Simply stated, a franchise is a business that has been expanded beyond its original owners.  The process of franchising usually involves a franchisor business that sells their trademark products or services to a franchisee.  A franchise can range anywhere from a small business opportunity (for instance, a vending machine can be franchise) to a very complex multi-unit franchise (several large corporations, for instance, require franchisees to develop several stores or business locations in a specific market).

Franchise Advantages

A franchise is a very attractive option for many entrepreneurs because it allows potential franchisees to purchase and operate their own business in a relatively fast manner.  A franchising business provides their trademark and a proven business model that can be easily replicated by the franchisee.  Building a business from scratch and creating a strong brand name can take decades, resulting in several false starts, a strong learning curve and very costly start-up and operational costs.  A franchise can allow a potential franchisee to by-pass these issues.  A good franchise attracts consumers who enjoy the product, are strongly attracted to the name brand, and appreciate a consistent product and business environment. 

How Does a Franchise Work?

So how exactly does franchising work?  The specifics of selling or buying a franchise can vary widely, depending on the type of business.  In general terms, franchisees are required to pay the initial franchise fee.  The franchisee is responsible for providing the capital to start up the business, as well as the initial franchise fee.  The franchisee is responsible for putting in place good managerial skills, and ensuring the successful day-to-day operation of the business. 

After they have purchased the franchised business, they are then required to pay ongoing royalty fees in order to maintain access to the franchise format that they originally purchased from the franchisor.  Part of the franchisees royalty fees also pay for the ongoing developments and enhancements that the franchising business develops through the course of the business development.  The franchising business is responsible for providing the operating system for each new franchise business, as well as initial training and ongoing support.  Both parties, franchisee and franchisor, must sign a contract called the franchise agreement.  The franchise agreement should be drawn immediately after the initial franchise fee has been paid.  The franchise agreement is crucial because it basically governs the relationship between both parties.  The franchise agreement should also detail the responsibilities of each party, and repercussions if one party should fail to comply.  After it has been signed, each party should keep a copy of the franchise agreement.

Potential Disadvantages To Franchises

If a franchise sounds like an appealing option for you, be aware that there are possible disadvantages to selling or purchasing a franchise.  If the relationship between the franchisee and franchisor sours, for instance, litigation may arise.  Litigation is not uncommon in cases where certain aspects of the franchise agreement have been unmet by either party.  Also, be aware that there are several disreputable franchisors that attempt to bait would-be entrepreneurs with offers that seem attractive, but which are ultimately scams.