Feb 18, 2018
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Do You Need a Franchise For Your Business?

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Did you know that 90% of franchisees managed to get their businesses into profit and receive income from it after the expiration of the franchise? This indicator is twice as significant as the experience of independent business. Nowadays franchising considered one of the most effective and successful ways of starting a business from scratch. Let’s look at investing in franchising in details.

Before investing in any business, the central question is appeared – to use a franchise or not? After all, along with a multitude of advantages of doing business on a franchise, there is also a considerable responsibility. In this article, we will consider the main nuances that you should pay attention to if you are thinking about buying a franchise.

What is Franchising?

  • Franchising is called the opportunity to conduct business on behalf of a well-known brand. In the world, there are many successful brands that want to expand their geography. In other words – to sell the franchise.
  • A franchisor is a seller of a license to use its product concept, and a franchise is a buyer.
  • To buy a franchise means to be able to conduct business on behalf of a well-known brand using their trademarks, successful developments, and interior design. As a rule, the franchisor is interested in the success of the franchise, and therefore provides sharing business experience and advises on many issues. Naturally, the franchisor gets a financial benefit as a pledge.
  • Royalties are periodic payments of the franchise to the franchisor in the form of a percentage of the profit of the franchisee’s business (usually 2-7%) or a fixed amount monthly. Term payments, as well as the term of the license – is limited, and this is spelled out in the contract.
  • Lump-sum payment – the franchisor often also requires a one-time fixed pay for the use of the brand and other services within the franchise. The lump-sum fee is not refundable and, unlike royalty, does not depend on the profitability of the subsidiary.

History of Franchising

And although the origins of franchising as the right to use the operating time of the business goes back centuries, it was the first time that Ray Kroc managed to perfect this idea. It was thanks to this man about the fast-food chain that McDonald’s was recognized all over the world. This man was able to improve the organization of cooking and expand the network to the whole of America, and then the chain of fast food restaurants spread to the whole world.

Advantages and Disadvantages of Franchising

AdvantagesDisadvantages
For the franchisor
  • Rapid and effective expansion of the business network;
  • No risks;
  • Income from the sale of a franchise + royalty;
  • Increase brand awareness;
  • Staff training requires financial costs;
  • Risk of loss of trade secrets;
  • The need for an effective control and management system;
For franchisee
  • Business consulting;
  • Risk minimization;
  • Cost optimization;
  • Restriction of freedom of action within a franchise;
  • License purchase costs;

Thus, franchising is an efficient way of a quick start in business. However, it can be more costly and inefficient if you have your unique idea for a startup. At the same time, franchising gives you the opportunity to teach you how to conduct business, select staff and attract customers.

In each activity, there are advantages and disadvantages. You should understand that you have to pay for experience and minimizing your risks. And it’s up to you to decide (independently or with the help of business analysts) whether the investment in buying a franchise is justified in your particular case.

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