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Franchising: How It Works and What It Can Do

by: clintshaff on Date: Tue, 10 Jan 2012 Time: 9:27 AM

An established business can sell its business model to another business to share its success. The business model, which gives the buyer an opportunity to avoid starting from scratch, is called "franchise," and the process of exchange is called "franchising." Practiced for many decades, franchising has remarkably established various forms of industries and has triggered globalization. It is considered a great alternative to building chain depots and it can make similar or even higher profits than the source of the business model. In other words, the practice benefits both parties in different ways.

Franchising is played by two main characters—franchisor and franchisee. The franchisor sells the business model to the franchisee, which in return starts the chain. In this business practice, the franchisor avoids the formidable task of starting branches, while the franchisee avoids the risks of building a new name. However, the franchisor remains a continuous beneficiary of the franchise based on formal agreement between the parties. The franchisee, on the other hand, can buy as many franchises as it can as long as necessary fees for such exchange are paid off.

Two types of fees are involved in franchising, particularly paid by the franchisee to the franchisor. One is royalty, a right to ongoing use of a certain asset. In franchising, royalty covers the trademark that makes a shortcut venture for the franchisee. Another is the compensation for the required training and consultation given by the franchisor during the start of the business. Both can be paid either individually or collectively depending on the agreement.

In a general context, franchising is not a permanent exchange in which a product is sold. Rather, it is an act of leasing or renting a business model. This is explained in the contract for the use of the model stating a finite term of license. This means the franchisee is given a limited but renewable license to use the franchise and not actually buy a title of ownership of the franchise. A considerably best franchise license can last up to 30 years before expiration.

There are several factors considered before a franchise is sold by the franchisor or bought by the franchisee. The franchisor may require the franchisee to provide feasibility studies proving a broad geographical appeal for the business to secure continuous revenues throughout the lifetime of the contract, while the franchisee can demand data proving the best franchise has a good track record of profitability and is easy to duplicate.

Such an arrangement is usually made during a pre-presentation of the detailed business model prior to the training and consultation. The best franchise has easy-to-operate systems and processes. These factors help predict a sure success for the franchisee.

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