How Do Franchises Work?
For a franchisee to legally operate a trademarked business, they must purchase the rights from the business’ franchisor. Franchising start-up costs include a flat fee known as a franchise fee, as well as other investments and restrictions. A franchisee pays the franchisor a percentage of their gross sales, known as a royalty fee.
It is up to the brand owner, or franchisor, to determine if an individual fits their business model and whether or not the prospective franchisee has the capital to establish a strong location. Large franchises like McDonald’s fast food franchise can be highly selective about who they choose to extend the use of their brand to.
Before a franchise business deal is brokered, the brand holder and prospective franchisee will meet to discuss future operations and determine if everyone is a good fit for the brand’s culture. At this time, both the franchisor and potential small business owner can interview one another. It’s important for franchisees to ask franchisors questions about the business, as the agreement must favour both parties and forge a strong working relationship.
Once all parties agree that a partnership is mutually beneficial, the future franchisee will need to sign a franchise agreement and franchise disclosure document. These documents will legally bind the new franchisee to the brand standards, including all franchising fees, royalty percentages, marketing requirements, and access to the brand’s intellectual property, such as trademarks and secret recipes.