What is a Business Franchise and How Does it Work

If you decide to start a business, you will have to evaluate the various forms of businesses. One example of the many types of business organizations is the franchise business.

 

A franchise is a unique way to structure a business relationship. The franchise model is one of the most popular business models globally, including some of the largest companies.

Franchise Business Model

A franchise business model has two essential parties: the franchisor and the franchisee. The franchisor is the company that creates the original business model. 

The franchisor is the company that will offer third-party companies the right to do business under their trademark and brand name. The franchisor comes up with terms of the franchise business system, which may extend to a particular location or over a while. 

On the other hand, the franchisee is the company that operates under the trademark and brand name of the primary company. The franchisee pays the franchisor an initial fee and regular royalties to conduct business using their name. 

There are over 3,000 franchisors in the United States alone and thousands more all over the world. It is a powerful business model with plenty of pros and cons. 

Five fundamental elements contribute to the way a franchise business works: 

Federal and State Law

Both state and federal laws govern the way franchise businesses operate. The broad legal framework addresses the rights and responsibilities of every party in a franchise business model. 

The federal laws on franchises’ operation are the U.S. Code of Regulations, 16 CFR Parts 436 and 437. The organization responsible for enforcing the laws is the Federal Trade Commission (FTC), which also has its own Franchise Rule. 

Every franchisor and franchisee in the U.S. should understand the Franchise rule. There are also state laws that will affect the franchises within those states. 

Long Term Contracts

The FTC Franchise Rule and other Federal or state laws that govern franchises only offer a broad legal framework to manage the obligations between franchisor and franchisee. Most of the operations in a franchise are based on a contract or franchise agreement. 

Both parties will sign a contract before going into business together. The contract will depend on the type of franchise; hence you can view franchises by category. The franchise agreement will typically last for between ten and twenty years. 

The contract will involve every detail about the franchise, including the franchise fee, royalty rates, obligations, and more. It will also include under which conditions either party can terminate the agreement. 

Franchise Rules

An essential element of the franchise business involves the franchisee following the rules set forth by the franchisor. Franchises involve extremely rigorous operating procedures and standards that the franchisor provides, and the franchisee has to follow. 

You do not get to choose how you do business as a franchisee. You either agree to follow the rules or decide not to start the business. 

There is little to no room to exercise any creativity in a franchise business. A franchisor can determine every little aspect of the business, including the colors and placement of the logo on the business premises. 

However, you will be buying into a tested and successful business model, so you should decide to follow the rules. 

Business Ownership

You will be the business owner as a franchisee rather than an employee of the business. There are no guarantees in business but being a franchise business owner means getting a boost from the franchise. 

You will still get to do most of the things that a regular business owner would do, including hiring and training staff, selecting the site’s location, controlling business expenses, customer service, and paying taxes. 

Scalability

One of the main features of a franchise business model is its ability to scale. There are a couple of ways in which you can grow a franchise business.  There are multi-unit franchises that involve owning multiple units of a franchise. Most rich franchise owners have multi-unit franchises, meaning that they have several franchise business outlets in various locations. 

There is also the master franchise way of growing a franchise business. It involves buying the right to run a franchise in an entire location based on its population. 

If you are a master franchisee, then you obtain the right to sell multiple franchise units in your allocated area.  

There is much to know about the franchise business model. The above is only the tip of the iceberg. However, those are the most vital elements of a franchise business model and should give you a basic understanding of how a business franchise works.

More From HU17.net