A franchiser is a business owner who allows another party, called a franchisee, to operate a branch of his company while he retains exclusive ownership of it rights and trademarks. Through a business model called a franchise, a company owner permits a franchisee to use the name, brand and associated elements of his business in exchange for a fee and a portion of the gross revenue sales. In most instances, this is a win-win for both parties. If the franchisee successfully operates his branch of the company, then both he and the franchiser benefit from increased brand recognition and greater customer loyalty. For the franchiser, this can also lead to company expansion as more people seek to become franchisees and launch their own branch of the business.
A franchiser can use the franchise business model as a way to expand his company without the significant cost and liability of building chain stores. It provides him access to venture capital without having to relinquish control of his business through acquisition by another company. Using the dollars he gains from franchisee fees, a franchiser is able to sell more franchises — both domestically and internationally — fairly quickly. Building on an already tested brand and replication formula drastically reduces his risk.
A franchise is an attractive option for the person who wants to invest in a business but, perhaps, has neither the time nor the money to develop a trademark and the infrastructure to start his own company. It allows him to oversee a branch of an existing business by leveraging the popularity of an already established brand. An added incentive is that most franchises require a relatively small investment, and some only require only a few thousand U.S. dollars (USD) in start-up franchise costs.
Typically, a franchiser contracts with a franchisee to serve a specified territory for a fixed period of time, perhaps from five to 30 years. The franchiser supports both the investor and the brand by making training, advertising and other services available to the franchisee to help boost sales. If he invests the required franchise fee, a franchisee may operate several branches of the business. He should be aware, however, that he will most likely incur serious consequences if he cancels his franchise agreement early. Although franchises are considered temporary business investments that involve only the renting or leasing of a brand rather than the ownership of it, early termination of such an agreement is considered a breach of contract.
The franchise model works best for businesses that have a solid history of profitability and are easily copied. The U.S. has led the world in the number of franchises since the launch of the fast food franchise in the 1930s. By the start of the 21st century, the franchise model was used in almost 100 industries and generated more than $1 trillion USD in sales each year through more than 700,000 establishments. While fast food restaurants continue to lead among major franchises in the U.S., other types of franchises that rank near the top include convenience stores, hotels and cleaning companies.
