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Franchising is another form of business - often between a big firm and a sole proprietor. The big firm has a well-known product with its own brand name, or a service, or a special kind of shop. In return for an initial fee and continuing royalty payments, the franchiser allows the franchisee to set up his or her own business and to use the firm’s brand name.
Many hotel, motel, gas station, and fast-food chains are franchises. A franchise is a contract in which a franchisor sells to another business the right to use its name and sell its products. The person or business buying these rights, called the franchisee, pays a fee that may include a percentage of all money taken in.
How does franchising work? A big firm may decide that it wants to expand without investing large amounts of capital. So it decides to go into franchising instead. First of all, it carries out a pilot operation to see if the idea is practical. If this trial franchise, which is owned and run by the company, makes a fair profit in the first year, excluding investment costs and overheads, then the company decides to go ahead. The company sets up a training scheme for franchisees, based on what has been learnt in the pilot operation. When all is ready, it advertises for franchisees. The advertisements bring many replies. The most promising applicants are interviewed; but most of them are unsuitable. The franchiser must be very careful in selecting franchisees. If they do not succeed, they could run the company’s reputation.
A few people are finally chosen who have the necessary capital and the right qualities. After training, they are given exclusive trading rights in their own areas and set up successful businesses. A few more people are granted franchises in the second year. Later, say in the third year, the franchiser starts to make a profit which increases greatly in later years, as the number of franchises grows.
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