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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Business Essentials Guide to Mergers and Acquisitions. Business Business Essentials. Table of Contents Expand. What Is a Franchise? Understanding Franchises. The Basics and Regulations. Pros and Cons. Franchise vs. Key Takeaways A franchise is a business whereby the owner licenses its operations—along with its products, branding, and knowledge—in exchange for a franchise fee.
The franchisor is the business that grants licenses to franchisees. The Franchise Rule requires franchisors to disclosure key operating information to prospective franchisees. Ongoing royalties paid to franchisors vary by industry and can range between 4. What Are the Advantages of Franchises? What Are the Risks of Franchises? How Does the Franchisor Make Money? Article Sources.
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You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. For example, Coca-Cola was able to expand throughout the United States by shifting the burden of manufacturing, storing and distributing its product to local business people who acquired bottling rights.
Car manufacturers who had been spending enormous amounts of capital tooling their assembly lines found they could develop retail distribution networks using capital provided by independent dealers. Oil companies such as Standard Oil and Texaco also started granting franchises to convenience stores and repair mechanics across the U.
No business method or industry sector can guarantee success , and franchising is no exception. If a franchise system has a proven product or service with a well-recognized brand combined with hard-working, well-financed franchisees, the chances of success are very high — but never a percent given. If, on the other hand, the franchise system is under-funded with an ill-conceived business plan that has not been tested properly, and franchisees have been poorly recruited or trained, failure is likely.
Due diligence is key in making the right decision for you. Seek the advice of seasoned franchise professionals and ask questions until you are confident in your decision. Remember, it is your investment that is at stake.
More information about finding the most profitable franchise for you can be found here. Many people feel as though they have an understanding of the concept of franchising. However, do you really know what franchising is? Can you define it? The franchisor picks a number of development areas they believe will be receptive to the concept. One area I really like is Indianapolis, which seems to be a good location to try new concepts.
The key issue many fledgling franchisors have is funding new development. The structure I generally recommend to fund new unit development is with a private placement. Private placements entail finding investors who are both interested in cash flow and knowledgeable about your restaurant. These investors are, in almost all cases, accredited investors, and with the liberalization of some of the securities laws, can readily be found to invest in these types of deals.
Ultimately, the first approach is to sell existing company stores in conjunction with development rights to a potential franchisee, or use the private placement to entice investors to build new stores.
The beauty of using a private placement that focuses on cash flow is that there is a definable exit strategy for the investors. And of course, the list goes on and on. The fact of the matter is, a significant number of franchise companies are in industries in which their products or services are not readily differentiated.
What these questioning entrepreneurs fail to understand is that, as entrepreneurs, they are the one group on earth that is perhaps the least suited to understand the mindset of the prospective franchisee. The typical entrepreneur is, at least by my definition, someone who never saw a rule he or she did not want to break. And, in many respects, the entrepreneur is often the last person you would want to be a franchisee. The best franchisees are not the rule-breakers.
And, in fact, the truly entrepreneurial are often the least inclined to buy a franchise. The best franchisees are motivated adopters-people willing to accept some level of risk, but people who, nonetheless, are willing to follow the rules established by their franchisor. Ultimately, what the franchise prospect is buying is a combination of two things: a strong value proposition plus a unique market position. Developing the Value Proposition If you are thinking about franchising a business that you feel isn't particularly sexy or unique, chances are, you have already watched a number of your competitors come and go.
Why did they fail, while you survived with a similar product or service? The answer is the system. The system is the embodiment of all those things that make the ultimate difference between success or failure.
Site selection. Lease negotiation. Customer service. Quality control. Financial management. It can be found in everything from the products you buy to the way your people answer the phones.
When someone buys a McDonald's franchise, they aren't doing it because they want the recipe for the "special sauce" on the Big Mac. In fact, they probably aren't doing it because they believe that McDonald's serves the world's finest hamburgers. But few would argue over the quality of their systems-which are among the best in the world. The best companies not only have developed their systems, but they use those systems to ensure consistency at the consumer level.
And that is what your franchisees want to buy-a consistent consumer experience that has been proven in the marketplace.
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