A franchise is a type of license that a party (franchisee) acquires to allow them to have access to a business’s (franchisor) proprietary knowledge, processes, and trademarks in order to allow the party to sell a product or provide a service under the business’s name. In exchange for gaining the franchise, the franchisee usually pays the franchisor an initial start-up and annual licensing fees.
Examples of franchises
- McDonald’s (Most Popular).
- Pizza Hut
- Burger Hut.
- Choice Hotels
- Taco Bell
Franchise and startup
If you don’t want to carry on somebody else’s idea for a business, you can start your own. While founding your own company has plenty of potential rewards, both monetary and personal, it is also risky. When you start your own business, you are on your own, and much is unknown. Will the product sell? Will customers like it? Will I make enough money to survive?.
Also, the failure rate is high (this doesn’t mean you would fail, the major cause of business failure is lack of endurance). Statistics show that 25% of startup businesses don’t survive the first year. About half make it to year five, while approximately 30% last ten years. If your business is going to survive, you alone will have to make that happen. To turn your dream into a reality, you can expect to work long, hard hours with no support or expert training. If you try this on your own without any experience, the deck is stacked against you. If this sounds like too big a burden to bear, the franchise route may be a wiser choice.
Pros and cons
A franchise comes with a built-in business formula including products, services, even employee uniforms and well-established brand recognition such as that of McDonald’s. Depending on the franchise, the franchisor company may offer support in training and financial planning, or even with approved suppliers. Whether this is a formula for success is no guarantee.
Disadvantages include heavy start-up costs as well as ongoing royalty costs. To take the McDonald’s example further, the estimated total amount of money it costs to start a McDonald’s franchise ranges from $1 million to $2.2 million
- The franchisor is the business that grants licenses to various franchisees,
- Franchise contracts are complex, and the costs and responsibilities to potential franchisees will vary from offer to offer.
- While some franchises are established brands with lower risk and a reliable customer base, others are risky and may require a substantial financial outlay to the franchisor.