Definition of Franchise Business

A franchise business consists of purchasing the rights to distribute product, services, techniques and trademarks from a third party in exchange for a percentage of the gross profit and a royalty fee.

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What is Franchise

Prominent in the fast-food industry with brands including McDonalds, Subway, Dominos and Burger King, a franchise lets an investor or entrepreneur use an existing and proven system to distribute goods and services, allowing many investors to operate and manage a business whilst reducing the risks associated with the initial start up and management of a small business.

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Definition of Franchisee

The franchisee is the individual who purchases the right to use a franchise trademark from the franchiser which consists of the products and services, brand name and the franchise business model.

Definition of Franchisor

The owner of the distribution rights to a company or business. The franchisor determines criteria for franchisees to purchase the rights and takes an upfront fee as well as ongoing royalties. One example of a prominent franchisor is Subway.

How to Franchise Business

There are many benefits of franchising a Business including higher returns on investment, and the retention of capital. Several factors influence the ability of a business to be franchised including credibility, a suitable operations model, return on investment for a franchisee, management, and having a superior product.

If these factors show a viable franchise, then a business and franchise plan; trademarks and business security; and training and operations manuals are developed as well as creating and meeting legislative requirement documentation. The business can then be sold to possible investors as a franchise business.

How to Buy a Franchise Business

Over the past 5 years the internet has opened up a myriad of options on how you can purchase a franchise business. Information is available from both owners as well as third party sources meaning an investor or entrepreneur can make an well informed decision on which franchise business is suitable for them.

As with purchasing or starting any business there are pre-requisite criteria that need to be meet and include the amount of capital, net worth and the business experience of the potential investor Upon qualifying it is simply a matter of providing the capital, and completing legal documentation, and establishing your franchise business.

Advantages of Franchise

  • Risk minimization is low as start up is fast and investors follow a proven business model meaning the learning curve is significantly reduced.
  • Initial investment is low to entice and favour new investors or entrepreneurs.
  • Using an already established brand name or trademark means you are already selling a proven concept.
  • Business support from the franchisor on a continuing basis to help manage and further support new technology, products, training and marketing.
  • Purchasing power from the franchisor buying in large quantities and passing down savings to franchisees.

Disadvantages of Franchise

  • Restrictions on how you manage the business as to keep consistency among franchises. This is because the franchisers initial business model has to be followed accurately by all franchisees.
  • Costs at times can be higher than projected with an up-front purchase fee as well as ongoing royalties.
  • Difficult that occurs when selling the franchise, selling to investors that have to be approved by the franchiser.
  • Ongoing royalties mean profits are shared with the franchisor
  • Limited growth potential due to territorial rights; and contractual and franchise obligations.

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