An important step in the small business start-up process is deciding whether or not to go into business at all. Each year, thousands of potential entrepreneurs are faced with this difficult decision. Because of the risk and work involved in starting a new business, many new entrepreneurs choose franchising as an alternative to starting a new, independent business from scratch.
What is Franchising
A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchisor or that meet the franchisor's quality standards.
Franchising is based on mutual trust between the franchisor and franchisee. The franchisor provides the business expertise (marketing plans, management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee. The franchisees bring to the franchise operation the entrepreneurial spirit and drive necessary to make the franchise a success.
There are primarily two forms of franchising:
- Product/trade name franchising; and
- Business format franchising.
In the simplest form, a franchisor owns the right to the name or trademark and sells that right to a franchisee. This is known as "product/trade name franchising." An example might be a local hardware store selling True Value products and using the national True Value brand as a way to help define the store.
The more complex form, "business format franchising," involves a broader ongoing relationship between the two parties. Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing. Examples of this franchising approach include: Jiffy Lube, McDonalds, Curves, Midas Muffler and many others.
A note of caution: Franchising may seem like an easy way to go into business, but there are pitfalls with this form of business ownership as well. Step carefully, and by all means, do your homework in properly checking out any franchise you might consider.
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