Franchising typically is done by companies with a well established business and the ability to provide significant marketing support or well-established systems for franchisees to get started. When this successful business model is proven, break away “chains” that follow that model become franchise firms.
Franchisees pay money in return for using the brand name and relying on the proven business structure already in place. Returns from franchising your business may take longer to realize, so it is not as advisable a funding option for short-term cash flow needs, but can provide consistent, longer term revenue streams for companies in need of cash.
While franchising is often thought of as a means of building your brand with limited capital outlay, franchising can also provide an additional revenue stream for your business through franchising fees and royalties. Typically, entrepreneurs charge an initial fee for the purchase of the franchise as well as continuing fees on total revenue. Ongoing management fees are charged as a percentage of total turn-over in exchange for sales, marketing and additional support. In some cases, the entrepreneur also acts as a vendor to the franchisee providing supplies, in which case additional revenue is generated based on the mark up of these items.