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Finance

What is Franchising?

By Luke Arthur
Updated Feb 20, 2024
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Franchising is a type of business model in which a business uses the same business model as an existing business. Franchising involves a franchisor and a franchisee. This type of business is commonly used in retail stores, restaurants, and many other types of businesses.

When a business decides to start franchising, it will offer the business model for sale to prospective business owners. Entrepreneurs who wish to start a business can pay a certain amount of money and purchase the rights to open a franchise in the same business model. The franchises will all share the same name and will typically be distributed in different geographical areas.

In most cases, franchisees have to pay an initial purchase price to purchase the franchise. In addition to that, the franchisee has to pay the franchisor an ongoing sum in franchise dues. Many times, the franchisee will also have to buy products for the business from the franchisor.

In return for the franchise fees, the franchisor is going to provide valuable business information to the franchisee. The franchisor has already created a successful business model and he or she is going to convey all of the necessary information for the franchisee to become successful as well. One of the big advantages of investing in a franchise is that the business owner is not going to have to create a new, successful business from scratch. He or she can simply follow the detailed plan that has been laid out by the original company.

Franchises can be a good investment because the franchisor wants all of the new franchises to succeed. In franchising, the original business owner is only going to be successful if the rest of the franchises are also successful. This means the franchisor is going to do everything in his or her power to make sure that new franchises do well.

When getting involved with franchising, it is important to do thorough research about the business in question. While certain franchises have been wildly successful over the years, others have not done as well. Investing in the wrong franchise could potentially cost an investor a large sum of money and waste a great deal of time. In most cases, investing in a franchise that has a solid track record and a good business history is going to be one of the best investments an entrepreneur could make.

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Discussion Comments

By SauteePan — On Apr 06, 2011

@Oasis11-I just wanted to say that I had a friend that created businesses and then she would franchise them and make a lot of money.

She developed grocery stores and fast food concepts. It was really amazing. If the business model is simple enough and there is sufficient profit for a franchisee then a franchisor can charge a fee for each location and when the chain becomes successful, they can sell to a large corporation or expand internationally.

This is what my friend used to do.

By oasis11 — On Apr 05, 2011

@Icecream17- Those are all good points. I think that a lot of people are looking for franchise opportunities because they have not been able to find a job. It is really empowering because you can really take control over your life instead of waiting for a job to come around.

I do have to say that you should definitely do your homework regarding the company’s finances and possibly a business broker can help you assess what existing opportunities are best for you.

Usually people that prefer to receive direction from a corporation do well with franchising, but people that are very independent minded may really end of hating owning a franchise because they have very strict rules and regulations that have to be followed.

A lot of people don’t realize this and end up making a big mistake. Also, you do have to pay royalties to the franchise company so if you want all of the profits then you are probably better offer buying an existing business with a proven track record that is not a franchise so that you have total control over the business model.

By icecream17 — On Apr 03, 2011

@Cupcake15 -I agree and I also wanted to add that if you want to buy a franchise it is best to actually work in the business for at least six months in order to determine if you truly like the business because if you hate going to work every day you will not be successful. I a lot of people that do this actually change their mind because what they envision is different than what they experience.

Also, you can gauge how successful the business is and what it will take to actually be profitable. You should to talk to other franchise owners to see how they feel about their business and see a franchise attorney in order to discuss any legal questions so that you will know what you are getting into.

I say this because there was franchise that was ranked in the top five a few years ago that misrepresented a lot of information and many of the franchisees lost a lot of money and eventually sued the company. It is a rare event but these things do happen.

By cupcake15 — On Apr 02, 2011

I think that if I were considering buying a business, I would look into the best franchise opportunities available. Franchise opportunities are less risky in my opinion because they have a proven business model so you know that the concept works.

I know that there are magazines that rank the various franchises and offer you information regarding the startup capital that you will need as well as the length of the initial training. I think that the support is really important because you will need to know that you will have someone to talk to if you run into a problem or some type of challenge.

The nice thing is that some of these franchises could even be run from home so it allows you to start your business with less start up capital and some even allow absentee ownership.

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