Understanding Franchising

What is franchise?

A franchise is a type of license that grants a franchisee access to a franchisor’s proprietary business knowledge, processes and trademarks, thus allowing the franchisee to sell a product or service under the franchisor’s business name.

In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual licensing fees.

In other words, a franchise is a joint venture between a franchisor and franchisee. The franchisor is the original business. It sells the right to use its name and idea. The franchisee buys this right to sell the franchisor’s goods or services under and existing business model.

Why get into franchise?

Through franchisor’s perspective,

When a business wants to increase its market share or geographical reach at a low cost it may think about franchising its product and brand name.

Through franchisee’s perspective,

Franchises are popular way for entrepreneurs to start a business, especially when entering a highly competitive industry such as fast food. One big advantage to purchasing a franchise is you have access to an established company’s brand name. You won’t need to spend resources getting your name and product out to customers.

When to get in franchise?

Franchising a business has a whole host of benefits. Though franchising is the best option for expanding a business, not all businesses make good franchises. There are a few essential conditions that any business hoping to jump into franchising needs to have covered.

The business which is successful in one location may fail to prove it in another or nationwide. Thus, there are few things you need to contemplate about, before franchising your business. Patience is the key, wait for the perfect time to replicate your business model. But the question still remains, how to know if it’s the right time?

So, here are some points to consider,

  1. Demand for your Business

One of the good signs which will indicate the right time for franchising your business is when potential franchisees start reaching out to you. People will start asking if you are accepting franchise applications, whether you could offer them franchise, or if you’ll be franchising in the future. And when there will be interest from third parties to invest in your business, is one of the green flags to consider replicating your business model.

2. Sales are steady

If you are thinking about franchising your business make sure your sales number are steady. Introspect into your business growth how the sales have been for the past few years. If there’s any dip in the profit share, your business model is not ready for franchising.

3. Can you clone it

Franchising is all about replicating a successful business model. Make sure your business structure has a strong system and process, which can be replicated easily.

If you own a fast food business, once you decide to start franchising, you’re no longer preparing them yourself. Instead, you are now running a joint which will serve fast-food. You will be required to teach your prospective franchise on how to prepare the food, which locations are preferable.

4. Capital

If you are thinking that franchising is a ‘no-cost’ expansion strategy, then it’s time to burst that bubble. Franchising is definitely a low-cost means of expansion; it is not a “no-cost” strategy. This is because you will need capital to develop legal documents, manuals, training programs and marketing materials, not to mention a marketing budget for franchise lead generation. If you do not have the budget for executing all these tasks, then it’s definitely not the right time for you to franchise your business.

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