Investing in a Franchise

Buying a franchise is a significant investment so it is important that you understand exactly how franchising works, what fees are involved, and what is expected of you from the franchisor.

To invest in a franchise, the franchisee must pay an initial fee for the rights to the business. Thereafter, the franchisee will generally pay the franchise business owner an ongoing fee, either on a monthly or quarterly basis, in relation to the cost of managing and overseeing the franchise, the cost of products and materials ordered from the franchisor and the cost of marketing the franchise. This payment is usually calculated as a percentage of the franchise operation's gross sales.

In return, the franchisor has an obligation to support the franchise network, notably with training, product development, advertising, promotional activities and with a specialist range of management services.

Generally, the business model for each franchise is the same and the franchisee must follow certain rules. Each franchise is owned and operated by the franchisee but the franchisor retains control over the way in which products and services are marketed and sold, and controls the quality and standards of the business. For example, the franchisor will require the franchisee to use the uniforms, business methods, and signs or logos particular to the business itself. The franchisee will also usually have to use the same or similar pricing. The franchisee should remember that he or she is not just buying the right to sell the franchisor’s product, but is buying the right to use the successful and tested business process.