What is a franchise business?
Posted on July 1, 2008
Filed Under Business, Investment Guide |
You may be having an impression that to own a business you must start it. Well, not exactly, you can even buy an already built business isn’t it? Yes you can and that’s where we have an option called franchise business. A franchise business can be explained from two perspectives, one from the franchiser -the one who sells the business and other from the franchisee -the one who buys the business. Well here don’t take the literal meaning of buying the business, because exactly its’ not the acquisition or buying shares of the business. By buying the business I mean buying the name, fame and brand of the business. Let’s look at it with an example.
Suppose there is a company called “XYZ Systems Ltd.” and consider it has a product “productxyz” and it wants to expand its business throughout the world (or simply to any place whether it doesn’t have any business till date.) It can expand the business through franchises. It declares that it has started giving out franchises. Those who buy franchise are required to pay some amount as fee (remember you are buying the name and brand value) to the XYZ Systems Ltd. and also in some cases a yearly fee and also in some cases a percentage of profit you earn after launching the business in your city. These fees are decided by the company itself. Suppose XYZ Systems Ltd decides that the joining fee should be $1 million, the yearly fee should be $20,000 and the percentage from profit should be 10%. Now suppose you find that the product of that company productxyz will have a lot of customers in your city then you buy the franchise. Here, now the company XYZ Systems Ltd. became the franchiser and you became the franchisee. Franchisee needs to pay all the fees prescribed and needs to abide by the rules defined by the franchiser. After buying the franchise you can sell the product under the name of XYZ Systems Ltd. If suppose you buy and make a profit of say $40,000 in 1st year then at the end of year you need to pay a total of:-
Franchise buying: $1,000,000
Franchise Annual Fee: $20,000
10% of profit: $4,000
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Total: $1,024,000
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This is for joining and the first year,
If for 2nd year suppose you made profit of $50,000 then you need to pay
Franchise Annual Fee: $20,000
10% of profit: $5,000
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Total: $25,000
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Generally the franchiser demands some amount of experience in handling business and financial stability to make sure that you are financial strong enough to sustain the failure in business. They guide you for some initial period to a great extent and you are like a part of them. Here there is a win-win situation for both because the franchiser is getting huge amounts in fee’s and a percentage of profit margin without doing anything besides training and helping the new franchisee’s and on the other hand the franchisee is making money by selling the product of franchiser under the franchiser’s rich brand value! XYZ Systems Ltd is very famous and people will come to your shop to get the productxyz. The success of franchisee depends largely upon the skills of the franchisee. For some people who want to own business in a very short time this is a very nice option as you don’t have to start from scratch.
I hope this post makes you understand what the franchise business is, your questions are welcome through comments.
Related Posts: (not autogenerated)
Franchise Business in India:To know why India is good and which sectors in India are good for franchise business.
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