Glossary of Human Resources Management and Employee Benefit Terms
A franchise business is a type of business that licenses the rights to sell its products or services under its name brand and business model. The owner of a franchise business is called a franchisor, while the licensee is known as a franchisee. Many locations of common retail chains such as McDonald’s and Jiffy Lube are operated by franchisees instead of being owned by the parent company.
Much of the value of a franchise business is in its familiar name brand. Many customers return to franchise business chains they have patronized in the past because they are confident they will have the same satisfying experience at any location.
A franchise business model is well suited for businesses that want to increase the number of their locations or expand into new territory. They can do so with fewer capital requirements, which are paid by franchisees.
Investing in a franchise business requires more than simply writing a check. Before a contract is signed, both the franchisor and potential franchisee carefully vet one another to make sure the business relationship will be a good match. Even so, contracts aren’t permanent; most last for five to 30 years before they must be renewed.
In return for initial fees plus ongoing annual fees, franchisors provide franchisees with a stable, tested way of running a business. Many franchise businesses offer established brands with proven customer appeal. Others may be new or less familiar, with no guarantee of success.
Franchise businesses provide expert assistance every step of the way to help new franchisees get up and running. This often includes such things as:
Providing professional site selection services
Planning the store layout
Assisting with bookkeeping and local and federal reporting requirements
Training the franchisee and their staff
Providing operating manuals and brand standards
Once a franchisee’s location is open, the franchise business continues to support the franchisee through such activities as:
Monitoring the business’s progress
Providing quality control
Offering continuing advice
Creating marketing campaigns
Developing new products or services to promote greater success
It should be noted that franchisees are not only entitled to use the franchisor’s operating methods; they are required to. This helps maintain the desired consistency between franchise locations, but it restricts the ability of each franchisee to innovate.
As you might expect, the cost of investing in a franchise business varies dramatically, depending on the business and the industry. The size and growth of the franchise operation, its brand strength, and its financial stability all help to determine how much it will charge franchisees. For example, McDonald’s, which consistently ranks among the best franchise businesses, may charge more than one million dollars for a franchise. Other well-regarded but smaller chains may charge far less, such as 7-Eleven, where a franchise can cost less than forty thousand dollars.
The initial cost is not the only expense for franchisees, however. Franchise businesses also collect ongoing royalties from franchisees, usually a percentage of monthly revenue. The percentage can vary dramatically for different industries and different sales volumes, but most often it’s between four and 12 percent. Also, there are usually other expenses when a franchisee is launching their business, for such things as equipment, training, and professional advice. These can drive up the costs considerably.