Franchises for Beginners

By Ted Rollins , last updated February 24, 2012

The practice of franchising refers to paying for the use of another company's or firm's business model for one's own use. In most circumstances, a franchisor is paid a fee by a franchisee in order to use the company's business plan, name, logos and connections to form an extension of the business under the same umbrella. Typically, the franchisor maintains a large interest in the success of the franchised business, as profits made by the franchise are split in some fashion.

In most of the world, there aren't many provisions differentiating between franchised and enfranchised businesses, but in the United States, there are specific laws pertaining to franchising. Typically, franchisees choose to franchise because they see that a business has a high likelihood to be profitable and that the success of the business can easily be replicated in a market or location previously unexplored. Most companies don't allow for franchising, but many of America's most successful ones do, including Subway, McDonald's, 7-Eleven and Dunkin' Donuts. Normally, a franchising agreement involves two fees: a royalty fee for the use of name and image of the franchised company and a second reimbursement for training and setup of the company. A franchise agreement typically is created to last over a specified period of time, usually between 5 and 30 years. What happens to the franchise at the end of the period varies depending on the agreement. All franchisees are forced to sign FDD's, or Franchise Disclosure Documents, which present the process of franchising and verify a full understanding of the process.

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