What is a Franchise Business?
UPDATED: February 7, 2020
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A franchise business is a business in which the owners, or "franchisors", sell the rights to their business logo, name, and model to third party retail outlets, owned by independent, third party operators, called "franchisees". Franchises are an extremely common way of doing business. In fact, it's difficult to drive more than a few blocks in most cities without seeing a franchise business. Examples of well-known franchise business models include McDonalds, Subway, UPS, and H & R Block. In the United States, there are franchise business opportunities available across a wide variety of industries.
Investing in a Franchise Business
To invest in a franchise, the franchisee must first pay an initial fee for the rights to the business, training, and the equipment required by that particular franchise. Once the business begins operating, the franchisee will generally pay the franchisor an ongoing royalty payment, either on a monthly, quarterly, or annual basis. This payment is usually calculated as a percentage of the franchise operation’s gross sales.
After the contract has been signed, the franchisee will open a replica of the franchise business, under the direction of the franchisor. The franchisee will not have as much control over the business as he or she would have over their own business model, but may benefit from investing in an already-established, name brand.
Read What's in a franchise agreement? to learn more about these contracts.
Control of the Franchise
Generally, the franchisor will require that the business model stay the same. For example, the franchisor will require the franchisee to use the uniforms, business methods, and signs or logos particular to the business itself. The franchisee should remember that he or she is not just buying the right to sell the franchisor's product, but is buying the right to use the successful and tested business process.
The franchisee will also usually have to use the same or similar pricing in order to keep the advertising streamlined. For example, if you saw an advertisement for $75 tax preparation from a well-known tax preparation franchise, you would expect to find this deal at the franchise operation closest to you. Aside from using the business model determined by the franchisor, the franchisee will otherwise remain an independent owner of the franchise.
While there are many benefits to investing in an already-successful franchise business model, there are drawbacks as well. As with any investment you make, you should do your research thoroughly before you make any franchise purchasing decisions. If you are considering buying into a franchise, you should contact an experienced franchise attorney for further assistance.