How Franchising Works

Franchising is a popular way of doing business in which an individual or company can purchase and operate a proven business model, this avoiding the risk of starting something that is completely new and uncertain.

One of the main reasons why people buy franchises is the reduced risk. Most small businesses fail, and the main reason for that failure is ‘’weak management’’ (1). A franchised business addresses that issue by ‘’leasing that managerial know-how’’ (1) to those who purchase the franchise.

Another reason why I would buy a franchise is because it allows small businesses to enjoy some of the benefits that only big companies would have otherwise. Some of these are: reduced price for supplies since they are bought for the whole chain in bulk, instant recognition from customers because of standardized products and service in all locations, and chain-wide marketing campaigns.

The downside of purchasing a franchise is the lack of freedom to direct the business, ongoing royalty payments that depend on sales rather than profit, and non-competition rules outlined in the franchise contract.

One thing to point out here is that there are some kinds of businesses that are so similar one to another that can one could think that they offer some of the benefits of a franchise, without the rules and limitations of a franchise. An example of this are Chinese restaurants. When I go to a Chinese buffet I know what to expect from the beginning, their food is almost the same and they even look very similar one to each other. The key here worth considering is that they don’t have a proven successful managerial method, so a new business owner would have to create one from scratch, which implies more risk.

Would I ever consider owning a franchise? Yes; I would do it despite all the limitations that owning a franchise might entail.

1.      Lee Ann Obringer. “How Franchising Works’’. Taken from http://money.howstuffworks.com/franchising2.htm