One of the most volatile times of a new business’ life is its beginning. A new venture must stand on its own and distinguish itself from the other players in the industry. This darwinian bottleneck can often spell the end for untested brands with unproven products. That’s why some entrepreneurs choose a different route for their startup: franchising.
Franchising refers to the act of obtaining and using a franchise license. A franchise license allows individuals to affiliate with a well-known name and brand to conduct business. Franchising is common in a number of industries, most notably in fast food and restaurant chains where individuals purchase the rights to set up a new location on behalf of a multinational corporation.
First, the individual seeking to open the franchise, known as the franchisee, must purchase the rights to use the name and brand of the franchise controller, known as the franchisor. In addition to paying a licensing fee, the franchisor may also require the franchisee to purchase training, obey certain practice requirements, or engage in specific business practices. Finally, the franchisee must agree to give a percentage of their profits to the franchisor in the form of royalty payments. Once the franchisee has completed the franchise application and finalized the paperwork, then they can begin the process of opening up their franchise store.
When franchising a business there are some costs that are typical of any venture and others that are unique to franchising. Separate from any startup costs like advertising, construction, furniture, or sales software, there are franchise fees and royalty payments. A franchise fee can range from $20,000 to $50,000 depending on the franchisor. Royalty fees can similarly vary but often range from 4-12% of revenues.