Franchising For Dummies – What It Is And How It Works

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Franchising is one of the greatest ways to start your own business and be your own boss. This is why everybody should know what it means. Here I will throw some light on the matter, giving you a very simple explanation (for dummies) of the word franchising.

An Example of Franchising

Imagine that John has built a successful bakery and makes a really fine bread. For the last years, his brand has been well established and everybody in town knows about the tasty bread he makes. He has a really profitable business, but doesn’t want to expand, because of the fact he doesn’t want to be involved in the management of new stores and people. Also, he doesn’t have the money for doing this. So, John decides to take advantage of franchising. Everybody, who likes his business and has a passion for starting a company can use his proven business model to start a branch of John’s bakery. For providing the know-how, John collects $2 000 dollars initial fee and 5% of the income of any new business unit. In exchange he gives the right to the new business to use his trademark, helps with the start of the new store, with marketing and with training their staff. This is actually how the McDonalds empire was actually built.

McDonald’s Logo, 2012

Theory

Franchising is simply when a business (franchisor) sells a well established and successful business model to other businesses (franchisees). This way the franchisor expands its business and brand without having to manage the new branches, and without the need to invest money and resources to expand. The new store/business unit is almost independent and separate company, that is managed by its own manager and has its own staff. What the franchisee takes advantage of, is the opportunity to start an already working business and receive complete know-how for running it. It operates under the brand of the franchisor and sticks to some rules in order to clone the same successful business model. The franchisee get the right to use franchisors trademark.

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In exchange for the lucrative business model, the franchisor collects a percentage of the income (or profit) of its franchisees and sometimes a one time fee at the beginning of the contracts between them. The taxes and fees may vary, sometimes the franchisor may take a stake of the equity of the franchisee.