Definition of Franchise
A franchise is an existing business or company that a franchisee buys into for the right to use the franchise's name and branding, as well as to sell its products or services. Some of the most popular examples of franchise companies include McDonald's, Subway, Domino's Pizza and the UPS Store.
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How a Franchise Works
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In order to operate a business as a franchise, you first have to buy into the franchise, which usually includes paying a franchise fee. The franchise fee ranges from $10,000 up to a couple of hundred thousand dollars. When you purchase a franchise, you are referred to as a franchisee. In order to operate the business as a franchisee, you have to abide by the rules set by the franchisor---the company that sold you the franchise. There may be other fees associated with running a franchise besides paying the franchise fee. These costs include paying a percentage of your business profits (royalty fees) and other upfront investment costs such as buying equipment, leasing a location and hiring and training employees.
History of Franchising
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The concept of a franchise is not new. It took root in in the 1850s and has continued to flourish as a way for individuals to start and run a business. Franchising started with Singer sewing machine licensing individuals around the country to sell its sewing machines and continued into the 1950s, when McDonald's became the most successful fast food franchise in the world. A franchise is one route an individual can take to own and operate a business. Unlike starting a business from scratch, franchisees have a higher success rate because there is already a proven system in place to sell the products and services of the franchise.
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Leverages Corporate Image
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One of the reasons a franchise tends to be more successful than starting a business from scratch is that the franchisee can leverage the corporate image of a well-known brand and company. Since franchises have an established brand and customers recognize it, customers are more comfortable doing business with it over a mom-and-pop-type business. People who are looking for a place to eat in an unfamiliar town, for example, know what to expect from McDonald's, Wendy's or Burger King.
Training
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The franchise also provides the franchisee with the training and knowledge needed to start and run the business successfully. This means the business owner doesn't have to try to figure it all out for herself. The franchisor only succeeds if its franchisees succeed, so it is willing to invest time and tools into making sure that franchisees succeed.
Time Saver
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Buying and running a franchise can also save you a great deal of time. Since the setup of the business or the model of the business is already in place, you can focus on running the business according to a set standard rather than trying to set standards of your own. The map has been drawn, and all you have to do is follow the directions.
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