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How Does A Business Franchise Work?

Owning a business gives a deep sense of self-worth and self-sustenance, which are both great feelings. But in a real sense, creating a business from the ground up is quite challenging. Entrepreneurs will have to create a striving business model, develop a marketing strategy, create a solid reputation for their brand, and the list goes on and on. According to expert analysis, about half of newly established businesses fold up before they clock five years.

Nonetheless, you can avoid the challenges of beginning a new brand by buying a business franchise from an established brand. Franchising offers entrepreneurs a wide range of benefits that give new business owners an edge over businesses starting from scratch. If franchising seems unfamiliar to you, or you wish to have an in-depth knowledge of how it works, kindly click on the weblink to learn more.

What Is A Business Franchise

Before we dive into the details of how franchising works, let’s take a little time to understand what a franchise is. A franchise is a replica of an established business brand in a different location.

For further clarification, a franchise is usually not owned by the original business idea owner (franchisor) but by anyone willing to pay for the franchising rights. So even though a franchise can be perceived as though it belongs to the franchisor, it doesn’t.

Basically, a franchisor allows new business owners (franchise) to operate a replica of the original business and leverage the customer base of the franchisor. 

The Franchise Business Model

Franchising involves two main parties; the franchisor and the franchisee.

The franchisor: A franchisor is the business owner or brand that has been in a line of business for a while and has created a successful business model over the years. The franchisor is then willing to grant entrepreneurs or investors permission to use their already established business model, brand name, and other things specific to the franchisor. The franchisor grants a license to the entrepreneur for a specified period of years.

What Does A Franchisor Offer

A franchisor offers major business details peculiar to their business, such as:

  • A proven, well-established business model
  • A recognized brand name and logo
  • An established business operating system and processes
  • Training
  • Ongoing support and guidance
  • Marketing Strategy

Franchisee: On the other hand, a franchise is an entrepreneur who wishes to gain a competitive advantage in the industry by buying a franchise from a franchisor.

What Is Expected From A Franchisee

A franchisee is expected to pay a fee for using the established model of the franchisor. The fee is usually in two parts; the initial investment and the ongoing fees.

The initial investment in a franchise covers several necessities: franchise fee, travel expenses and training, initial marketing, rent or building construction, fixtures, furniture, equipment and supplies, insurance, inventory, and more. The ongoing fee is the royalty fee which is a percentage of the franchisee’s gross sales; it’s usually paid monthly, weekly, quarterly, or as desired by the franchisor. The ongoing fee can also include regular advertising or promotional cost.

Fundamentals Of Franchising

To better understand how business franchises work, let’s look at the basic aspects of business franchises.

  • Federal and State laws

Franchising is a business strategy known and recognized by both federal and state governments. Federal rules and regulations have been put in place for franchisees and franchisors to follow. The rules state the broad legal responsibility of both parties to help in the smooth relationship between franchisee and franchisor.

  • Binding contract

After all the necessary payments have been made, both parties will sign a binding contract when franchising. The contract can last for 3 to 5 years for a short-term contract and can last for as long as 20 years. The contract is created to ensure that both parties stick to their side of the bargain. Buying a franchise is a huge investment, so it’s only right to have a legally binding contract to guide the relationship.

  • Rules of operation

Buying a franchise is mainly because you wish to take advantage of an already established business model or structure. For this reason, the franchisee must follow the rules of business operation created by the franchisor. With franchising, the franchisee will need to pocket the buzzing creative business operation ideas in their head and strictly follow the model and process of the franchisor. The franchisee should clone the franchisor from the building structure, color, signage, recipe, customer service, staff uniform, and more.

  • Independent business owner

Although many people believe that the franchising model gives franchisees little control over their business, this is far from the truth.

As long as they don’t do anything that could damage the brand image or credibility. Most franchise owners are allowed to manage their business as they see fit. Therefore, anyone trying to own a franchise needs to understand that they are still independent business owners striving for excellence.

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