when a business wants to increase its market share or geographical reach at a low cost it may franchise its product and brand name a franchise is a joint venture between a franchisor and a franchisee the franchisor is the original business it sells the right to use its name and idea the franchisee buys this right to sell the franchisor s goods or services under an existing business model and trademark 
franchises are an effective way for entrepreneurs to start a business especially when entering a highly competitive industry such as fast food or an industry that is established and requires time to develop its operating processes from scratch one big advantage to purchasing a franchise is you have access to an established company s brand name management knowledge processes and procedures financial toolbox and metrics you won t need to spend time and resources building them and getting your name and product out to customers the franchise business model has a storied history in the united states the concept dates to the mid 19th century when two companies the mccormick harvesting machine company and the i m singer company developed organizational marketing and distribution systems recognized as the forerunners to franchising these novel business structures were developed in response to high volume production and allowed mccormick and singer to sell their reapers and sewing machines to an expanding domestic market 3before buying into a franchise investors should carefully read the franchise disclosure document which franchisors are required to provide this document contains information about franchise fees expenses performance expectations and other key operating details 1the earliest food and hospitality franchises were developed in the 1920s and 1930s a w root beer launched franchise operations in 1925 howard johnson restaurants opened its first outlet in 1935 expanding rapidly and paving the way for the restaurant chains and franchises that define the american fast food industry until this day 4there were 790 492 franchise establishments in 2022 that supported the u s economy with an expected 805 436 for 2023 these franchises contributed over 500 billion to the economy in the food sector franchises included recognizable brands such as mcdonald s taco bell dairy queen denny s jimmy john s and dunkin other popular franchises include hampton by hilton and days inn as well as 7 eleven and anytime fitness 5franchise basics and regulationsfranchise contracts are complex and vary for each franchisor typically a franchise agreement includes three categories of payment to the franchisor first the franchisee must purchase the controlled rights or trademark from the franchisor in the form of an upfront fee second the franchisor often receives payment for providing training equipment or business advisory services finally the franchisor receives ongoing royalties or a percentage of the operation s sales a franchise contract is temporary akin to a lease or rental of a business it does not signify business ownership by the franchisee depending on the contract franchise agreements typically last between five and 30 years with serious penalties if a franchisee violates or prematurely terminates the contract in the u s franchises are regulated at the state level however the federal trade commission ftc established one federal regulation in 1979 the franchise rule is a legal disclosure a franchisor must give to prospective buyers the franchisor must fully disclose any risks benefits or limits to a franchise investment 1this information covers fees and expenses litigation history approved business vendors or suppliers estimated financial performance expectations and other key details this disclosure requirement was previously known as the uniform franchise offering circular before it was renamed the franchise disclosure document in 2007 1advantages and disadvantages of franchisesthere are many advantages to investing in a franchise and also drawbacks widely recognized benefits include a ready made business formula to follow a franchise comes with market tested products and services and in many cases established brand recognition if you re a mcdonald s franchisee decisions about what products to sell how to layout your store or even how to design your employee uniforms have already been made some franchisors offer training and financial planning or lists of approved suppliers but while franchises come with a formula and track record success is never guaranteed disadvantages include heavy start up costs as well as ongoing royalty costs to take the mcdonald s example further the estimated total amount of money it costs to start a mcdonald s franchise ranges from 1 3 million to 2 3 million on top of needing liquid capital of 500 000 6by definition franchises have ongoing fees that must be paid to the franchisor in the form of a percentage of sales or revenue this percentage can range between 4 6 and 12 5 depending on the industry 2for uprising brands there are those who publicize inaccurate information and boast about ratings rankings and awards that are not required to be proven so franchisees might pay high dollar amounts for no or low franchise value franchisees also lack control over territory or creativity with their business financing from the franchisor or elsewhere may be difficult to come by other factors that impact all businesses such as poor location or management are also possibilities ready made business formulamarket tested products and servicesestablished brand recognitionlarge decisions already madelist of approved supplierstraining and financial planning providedsuccess not guaranteedlarge start up costsongoing feeslack of territory choicelack of creative controlfranchise vs startupif you don t want to run a business based on someone else s idea you can start your own but starting your own company is risky though it offers rewards both monetary and personal when you start your own business you re on your own much is unknown will my product sell will customers like what i have to offer will i make enough money to survive the failure rate for new businesses is high two thirds of businesses survive just two years and 50 survive just five years if your business is going to beat the odds you alone can make that happen 7to turn your dream into reality expect to work long and hard hours with no support or expert training if you venture out solo with little or no experience the deck is stacked against you if this sounds like too big a burden the franchise route may be a wiser choice people typically purchase a franchise because they see other franchisees success stories franchises offer careful entrepreneurs a stable tested model for running a successful business on the other hand for entrepreneurs with a big idea and a solid understanding of how to run a business launching your own startup presents an opportunity for personal and financial freedom deciding which model is right for you is a choice only you can make 