A few steps are involved in franchising a business: first, a franchisor develops a successful philosophy of business which they are willing to train others to use. Second, an investor willing to establish a franchise contracts with the franchisor and then builds it. Third, the franchisor generally provides training and advertising in the investor’s target market as part of the contract.
Last of all, the franchisor stipulates a lease period through a contract, ranging anywhere from five to thirty years depending on the franchisor’s discretion. Any premature breaching of the contract will lead to serious consequences for the independent operator of a franchise.
For example, one possible consequence of an early-closed franchise would be the loss of sunk costs for the franchisee. While not a specific consequence of closure another point of consideration for potential franchisees is the royalty rate.
Because royalties are to be paid on the gross sales of the franchise, it is possible for a franchisee to not be making any profit, but still be obligated to pay royalties. Thus the nature of a franchise business model needs to be carefully considered before a franchisee invests their capital, especially in light of a franchisor’s advantages.
A franchisor can expect a few significant advantages from the franchise business model. First the franchisor gets to expand their brand without the use of their own capital and at the same time retain control of that brand’s use. A familiar example of this are fast-food restaurants like Subway or McDonalds which seem to have stores everywhere, but because of the central control provide a similar experience to customers throughout the country.
Another advantage for the franchisor is a reduction in need to micromanage franchisees as compared to direct employees. Since franchisees are given considerable decision making power and responsibilities for day-to-day operation a franchisor can reap the financial benefit without much managerial pain. On the downside, franchisors are limited by the pool of eligible franchisees which tends to be small.
Franchisees have the responsibility to run the franchise successfully with the help that the franchisor agrees to provide. Due to the power of the brand they’ll sell franchisees have the opportunity to turn a good profit.
However, potential franchisees should consider the temporary nature of their investment and decide if the benefits outweigh the realities of being a franchisee: loss of creative control, payment of royalties regardless of profit, and lack of significant legal recourse in the case that the franchisee is wronged by the franchisor.
TCBY (http://tcbyfranchise.com) offers investors the opportunity to operate frozen yogurt franchises that sell The Country’s Best Yogurt. Art Gib is a freelance writer.