A franchise is a type of license that a person or group—called a franchisee—acquires to allow them to have access to a business’s (the franchisor) proprietary knowledge, processes, and trademarks. This agreement also allows the franchisee to sell products or provide services under the business’s name. To do this, the franchisee typically pays the franchisor an initial start-up fee and annual licensing fees.
More than one in every 10 U.S. businesses is a franchise, according to the U.S. Census Bureau. Franchises contribute about $713 billion to the economy each year and employ about 7.88 million people.
What are the most popular types of franchises?
While franchising opportunities are available in nearly every industry, it’s not surprising that fast-food franchises are the most common type—and they don’t seem to be losing popularity. In fact, a recent survey found that 30% of those interested in opening a franchise in the United States said that they wanted to open a quick-service fast-food franchise.
What are the benefits of franchising?
Franchising carries several benefits, including access to the franchisor’s:
- Business model and business plan
- Products and services
- Training and financial planning services
- Marketing materials, from signage to menus to uniforms
- National buying power and negotiation muscle
Franchisees can also benefit from instant brand recognition (think McDonald’s).
What are the disadvantages of owning a franchise?
Even if the franchise is well-established, there is no guarantee for success. The barrier to entry to high: most carry heavy start-up costs and ongoing royalty costs. In fact, some royalty fees can be as high as 4% to 8% of sales or revenue.
Other disadvantages include:
- Lack of territory control
- Lack of creative control
- Limited financing options from the franchisor
Like all businesses, the success of your franchise is dependent on factors like location and management. The good news is that there are many franchising options and contract configurations for you to consider.
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