Franchising is the practice of using another firm’s successful business model. For the franchisor, the franchise is an alternative to building ‘chain stores’ to goods and avoiding investment and liability over a chain. The franchisor’s success is the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.
At least two parties are involved in a franchise system:
- The franchisor- lends his trademark or trade name and a business system
- The franchisee- pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.
Franchising is a business model used in more than 70 industries. Two payments made to a franchisor: (a) a royalty for the trade-mark and (b) reimbursement for the training and advisory services given to the franchisee. These two fees may be combined in a single ‘management’ fee. A fee for “Disclosure” is separate and is always a “front-end fee”.
Businesses for which franchising works best have the following characteristics:
- Businesses with a good track record of profitability.
- Businesses which are easily duplicated.
As practiced in retailing, franchising offers franchisees the advantage of starting up quickly based on a proven trademark, and the tooling and infrastructure as opposed to developing them.
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