Franchise Business

What is a franchise business?

In 1851, Isaac Singer sold local companies the rights to sell his sewing machines in exchange for a share of the profits. This is one of the earliest examples of a franchise business. The franchise model soon spread to the food, medical, and automobile industries. Fast-forward to today, and the franchise business model is one of the most popular models around.

The franchise system works because it allows business owners to scale their businesses and increase revenue, and it gives entrepreneurs a “pre-made business” that skips many of the hurdles and headaches of a startup. Because it is so nicely packaged, however, it comes with a hefty initial franchise fee and ongoing royalties, but financial institutions may also be more willing to lend money for a franchise investment.

There are two main parties involved in a franchise business: the franchisee and the franchisor. The franchisor licenses the rights to use its business name, model, and expertise. Plus, they usually provide ongoing training. The franchisee purchases those rights. Their individual rights and responsibilities are outlined in a franchise agreement. 

Read more about owning and operating a franchise business. 

FAQs 

Why is a franchise less likely to fail?

A franchise is less likely to fail because the business model has already proven successful, and they have already established brand recognition. Instead of starting a new business from scratch and bearing the burden of getting the name out and finding customers, a franchise is a ready-made business. It’s the difference between cooking from scratch and buying a box mix. 

What do you call the owner of a franchise?

The owner of a franchise is called a franchisee. The franchisee pays for the rights to operate under the parent company name and use its branding, processes, marketing plan, and any other assets outlined in the franchise agreement.

What are the drawbacks of owning a franchise? 

Buying a franchise takes a lot of the guesswork and risk out of starting a business, but it’s not without its challenges. The initial investment is steep, and the franchisor can stipulate minimum net worth requirements for prospective franchisees. Furthermore, franchisees pay ongoing royalties to the franchisor and have limited autonomy over how their business is run. 

Can I own more than one franchise?

Yes, successful franchise owners may want to own more than one. Multi-unit franchise owners typically hire management teams to run each franchise while they oversee operations.

How do I know if a franchise opportunity is a good investment?

The Federal Trade Commission (FTC) requires all franchisors to provide potential franchisees a Franchise Disclosure Document (FDD), which gives them enough information to weigh the risks and benefits of investing. The FDD includes 23 items, including sales revenue projections, operating expenses, litigation history, the franchisor's financial statements, business experience, trademarks, and more.

What are some examples of franchises?

Fast food restaurants, gas stations, hardware stores, shipping stores, gyms, and hotels are examples of businesses that commonly operate as franchises.