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A franchise is a type of license that a party (franchisee) acquires to allow them to have access to a business’s (franchiser) proprietary knowledge, processes, and trademarks in order to allow the party to sell a product or provide a service under the business’s name. In exchange for gaining the franchise, the franchisee usually pays the franchiser an initial start-up and annual licensing fees.
When a business wants to increase its market share or increase its geographical reach at a low cost, it may create a franchise for its product and brand name. A franchise is a joint venture between a franchiser and a franchisee. The franchiser is the original or existing business that sells the right to use its name and idea. The franchisee is the individual who buys into the original company by purchasing the right to sell the franchiser’s goods or services under the existing business model and trademark.
Franchise contracts are complex and vary for each franchiser. Typically, a franchise contract agreement includes three categories of payment that must be made to the franchiser by the franchisee. First, the franchisee must purchase the controlled rights, or trademark, from the franchiser business in the form of an upfront fee.
Second, the franchiser often receives payment for training, equipment, or business advisory services from the franchisee. Lastly, the franchiser receives ongoing royalties or a percentage of the business’s sales.
It is important to note that a franchise contract is temporary, akin to a lease or rental of a business, and does not signify business ownership by the franchisee. Depending on the franchise contract, franchise agreements typically last from five to 30 years, with serious penalties or consequences if a franchisee violates or prematurely terminates the contract.
If you don’t want to carry on somebody else’s idea for a business, you can start your own. While founding your own company has plenty of potential rewards, both monetary and personal, it is also risky. When you start your own business, you are on your own, and much is unknown. Will the product sell? Will customers like it? Will I make enough money to survive?
Also, the failure rate is high. Statistics show that 25% of startup businesses don’t survive the first year. About half make it to year five, while approximately 30% last ten years. If your business is going to survive, you alone will have to make that happen. To turn your dream into a reality, you can expect to work long, hard hours with no support or expert training. If you try this on your own without any experience, the deck is stacked against you. If this sounds like too big a burden to bear, the franchise route may be a wiser choice.
People purchase a franchise because the model often works. It offers careful entrepreneurs a stable, tested model for running a successful business. It also requires them to operate on someone else’s business model. For those with a big idea and a solid understanding of how to run a business, launching your own startup presents an opportunity for personal and financial freedom. Deciding which model is right for you is a choice only you can make.
There are many advantages to investing in a franchise, and there are also drawbacks. Widely recognized benefits to buying a franchise include a ready-made business operation. A franchise comes with a built-in business formula including products, services, even employee uniforms and well-established brand recognition such as that of McDonald’s. Depending on the franchise, the franchiser company may offer support in training and financial planning, or even with approved suppliers. Whether this is a formula for success is no guarantee.