Franchise

Franchise is a business model in which a franchisor grants a franchisee the rights to operate a business using the franchisor’s branding, operational model, and support. This is typically in exchange for an initial purchase fee and a subsequent ongoing payment, often a percentage of gross sales.

Examples

Real Estate Brokerage: Examples in the real estate industry include franchises like Century 21, RE/MAX, and Red Carpet. Local brokerage firms operate under these well-established brands, benefiting from the national advertising, training, and other services offered by the franchisor.
Food and Beverage: Fast food chains like McDonald’s, Subway, and Dunkin’ Donuts, where individual restaurants operate under the franchisor’s global brand and business model.
Retail: Chains like The UPS Store, which provide shipping, printing, and business services, where individual outlets operate under a uniform setup dictated by the franchisor.

Frequently Asked Questions

What is a franchise fee?
- A franchise fee is the initial cost a franchisee pays to acquire the rights to open a new franchise location. This may also include ongoing payments based on sales.
What services does a franchisor provide?
- Franchisors typically provide brand name use, marketing support, training programs, business strategy, and sometimes proprietary tools and products.
Are franchise fees a one-time payment?
- No, while there is typically an initial franchise fee, most franchises also require ongoing payments, often a percentage of the gross sales.
Do franchises offer any form of operational support?
- Yes, franchisors generally offer ongoing operational support to ensure the consistent quality and success of their franchisees.
Can a franchisee sell their franchise?
- Yes, franchisees can typically sell their franchises, but this often requires approval from the franchisor, and the new owner must meet the franchisor’s qualifications.

Franchisor: The company that owns the overarching brand, business model, and intellectual property of the franchise system.
Franchisee: An individual or entity that buys or leases the rights to use a franchisor’s business model and brand in a specific location.
Royalty Fee: An ongoing payment (usually a percentage of gross sales) made by the franchisee to the franchisor for the continued right to operate under the franchisor’s brand and structure.
Business Model: The strategic plan implemented by a company to generate revenue and make a profit in a specific market.
Initial Investment: The upfront cost required to start a franchise, typically including the franchise fee, equipment, inventory, and other startup expenses.

Online Resources

Franchise Direct (website): A comprehensive database of franchise opportunities.
International Franchise Association (website): Offers resources, legal advice, and educational materials for both franchisors and franchisees.

References

International Franchise Association, “What is a Franchise?” Retrieved from IFA.
Franchise Direct, “Franchise Industry Overview.” Retrieved from Franchise Direct.
Entrepreneur, “Franchise Business: Definition and Structure.” Retrieved from Entrepreneur Media.

Suggested Books for Further Studies

“Franchising for Dummies” by Michael Seid and Dave Thomas
“The Franchise MBA: Mastering the 4 Essential Steps to Owning a Franchise” by Nick Neonakis
“Franchise Management For Dummies” by Michael Sed and Joyce Mazero
“The Educated Franchisee: Find the Right Franchise for You” by Rick Bisio

Real Estate Basics: Franchise Fundamentals Quiz

### What is a primary benefit for a local real estate firm to operate as a franchisee of a national brand? - [ ] Reduced tax obligations. - [x] Access to national advertising, training, and other business services. - [ ] Immunity from local real estate regulations. - [ ] Guaranteed sales increases. > **Explanation:** By operating as a franchisee of a national brand, a local real estate firm can benefit from the national brand’s advertising, professional sales training, and other valuable business services that help enhance operational success. ### Which of the following best describes a franchise fee? - [x] An initial payment made to use the franchisor's brand and business model. - [ ] A tax applied on goods sold by the franchisee. - [ ] A primary operational cost paid weekly. - [ ] Employee salary required by the franchisor. > **Explanation:** A franchise fee is often an initial payment made by a franchisee to the franchisor, granting the right to use the franchisor’s business model, brand name, and receive business support. ### What is a royalty fee in the context of franchising? - [ ] A government fee for operating a business. - [ ] Employee bonuses. - [x] An ongoing payment made by the franchisee to the franchisor based on a percentage of sales. - [ ] Annual corporate tax payment. > **Explanation:** A royalty fee refers to an ongoing payment frequently made as a percentage of the franchisee’s gross sales, paid to the franchisor for continual use of the franchisor’s brand and operational support. ### Which entity owns the overarching brand in a franchise arrangement? - [x] Franchisor - [ ] Franchisee - [ ] Government agencies - [ ] Real estate developers > **Explanation:** In a franchise arrangement, the franchisor owns the overarching brand and grants the franchisee the rights to operate under this brand according to agreed terms. ### What type of business model is franchising regarded as? - [ ] Non-profit model - [x] Expensive model - [ ] No-field model - [x] Business model > **Explanation:** Franchising is considered a business model where a franchisee operates their business using the franchisor's established brand and system, in exchange for fees and adherence to set guidelines. ### When calculating ongoing payments in a franchise arrangement, which of these is often used? - [ ] Annual property appraisal requirements - [x] Percentage of gross sales - [ ] Number of employees - [ ] Number of hours open daily > **Explanation:** Ongoing payments, or royalty fees, in a franchise arrangement are often calculated based on a percentage of the franchisee’s gross sales. ### What is typically included in the support provided by franchisors? - [x] Brand name use and helps in marketing efforts - [ ] Operational business control - [ ] Ownership rights of physical properties - [ ] Management of customer complaints > **Explanation:** Franchisors generally provide support that includes brand name use, marketing strategies, and training programs to ensure a standardized operation across all franchises. ### What is one key advantage of operating a franchise rather than an independent business? - [ ] No need for marketing efforts - [ ] Lower start-up costs compared to independent businesses - [x] Access to established branding and a tested business model - [ ] Freedom to change brand logos without consent > **Explanation:** One of the primary advantages of operating a franchise is the access to an established brand and a tested business model, as well as potential business support, which can significantly reduce the risk compared to starting an independent business. ### Can franchisees decide to change the operational business model of the franchise? - [ ] Yes, they have complete freedom. - [ ] Yes, with periodic approval from regional agencies. - [x] No, franchisees must follow the franchisor’s business model. - [ ] Only during the first year of operation. > **Explanation:** Franchisees must adhere to the franchisor’s established business model and guidelines to maintain the franchise’s consistency, quality, and brand integrity across all locations. ### Who primarily benefits financially from the royalty fees in a franchise? - [ ] The local government - [ ] Franchisee’s employees - [x] The franchisor - [ ] The customers > **Explanation:** The franchisor primarily benefits financially from royalty fees, which are ongoing payments made by the franchisee for the continued right to operate under the franchisor's brand and receive its support services.