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Franchises represent some of the biggest business opportunities in our country’s entire free market. You may have heard of this business term before, but what exactly is it? What is a franchise and how does it work? Here’s a great rundown just for answering these frequently asked questions on this common business concept.
Franchising Basics
As so fundamentally defined by IFA, or the International Franchise Association, “Franchising is simply a method for expanding a business and distributing goods and services through a licensing relationship.” In short description, franchising is therefore a business agreement that allows or “licenses” an external body to represent or offer the services of that parent company or brand.
Typical Parameters
At the core of any franchising arrangement is the agreement to provide quality representation of the brand, never tarnishing or soiling its image. This is the core understanding at the heart of all franchises. Once past this core value, the joining and offering parties must agree to a lot of terms and conditions.
Typically, the financial side of these arrangements involves predetermined percentages of profits and losses alike to be agreed to. A franchise arm of a home improvement chain for example might then agree to a total claim to 30% of all profits and 50% liability in all losses suffered. Beyond finances, there will likely be agreements on who takes care of building maintenance, landscaping,service equipment, employee benefits, and even the advertising needs for the location in question. In the end, a comprehensive agreement is entered into by both parties that spells out every parameter of the deal.
Real-Life Examples
To better illustrate the world of franchising, we look to some real-life examples of this concept in action. Courtesy of Entrepreneur’s Franchise 500 List of 2016, we can easily take a look at hundreds of today’s top franchising opportunities and their basic requirements for entry. Here are just a few.
Supercuts
The Supercuts brand has been around for many decades. Children were raised coming here for hair cuts, and in turn, later grew up and brought their kids here in following tradition. According to Entrepreneur, to buy into a franchise in this #3 opportunity, one will need an initial investment of between $144,400 and $293,800. From here, an ongoing, 6% royalty fee and 5% ad royalty fee will be required of the new franchise owner. Outside of this, profits are theirs to be had.
McDonald’s
Listed at #6 on Entrepreneur’s list is the classic, American chain restaurant, McDonald’s. With an initial investment of between $1,003,000 and $2,228,000, a new franchise owner can take ownership of a restaurant of this long-standing icon’s namesake. Ongoing royalties and ad royalties each fall to the new franchise owner at around 4% each.
The UPS Store
The UPS Store is a division of UPS, the global leader in shipping solutions and parcel movement. For an investment of between $159,224 and $434,521, anyone can become a UPS Store owner. After basic royalty fees between 2.5 and 5%, the owner gets to take all in this franchise opportunity listed by Entrepreneur at #17.
Franchising is a great business opportunity that allows for common people to become a part of a major brand, thus spreading its influence and service base. Without this business concept, it’s hard to say how the business world would look today. These are the basics of today’s franchises as well as some of their most common contractual parameters.
