Franchising Definition – What Is It And How Does It Work?

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Franchising is one of the greatest ways to start your own business and be your own boss and at the same time take advantage of an already established brand and business operations. This is why everybody should know what it means. Here I will throw some light on the matter, giving you a very simple franchising definition. We will see how it works and will go through its main advantages and disadvantages.

How Does Franchising Work? An Example With “John’s Bread”

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. John has coined the most efficient processes procurement with materials, for preparing the right dough according to a secret recipe, he has a special baking procedure for achieving the most awesome crust on his bread that one could imagine. John has not only established a well-recognized brand in his town but also he has built up precious know-how about how to prepare the most delicious bread in the state. All of this has resulted in a really profitable business that could be easily replicated in other towns and states. But how can John open many new stores, he would need lots of money to replicate his business multiple times? Or it may be possible that John just doesn’t want to expand, because of the fact he doesn’t want to be involved in the management of new stores and people. So what could our guy do in this case? He can simply take advantage of franchising and become a franchisor. Everybody who likes his business and wants to start a company of her own can use John’s proven business model, his secret recipe and baking procedure, the “John’s Bread” brand that everybody already knows. Let’s imagine that Pamela wants to open a bakery. She can simply become a franchisee of John and this way she can copy and paste John’s business to her location. Pamela can start benefiting from everything already established as know-how by paying a franchising fee to John. For providing the know-how, John collects $2 000 dollars initial fee and 5% of the yearly income of Pamela’s (and any other 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

McDonald’s Logo, 2012

What Is Franchising? Definition And Some Advantages And Disadvantages

The definition of franchising is simply when a business (franchisor) sells a well established and successful business model to other businesses (franchisees). This way the franchisor expands their 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 an almost independent and separate company, that is managed by its own manager and has its own staff. What the franchise 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 gets the right to use the franchisor trademark.

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.

Some of the most popular and successful franchises are McDonald’s, Starbucks, Subway, Dunkin’ Donuts, 7-Eleven, Great Clips, KFC and many others.

Video

To further understand the meaning of franchising, you can watch this amazing video explaining the basics of it. Here you are:

Resources

If you are hungry for more information on this great way of starting a business, you can check the following useful resources:

On Wikipedia: http://en.wikipedia.org/wiki/Franchising

franchising.com – a site full of information about franchising, tips and lessons, opportunities and much more.

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