According to Franchising.com, franchising is a "hybrid" form of business model in that it combines aspects of a sole proprietorship with those of a corporation. Franchising allows a business owner to grown a business by selling the rights to use her brand and business model instead of building new units on her own. A franchise can be a good way for a novice entrepreneur to get started because he can follow a successful business blueprint.
In a franchise operation, the owner of the original business, known as the franchisor, essentially sells the rights to use his brand to an entrepreneur called a franchisee. The franchisor provides the franchisee with ongoing support in areas such as business operations, marketing and obtaining financing. In return, the franchisee agrees to follow the franchisor's business model and to pay the franchisor royalties based on a percentage of unit sales.
Franchising allows business owners to grow their businesses without having to spend substantial amounts of their own money to build new units. Thus, the risk of possible failure is transferred to the franchisee who is responsible for coming up with the initial capital. For new business owners with little business experience, franchising gives them a successful business model to follow, which can relieve some of the uncertainty associated with starting a business venture from scratch.
Just because franchisors do not own the individual franchises, it doesn't mean that they're necessarily "off the hook" if something goes wrong with a unit. If a franchise unit develops a bad reputation for quality or service, it affects the reputation of the franchise as a whole. If a unit underperforms, it also means less in royalties for the franchisor.
Before franchising your business, be sure it is the type of operation conducive to franchising. To be a good candidate for franchising, a business should offer something unique in its industry and have a model that is easy to replicate. It should also be adaptable to a variety of different geographic areas, especially if your plan is to franchise on a large scale.
According to the Entrepreneur website, franchisors may paint an overly rosy picture of franchise ownership to entice franchisees to take the plunge. Before purchasing a franchise, talk to other unit owners to get a realistic idea of what to expect. Examine the franchise agreement closely so you gain a clear understanding of your rights and obligations.