Before answering the question of the day, “how do franchises work”, it is best for us to familiarize ourselves with the basics of how things work first. Industries all across the globe are willing to sell their franchise to people as it creates a sort of give-and-take between the franchiser, the one selling the franchise of their brand and franchisee, the one buying it. The relationship between these 2 is the very foundation of the franchise system. So, let us look at this relationship and give an answer to the question that you have come here for.
What is a franchise system and how does it work?
There are two ways of answering that question: the Legal and the Business. In Legal terms, a franchise system is one in which the franchisor gives a third party, the franchisee, a license to operate under its brand name while using their methods. It is nothing but a license.
However, that’s a crux of how you would define it legally. I am sure most of us here came for the Business side of things. From that perspective, a franchise system is a business model wherein the owner of a business, who is called the franchiser, sells a third party, whom we call the franchisee, the right to sell goods or services under the name of said business, for an agreed-upon amount of time in exchange of a fee.
This “fee” can be an upfront, one-time payment. It can be periodical one, determined by the agreed-upon percentage of revenue earned or it can be a fusion of the two
So, in short, answering the “how do franchises work”, the owner of a business, the franchisor, grants an interested group of individuals or an individual, the franchisee, with the right doing business using the name of their brand. For example, you can sell the merchandise of, say, the guitar company Fender if you purchase their franchise, in return of a one-time payment or a recurring one.
Related: Role of business incubators
How does a franchise agreement work?
We are back to the legal side of things. If you have understood how do franchises work, it is time to also pay attention to the legal matters now. A franchise agreement is a legal and binding contract, agreed upon and signed by both parties, the franchiser and franchisee, which can be considered the basis of their relationship. In this agreement, the franchiser states what they expect from you. In this agreement, the legal rights that are provided to the franchisee are given.
There is no set standard of a franchise agreement, they vary quite a bit from each other. The terms of condition, the methods of operation, etc. all vary depending upon a number of things. With that said, it mostly covers the legal aspect of things. Like I said earlier, it is the legal and binding contract that establishes a business/professional/franchisee relationship between the franchiser and the franchisee.
Note: Before signing any such document, I recommend you get yourself a franchise attorney to help you decode and understand everything that the document entails.
Advantages of a Franchise:
Investing in a Franchise is usually considered to be a good investment, a lot like a property. Here is why:
1. No Establishing Required:
One of the major constraints of a new business in establishing a solid foundation with the public. When you get yourself a franchise, you bypass that entire process as all of that work has already been done by the business. The methods of operation, the brand name, all the “what works and what does not” is already on the table for you.
2. Security and Support:
Another major advantage of getting a franchise is the support and security that you get from the Franchise. You do not have to be a business expert to run a franchise as a lot of training schemes and support of marketing, account management etc. are provided by the franchise itself. Pretty neat.
3. Business Relationships:
This is one of the major advantages of investing in a franchise in terms of the convenience factor. When you start a business, one of the major hurdles is establishing profitable business relationships. You save yourself the hassle of finding distributors and suppliers and in terms of cost, you save up on a lot of marketing and advertisers as well
Disadvantages of a Franchise:
There are 2 sides to every coin. We must look at things objectively to understand it truly.
Depending upon your agreement, you have to either share a determined percentage of profit you earn or an upfront cost. However, mostly, it is both. You both pay an upfront fee, but also a chunk of the profit you gain. So, wherein a business, the profit goes in your pocket. Here, you must share it.
2. No Control:
This is the biggest drawback in my opinion. Maybe the shared profit is the biggest issue for you, but the fact that you cannot, at least very easily, employ your own ideas and the lack of autonomy is the biggest disadvantage of investing in a Franchise.
3. No Guarantee:
I don’t even get why one would think it’s a sure-shot to success; it isn’t. Investing in a franchise is, at the end of the day, just like any other investment. There is always a chance of failure.
That about sums up it up, folks. Here we addressed and answered the question of how do franchises work, what are their advantages and disadvantages and what is the franchise agreement. Before I close this up, I want you to remember that just like any other business, investing in a franchise can be a risk. It is not a guarantee that you will succeed. With that said, nothing worth doing comes without any risks. If you have the right resources and mindset, you can absolutely make things work and make it worth your time and money. Hope this article helped. Thank you for reading!
- 1 What is a franchise system and how does it work?
- 2 How does a franchise agreement work?
- 3 Advantages of a Franchise:
- 4 Disadvantages of a Franchise:
- 5 Conclusion: