A franchise is a means of distribution of products or services directly between a franchiser, who creates the brand name or trademark s product and a business establishment, which contracts with the franchiser to provide the goods or services. Franchises differ from franchises in that contracts are entered into between the franchisee and the franchiser rather than between the franchise and another third party. In a franchise agreement, a franchisee agrees to provide sales, marketing, distribution, or advertising services for a fixed term, and to pay a fixed franchise fee for a fixed duration. Franchise fees are paid on a regular basis, either yearly or semiannually, or based on the earnings of the franchisee. Franchise fees can also be based on the number of outlets or locations provided by the franchise. Some contracts may have a provision granting the franchisee the right to sue the franchiser if a breach occurs, in order to recover its franchise fee.
Franchises can be of various types, including those relating to manufacturing, selling food, medical supplies or educational services. The two most common types of franchises are those relating to manufacturing and selling, but some business establishments can be involved in any one or more of these areas. In a manufacturing franchise, the manufacturer leases or owns the commercial building where the business is operated. The manufacturer usually maintains a large factory or warehouse, where the bulk of the products produced is manufactured.
With a franchising arrangement, a manufacturer provides workers, tools, materials and other aspects of production, while the franchisee maintains the location where the products are sold. A franchisee obtains access to a brand or trademark, which the franchisees believe gives them the right to use the trade name, and to sell the products as part of their business. In return, the franchiser or his or her subsidiary distributes the appropriate advertising and marketing materials, and pays royalties or royalty payments to the franchisee. These payments help the franchisee maintain its reputation, attract new customers and keep the company’s name in front of others interested in purchasing the product.
Selling franchises is usually a much more complex process, because there are many more potential parties who could have an interest in purchasing the business. These include individual buyers (such as a business startup), multiple investors or groups of investors, businesses looking for ways to diversify into the franchise business, and multinational companies looking for a way to enter the rapidly growing franchise sector. In order to sell a franchise, the franchisor must build a substantial customer base. It must also be able to market the franchise in a credible and consistent manner. Once a buyer approaches the franchisor to purchase a franchise, the franchisor must decide whether or not to approve the sale.
Approval can take a number of forms. If it is done through a standard franchising broker, the franchisee must provide financial documents such as personal credit history reports and financial statements. The franchisor will also review operational and business success metrics provided by the franchisee. Lastly, the franchisor will evaluate the franchisee’s application, performance, and reputation. If the business is a good fit for the public, then the franchisee should receive a positive offer. The franchisor may also deny a franchise, however, if it determines that the business cannot generate a significant profit due to certain operating methods.
Many franchisees look forward to selling their franchise, because they know that they have a great opportunity to achieve financial freedom. However, before a franchisee sells a franchise, he/she should conduct quality research and determine the suitability of the proposed business model. It is important to thoroughly understand each franchise business model, because no two franchise models are the same. Therefore, it is necessary to conduct a number of franchise business model comparison studies. Doing so will ensure that you choose the franchise that will best meet your own personal and professional requirements, while providing you with the financial security you need.