The Formation of a Franchise

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Once a successful business is established, expanding operations is a logical next step. Anyone who chooses to expand a business needs to choose the method that works best for them. One option is to start a franchise.

Identification

  • When you franchise your business, you, the franchisor, sell the rights to open a new location to another entrepreneur, the franchisee. The franchisee agrees to follow your business model and pay you an initial fee as well as royalties on an ongoing basis, typically a percentage of gross sales.

Benefits

  • Franchising allows you to grow your business quickly, as several units can be opened simultaneously. The franchisee uses his own capital to open the unit, which limits your risk if the unit fails. Because the franchisee agrees to follow your business model, you maintain consistency in operating procedures.

Considerations

  • Although you do not technically own the franchise units, you need to provide the operators with ongoing support. Franchisors typically provide training for unit operators and their employees and marketing support on the local, regional or national level. Additionally, franchisors sometimes provide assistance in obtaining financing or finding site locations for the franchisees.

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