What's A Franchise: Everything You Need to Know
What's a franchise? A franchise is a model for growing a business and distributing services and goods through a licensing relationship. 3 min read
What's a franchise? A franchise is a model for growing a business and distributing services and goods through a licensing relationship. From the public's point of view, franchises appear to be just like any other chain of branded businesses. In fact, many familiar restaurants, stores, and hotels you might see every day are franchises, including Ace Hardware, Pizza Hut, Subway, and thousands more. However, they are actually quite different than individually owned businesses. In a franchise system, the brand owner does not operate or manage the facilities and staff who serve consumers on a daily basis.
To successfully expand the brand, a franchise revolves around the contractual relationship between the brand owner and the local operator. Successful franchise systems are a result of the brand owner and individual operators working together. While both parties share a brand, each party plays a different role in both legal and logistical ways.
The brand owner, who is also known as a franchisor, grants the license to the operator (franchisee) to conduct business under his or her brand name. In exchange, the operator typically pays the franchisor an initial, one-time franchise fee and a continuing royalty fee for the use of the brand name and operating system. The franchisor also determines the products and services the operator will offer. In addition, the franchisor provides them with a brand, support, and operating system. The operator is ultimately responsible for interfacing with consumers.
Advantages of Franchises
There are numerous reasons why purchasing the rights to open a franchise makes sense. If you purchase a franchise, your rights include capitalizing on the brand itself, and that means using trademarked materials such as slogans, logos, photographs, and signage. In addition, the brand is likely to be well known and to already have successful advertising campaigns. Customers determine which businesses to frequent based on their knowledge and opinions about the brand. As a result, the most valuable asset of a franchise is its brand.
In addition to the advantages of an established brand, purchasing a franchise provides other benefits that aren't necessarily available to entrepreneurs starting from square one. You'll acquire a successful business operating system, replete with successful products, prices, and marketing techniques. New franchise operators can avert many mistakes that new entrepreneurs often make thanks to the time-tested experience gained by the franchisor's past trial and error.
Also, operators can benefit from strength in numbers. Franchisors are able to purchase supplies, materials, and services, such as advertising, in bulk, which greatly reduces the cost to the individual franchise. In addition, franchisors may help negotiate better lease terms and locations. In comparison, independent entrepreneurs or small business owners typically negotiate on their own, which often leads to less beneficial terms. Some vendors will not make contracts or sales with new businesses or will reject small businesses whose accounts aren't big enough.
How to Determine Which Franchise to Purchase
It can be difficult to choose a franchise endeavor because there are thousands of concepts available. To find your best option, consider the following:
- At what do you excel? Are you a "people person" who prefers to be in the center of customer interface? Or are you more of a behind-the-scenes operations person? Make a list of your top skills.
- Consider how your top skills can mesh with franchise opportunities. To find franchises, start by searching a franchise database online. Pick out a few that interest you, and determine whether your skill set would be a successful match.
- Pay attention to trends. Some products and services become immensely popular quickly, and then fizzle out just as fast. Don't take the leap into a franchise that is merely a fad.
- Narrow down your search to the types of franchises for which your local market has demand.
- Contact the franchisor and request more information about the franchise opportunity. Reputable companies will send information at no cost to you.
- Once you've received the information, take the time to analyze it in detail. Interview the franchisor and current franchisees. Determine the franchisor's assets and liabilities. Consider whether it has reliable operations, substantial credit, an attractive selling proposition, a positive public appearance, and a high success ratio, among other factors.
If you are considering whether to buy into a franchise, contact an experienced franchise attorney. You can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies such as Google, Menlo Ventures, and Airbnb.