Useful Tips for Business Investors

Franchise your Business

Franchising is one alternative for expanding a successful, existing business. Franchises are generally of two varieties. The franchisee purchases the rights to a single location or buys a master franchise to develop an area (i.e. multiple locations which may then be sub-franchised within a given geographic territory).

When a business is franchised, a contractual relationship (joint venture) is set up between the successful established business (the franchiser) and the hopeful buyer (franchisee) of a specially prepared copy for sale and lease of this successful business. This copy is based on the key elements of the original concept that are necessary to duplicate the success of the original business in any number of new locations. This copy kit will often include a sub-lease on a location, immediately identifiable changes to the building's exterior, a complete package of leasehold improvements, a furniture and fixtures assortment (all complete with logos and trademarks), an initial inventory package, an initial training package and an on-going support system comprised of accounting, promotion and general expertise in all aspects of the business management.

In return for providing this turn-key, proven success package, the franchiser expects a franchise fee and will expect to participate in the day-to-day profits of the business itself by means of a royalty (normally, anywhere from 2% on the gross sales revenue to 50% of the net depending on the nature of the business and the degree of involvement required of the franchiser). It is also not uncommon for franchisers to expect from 3% to 5% of a franchisee's revenues to be contributed to a national or international cooperative advertising and promotion budget to promote the entire conceptual entity and corporate identity (product, logos, signage etc.). In theory, then, the purchaser of the franchise package owns their own business, but in practice the franchise contract removes any creative freedom from the operation of that business.

Franchisers can often generate additional revenues by purchasing inventory and supplying stock to all the franchisees. A margin on the purchased stock or a service charge to the franchisees is quite common. Licensing the rights to manufacture products against a proprietary design or process patent is a common form of manufacturing franchise. Common to the construction industry sub-trades such as roofing, gutters, etc. is the licensing for a territory of the rights to a certain product and application of that product arrangement.

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