Franchise 101: The Basic Terms, Tips and Facts

RochelleBailis by Rochelle Bailis on June 25, 2014
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Franchises can mean quick business for those who don’t mind following the rules.

Potential business owners have a choice. They can either start their own business from scratch, or purchase a franchise business instead. There are pros and cons to each method. If you’re interested in quickly starting a business that has a higher chance for success, a franchise may be your best option.

What Is a Franchise?

According to the U.S. Small Business Administration, a franchise is an agreement between an individual or group and a company that owns a trademark, product name or business format. The individual pays to be able to use the company’s trusted formula for success.

For example, let’s say you want to own a sandwich shop. You know of a famous national sandwich chain that offers franchise options. In this case, they are called a “franchiser.” Upon contracting with them, you, as the “franchisee,” get their operations secrets and rules and use those to create your own sandwich shop under their name. While you own the franchise and profit from increased business, you pay fees to the sandwich shop to use their name, secrets and sandwich formulas.

The Pros of Franchising

Since you pay a fee to learn the intricate strategies of the business, a franchise is good for people without much experience in owning a shop. Rather than figuring it out on your own, the franchiser supplies you with key information to run the business well. This includes marketing plans, supplies, training, customer collateral and financing assistance. Everything is spelled out for you so you can open your shop much quicker than a business you created from scratch.

If you’re worried about making a safe investment when opening your own business, a franchise can be a good choice. Since franchises are based on already-successful business models, they have a much higher chance of succeeding than a company that you created from scratch. Jeff Elgin of Entrepreneur suggests that you research potential franchises to increase your chances of success. Some smaller franchises aren’t as successful as the larger national chains with thousands of locations. Ask for all research material from a potential franchise to see if it’s right for you.

The Cons of Franchising

Just like with any business model, there are negative aspects to becoming a franchisee. For one, you don’t have nearly as much control of the creative vision of the business. While you may have a say in seasonal discounts or the layout of the store, decisions such as the color scheme, logo, menu and prices are set in stone by the franchiser. While some business owners are fine with having less control, that isn’t the case for everyone.

As mentioned above, you also have to pay fees to become a franchisee. You’re essentially renting the image of the franchiser. Besides initial fees, you may need to pay a portion of your profits throughout owning the franchise.

Is This Right for Me?

To decide if franchising is right for you, weigh the good with the bad. If you want an already structured business that has a recipe for success, then franchising may be the right choice.

If instead you like to have complete control of your business and all decisions, you will find the idea of a franchise much too confining. In this case, create your own small business from scratch.

Citations

http://www.sba.gov/content/franchising-overview

http://www.entrepreneur.com/answer/222004

RochelleBailis

Rochelle is an experienced business writer, marketer and researcher. She is currently the Senior Editor and Content Producer at Intuit.

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