If you are a rookie entrepreneur or a newbie investor who wants to know what is a franchise, you come to the right place. We will outline in plain language all facts that must know by all individuals who are meeting for the first time with the term ”franchise”.
Starting franchises is more than ever popular among entrepreneurs, and because of that, many potential investors want to know what is a franchise exactly. So for all people interested in learning a little more about it, we will reveal all facts about franchising as a way of doing business.
What Is a Franchise
A franchise (franchising) is a business relationship in which the franchisee (buyer/investor) pays the franchisor(owner of the brand) fees to get the right to operate his business under the trademarks of the well-known brand.
Franchise, or as most people call it, franchising, is considered the most developed business system globally. Today a high percentage of the biggest brands offer opportunities to investors to buy their trademarks and start a business under the framework of their concept.
To start a franchised business, investors must sign the so-called ”Franchise Agreement” with the franchisor. This document summarizes what obligations of both business parties to each other under the law are.
The biggest example of that what is a franchise is McDonald’s. Approximately 90% of all McDonald’s restaurants are franchisee-owned, which means that owners are entrepreneurs who opted to operate their business under the trademarks of this brand.
But fast food, as an industry, is not the only example where customers can find franchises. This business concept is widespread in all industries, and at present, more than 4,000 companies offer opportunities to open businesses under their Trademarks.
Also, we can find franchises in the entertainment and sports industry. For example, the whole NBA operates as one big franchising system, and because of that often, we can hear in the media that basketball teams are often called franchises.
Franchising as a way of doing business is the most developed in the United States and Canada. In the other parts of the world, there are still more presented independent businesses, which means that investors don’t choose to open franchises soo often as we can see in the, for example, U.S.
When we talk about what is a franchise, we must outline a few types of industries in which franchising has become standard practice. We will outline a few most common types of franchises that can be found in the United States and Canada.
Buy & Own Business Franchise
The most common franchises are so-called ”buy and own business”. So investors opt to purchase brands’ trademarks and the whole business concept, and in exchange, they are obligated to work according to the franchisor’s rules.
Established brands use franchising to get cheap and rapidly expand to more locations. The franchise buyer invests his own capital to start a new location that will operate under the franchisor’s trademarks.
So franchising is a win-win situation for both parties; the buyer and the seller of the brand trademarks can profit from it. The buyer gets an already established brand, and the franchisor expands on more locations for free and without risks.
When they talk about what is a franchise, many people mention first the fast-food industry (Burger King, Subway, Taco Bell, etc.). As we mention above, the franchising opportunities offer more than 4,000 companies/brands.
It is good to know that franchising in America started in the 1930s, and since then, it has been in the growth trajectory. It is anticipated that more businesses will be operating as franchises in the future, which means now can be the right time to get involved.
Professional Sports Franchises
Most United States professional sports leagues operate on a system similar to franchising. The investor/owner buys the rights to manage and control a sports team in a certain territory/city, and because of that, teams are often referred to as a franchise.
The NBA is the biggest example of franchising in sports. All professional basketball teams are called franchises, which means that the owners have bought rights to participate in the league. Also, sports franchises can change owners, even cities in which they are based.
The peculiarity of the sports franchises is that they are also corporate entities, which means that business persons manage them, and they usually are not retired athletes. Sport is one of the most developed industries, so it is no wonder that investors who opt for buying a franchise in this industry must spend a few hundreds of million dollars to acquire them.
When we talk about what is franchise, we must mention that the first example of franchising in sports can be found in 1876. In that year, the baseball league started to operate according to this system, and later most other sports adopted this way of conducting operations.
Franchising in sports is most widespread in the United States. In Europe and most other countries, leagues are based on different principles, and because of that, there is much easier to own a professional sports team.
Media franchises are considered movies, series, reality shows, and video games, and we can also put books into this category. It means that someone’s original work(intellectual property) can be licensed for a fee and exploited in different directions for making profits.
As a concept, franchising in the media industry first became popular in Holywood. They started to buy intellectual rights from book writers, and according to their ideas, they began to make movies and series.
Star Wars is, at present, the most successful movie franchise in the U.S.
George Lucas, the creator of Star Wars, has made millions in profits from multiple directions. Yes, the movie itself grossed a lot of money from cinema tickets, but the most revenue came from merchandise, souvenirs, and video games.
However, when we talk about what is the most profitable franchise ever, we must mention Pokemon. The fun fact is that Pokemon has brought to its creators more than $110 billion in revenue since 1996, and the owner of the trademarks earned 80% of that amount from selling licensed merchandise to fans.
Is Franchising Good Business Concept
Yes, franchising is a good business concept because it provides a win-win solution for the trademark owner and the franchise buyer.
The investor gets a turnkey business with widespread brand awareness by buying a franchise. Usually, franchising companies are well established on the market, and they have already established brand awareness among potential customers/clients.
On the other hand, the franchisor/owner of the Trademarks gets an opportunity to expand to new locations/territories without any expenses. Also, the franchisor collects royalties from the franchisee and, in that way, makes its profit.
However, although franchising is a good business concept, that doesn’t mean that it doesn’t have its risks. If the entrepreneur chooses to invest in the wrong franchising concept, the franchised business may fail.
So now that we have presented what is franchise, the second step for all potential investors is to learn how to choose the right franchisor. This process will take some so it is advisable to hire a franchise consultant who can help decide what franchise to start.
We have covered all corners of this type of business and explained what a franchise is in plain language. Franchising is a great business concept, and all people who have a few thousands of dollars in savings can take this path.
Not all franchises demand a huge startup capital; many low-cost opportunities are available. So this business concept can be the ideal option for people who want to become their own boss but don’t want to start from scratch.