A franchise, or franchising, is when one person uses the business philosophy and business method of another to own a business that sells the products and services of the person with the business philosophy. Franchisors also provide their franchisees with advertising, training and other support services. A franchise relationship usually lasts anywhere from five to 20 years at a time.
Franchising originated in the 1850s and possibly before that when Isaac Singer began selling his sewing machine in mass quantities to improve its distribution. Other early franchises were Coca-Cola, automobile manufacturers, the telegraph and the A&W Root Beer restaurant chains.
Franchising works best for businesses with an excellent track record of profitability, businesses built around a unique concept, businesses with broad geographic appeal, businesses that are easy to operate, businesses that are inexpensive to operate and businesses that are easily duplicated.
As with all business ventures there are advantages and disadvantages for the franchisors and the franchisees. For a franchisor, the advantages are expansion, legal and operational considerations. With expansion, the franchisor will be able to get his product or service all over the county, the state, or even the country.
In terms of legal considerations, the advantages are that a franchisor does not have to bother with the normal paperwork involved in starting a new location such as the permits and the licenses. All of this is taken care of by the franchisee. In terms of operational considerations, the franchisor does not need to oversee the daily operations of each individual franchise because they do not have as much of a stake in the operation since they do not own it outright.
The advantages of owning a franchise for the franchisee are getting a quick start, the process of expansion and training. A franchisee can start their new business extremely quickly because the business philosophy is already in place and the franchisee does not need to come up with a product or service from scratch.
The final advantage for franchisees is the aspect of training. Franchisors usually offer franchisees training about how to run the business, how to train the employees and how to properly keep all of the paperwork and finances.
The disadvantages for franchisors are a limited pool of franchisees and control. Wherever the franchisor sets up his location and his franchise there will always be a limited pool of reliable owners to choose from when expanding the franchise. A franchisor cannot remove a franchisee from owning one of the franchises even if they are incompetent and are running the business into the ground. This can hurt the public image of the entire franchise but a lack of control over the business is the risk a franchisor takes when delving into this market.
The disadvantages for a franchisee are control, price and conflicts. A franchisee loses control of the business in terms of making changes to the operation of the business. All prospective changes must be approved by the franchisor before they are put into effect. The franchisee must also pay the price for everything that the franchisor wants in the store in terms of equipment, uniforms and the product. The franchisee cannot outsource any products for cheaper value. Conflicts can also arise between the franchisor and franchisee if either side has trouble running the business or runs it ineffectively.
An attorney can help anyone interested in becoming a franchisor or franchisee in any realm of the business industry. An attorney will help with the signing of the contract, the terms involved and the risk involved with entering such an agreement.