An Introduction To Franchising
What is franchising? You may be aware of popular brands such as Coca-Cola, McDonald’s, and Ford Motors. Without the franchising business model, these brands would never have their worldwide presence and phenomenal success. Let’s take a closer look at franchising and what it can do for you.
What Franchising Is
Basically, a “franchise” is a business agreement between two entities. The first entity, the “franchiser,” creates the product and/or the business operating system. The second entity, the “franchisee,” enters a contract with the franchiser to sell the product through the establishment of a “franchise unit.”
For instance, an entrepreneur can put up a McDonald’s franchise by entering a contract with the company, and then finding a good location and putting up the restaurant building. McDonald’s is the franchiser, the entrepreneur is the franchisee, and the restaurant is the franchise unit.
The franchising model allows companies to expand more quickly than if they relied on their own funds. With franchisees willing to fund a large part of the franchise unit’s establishment, franchises can do business in a wide variety of geographical locations — some even worldwide.
As mentioned before, franchisers enjoy the advantage of faster expansion with less capital. The only “tricky” part of the equation is in the creation of the product and the business itself.
On the other hand, franchisees enjoy the advantage of NOT having to create a product and operating system. The business is already there — all franchisees have to do is to establish the franchise unit and start selling.
Franchising offers budding entrepreneurs a venue to start and maintain businesses fairly quickly. Franchising also fuels economic growth by creating jobs for the general population.
Types Of Franchises
Franchises fall into one of two types: (1) product franchises, and (2) business format franchises. These two types of franchises have different types of products and ways of making money.
A product franchise sells ONLY the product. A product franchise sells the product to a franchisee, who then re-sells the product with a mark-up. Coca-Cola is one of the world’s most successful product franchises.
A business format franchise, on the other hand, sells both the product AND the operating system. Popular restaurant franchises like McDonald’s and Burger King are examples of business format franchises, since their operations form a major part of the service. Business format franchises often make money through royalties from gross sales.
Some newer franchises blur the gap between these two franchise types, as more complicated products and services benefit from the franchising business model.
How Franchising Started
One of the earliest instances of the franchising business model in history was recorded in Germany in the mid 1800′s, where beer makers contracted tavern owners to sell their beer exclusively.
The business model gathered steam in the early 1900′s, with products like Coca-Cola and Ford Motors experiencing massive growth in the United States. In the 1950′s, when TV made brand recognition a crucial part of business success, more franchises like McDonald’s and KFC began to expand worldwide.
Today, franchising is a vibrant industry in most developed and developing countries. It continues to be a viable alternative to the traditional mom-and-pop business model, and offers a low-risk venue for budding entrepreneurs to break into the business world at relatively low cost.