Franchising is a system for expanding an existing business through a licensing agreement.
According to the International Franchise Association “In franchising, franchisors (a person or company that grants the license to a third party for the conducting of a business under their marks) not only specify the products and services that will be offered by the franchisees (a person or company who is granted the license to do business under the trademark and trade name by the franchisor), but also provide them with an operating system, brand and support”
The Franchising models.
The most common type of franchising relationship is Business Format Franchising; the franchisor provides to the franchisee its brand name and an entire system for operating the business which has already proved in the real world.
The franchisee receives marketing material previously developed, recipes or formulas, operational process manuals, equipment specifications and training.
Starting and operating a business under a franchise provides less risk that starting a new business from scratch and it is a less stressful experience than inventing all by yourself.
An entrepreneur that invest in a franchise is buying a license to use the intellectual property of the franchisor.
According to the International Franchise Association:
- 90 percent of franchisees enjoy operating their business,
- 85 percent feel positive about their affiliation with their franchisor,
- 78 percent would recommend their franchise brand to others, and
- 73 percent would “Do it all over again” if they had the option.
The franchisee usually pays a franchise fee, an initial payment to the franchisor which is the monetary representation of the license that is acquiring, that is the intellectual capital; then, will have to invest in the physical components of the business: The capital equipment, inventory, furnishings, etc.
The other cost component of a franchise is the royalty. This is a fee paid for on-going support which of course includes continuous improvement of the business model, access to vendor discounts, product R&D, marketing and advertising programs, etc. Typical support royalties are between 6% and 8% of revenue.
A franchise may not be right for everyone and they are certainly not all created equal, but a good business model can lower the risk factor and accelerate one’s potential for long term success. As always, the key is finding the right match between the model and the operator.