Examples of franchises

Many of the world’s most famous businesses are run on the franchise business model. The franchise model is very well suited to geographical expansion, including international expansion.

Many franchises that began life in the US have now become ubiquitous all over the world. The likes of McDonald’s, KFC, Pizza Hut, Domino’s, Taco Bell, Papa John’s, Pizza Hut, KFC, and Starbucks have all been household names outside of the US for decades.

However, franchises extend well beyond the food and beverage sector. Other famous franchises include 7 Eleven (convenience stores), Proforma (printing and promotional products), Fit Body Boot Camp (health & fitness), Just Between Friends (clothing), and Help-U-Sell (real estate).

It’s fair to say that franchise opportunities are available in virtually every business sector.

What’s more, if there is a business sector without any current franchise opportunities, there’s probably scope to create them.

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The benefits of franchises for franchisors

Creating a franchise agreement allows franchisors to scale up their company with minimal investment risk. Instead of absorbing scale-up costs, the franchisor essentially creates a blueprint for franchisees to replicate their business in new locations. They are effectively outsourcing their business growth.

The franchisor still retains overall control of the business, in particular the brand assets. They may also take some level of responsibility for business operations. This will, however, typically be at a high level. For example, a franchisor might control the overall supplier network but leave the franchisees to choose and order their own supplies.

The drawbacks of franchises for franchisors

Creating a franchise still requires an upfront investment. In particular, most prospective franchisors are likely to need professional help to ensure franchise rule compliance. This is a federal disclosure law governing the information that franchisors must share with franchisees operating in the US.

Franchisors must also have a robust franchise agreement to protect them from intellectual-property theft. This is the only real potential risk from a franchisor’s perspective.

The benefit of franchises for franchisees

The franchise model can allow you to run your own business (and be your own boss) while mitigating many of the risks of starting a brand new business from the ground up. Therefore, it can provide a shorter and smoother path to profitability.

Going down the franchise route may be particularly helpful for people with limited experience in running a business themselves. For example, people in employment may well have skills they can transfer. They will, however, still need to adapt to the realities of entrepreneurship. Becoming a franchisee can help to flatten this learning curve.

From a franchisee’s perspective, many of the benefits of franchise businesses often stem from the ability to use the brand in sectors where consumers value familiarity and convenience.

The drawbacks of franchises for franchisees

There are two main potential drawbacks of entering into a franchise agreement. Firstly, the upfront investment required can be much higher than equivalent start-ups. Ongoing costs may also be higher as franchisors sometimes stipulate that franchisees can only use approved suppliers.

Secondly, franchisees have limited autonomy. While this may benefit new entrepreneurs, it can become a drawback as entrepreneurs gain experience. It may also prevent franchisees from optimizing their business for local conditions.

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