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Franchising is a means of business, marketing, and distribution in which a franchisor grants a franchisee the right to go into business using the franchisor's product, service, trademark, or brand. In return, the franchisee pays the franchisor a monetary fee or royalties.

As opposed to other business opportunities, franchising is a contractual and continuing relationship between the franchisor and the franchisee for a specified period of time.

Those who have the necessary capital may find a franchise to be a good way to start a business with minimal risk, as compared to many other entrepreneurial endeavors. Franchises offer entrepreneurs the opportunity to open a business that already has an established reputation and brand, as well as a plug-and-play business model in place.

Recognizable throughout the United States and in several other countries, Taco Bell, Jersey Mike's Subs, Ace Hardware, and Hampton by Hilton are well-known franchises. More than ninety percent of Taco Bell restaurants are owned, not by Taco Bell, but by independent franchisees and licensees. Likewise, Ace Hardware is one of the fastest-growing retailers in the United States, and the vast majority of its stores are franchises. Much of Ace Hardware's expansion is based on converting existing businesses to the Ace brand. In this way, a True Value store might become an Ace Hardware store after a contract period expires, or a family-owned and operated neighborhood store might sign on to the Ace brand. Ace Hardware sections might even be added to a grocery store.

Franchises allow retailers, service industries, and even educational institutions the ability to extend their reach.

Another benefit to owning and operating a franchise is the lack of business experience required. In most cases, franchisors offer complete businesses, and the franchisee's task is primarily to manage the business according to a proven business structure, without the need to create or develop new procedures. Of course, there are pros and cons to that. On the positive side, the franchisor will usually train the franchisee to attain the necessary skills to operate the franchise, but, on the other hand, the franchisee is generally not allowed to deviate from the franchisor's protocols, which may not allow the business to adapt to local peculiarities.

As mentioned earlier, a franchise also offers an established brand, greatly decreasing the cost of marketing expenses and branding. In fact, some franchise agreements don't allow a franchisee to market the business independently.

Successful franchisees will research the franchise they are considering buying into, ensuring that the franchise is a well-established company with a good reputation and sales record, while making sure that they understand the franchise costs, fees, and anticipated profitability.

Prior to entering into a franchise agreement, there will be an application process that will differ from one franchise to another but is likely to include questions about the applicant's background and financial ability. Many franchisors will ask an applicant to visit one of their facilities so that they can explain clearly what they expect from a franchisee and allow the franchisee to see just what he is getting into. If everything checks out and both parties are still interested, the next step is the agreement and financing. The pending franchisee should probably consult an attorney before moving forward. Once approved and licensed as a franchisee, it's time to choose a location and open up for business. Some franchisors will take an active role here in order to enhance the likelihood of success and to ensure that two franchisees are not competing for the same clientele.

Roughly twenty percent of startup businesses don't survive the first year, about fifty percent last five years, while only about thirty percent are still in business after ten years. Although the startup costs are high and there will be ongoing royalties or fees, a franchise might improve the new business owner's likelihood of beating the odds.

However, there are risks to the franchisee, particularly in new or lesser-known franchises. A franchisee may be duped by inaccurate information, or pay large fees for little or no franchise value. Financing from the franchisor may be more difficult to come by than anticipated.

Generally, there are three categories of payments received from the franchisee. Upfront, the franchisee must purchase the controlled rights, or trademark, from the franchisor in the form of a fee that may range from less than $10,000 to more than $100,000. The franchisor often charges for providing training, equipment, or business advisory services, as well. Finally, the franchisor receives ongoing royalties or a percentage of the operation's sales.

Owning a franchise can be an easy way for someone to go into business, but this comes with challenges.



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