Franchise: Meaning, Advantages, and Disadvantages

What is Franchise?

A franchise is a business system in which private entrepreneurs purchase the rights to open and run a location of a larger company. The franchising company, or franchisor, signs a contractual agreement with the franchisee, explaining in detail the company’s rules for operating the franchise.

In the United States, franchises are typically organized under state laws, although the Federal Trade Commission requires that franchisors provide full disclosure of franchise contracts in advance, to allow franchisees the opportunity to make a good business decision.

Franchise businesses come with a number of pros and cons that franchisees must take into account before signing the contract. When the franchisee signs the franchise agreements, he or she agrees to the terms of operating that franchise.

The business owner is required to operate the business according to the franchisor’s requirements. The specifics of these requirements are often dictated by the business itself and the expectations of the parent company.

In general, though, the contract will include elements, such as location, advertising, owner and staff training, trademark and copyright obligations, renewal opportunities, and termination.

Advantages of Franchise

Benefits of owning a franchise include familiarity with the company name and image and training from the parent company in operating the franchise successfully.

Failure rates among franchises tend to be lower than among other new businesses, largely because customers generally recognize the company name and know what to expect from the location.

What is more, the training usually includes extended support from the parent company: they cannot prevent the franchise from failing completely, but they do provide a support system for the franchise owner.

Disadvantages of Franchise

The primary disadvantage of owning a franchise is usually the initial cost of buying the rights to operate it.

For instance, a McDonald’s franchise can now cost between $1 million and $2 million. In addition, the franchise owner might be liable for ongoing expenses–including royalties for using the company’s name–that can cut into profits.

Franchise contracts are usually strict and can become restrictive for some business owners, but franchise owners must follow the contract to the letter or risk termination and losing the business.

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