Starting up a business and taking risks are often used loosely in the entrepreneurship world. Uncertainties around market, quality and demand of products or services are among the reasons why starting out new businesses is considered risky.

Capturing the market and setting a signature quality of one’s products are what differentiate a mezzanine business and successful one.

However, such uncertainties and risks can be minimized through franchising. It is basically raising a branch of an already existing and often successful business.

A practical and famous example of franchising is Kentucky Fried Kitchen a.k.a KFC. It was initiated in Kentucky, U.S in 1930s but today, it has over 23,000 franchises in over 140 countries, including Rwanda.

How franchises function

Essentially, a franchisee pays an initial fee and ongoing royalties to a franchisor. In return, the franchisee gains the use of a trademark, ongoing support from the franchisor, and the right to use the franchisor’s system of doing business and sell its products or services.

The franchisor supplies products, services, technological know-how, brand name and trade secrets to the franchisee. The Franchise even provides training and assistance in some cases. In return, the franchisee pays a one-time fee or commission to franchisor and some share of revenue.

Franchising is a contractual business relationship. Under a franchise, the two parties generally enter into a Franchise Agreement. The franchisee may sell these products and services by operating as a branch of the parent company. It may even use franchising rights by selling these products under its own business venture.

The franchisor may grant franchising rights to one or several individuals or firms. Consequently, if just one person gets these rights, he becomes the exclusive seller of the franchisor’s products in a specific market or geographical limit.

Contracts usually last 15 to 20 years and renewals of the contract are not guaranteed. If a store fails to meet goals determined by the parent business, the contract may not be renewed. The contract terms may also change when you renew.

Benefits

On the side of franchisors, franchising is a great way to expand a business without incurring additional costs on expansion. This is because all expenses of selling are borne by the franchise.

Franchising is also a strategy to minimize the risk involved in starting up a new business. A franchise can use franchising to start a business on an already existing brand name of the franchisor. As a result, the franchise can predict his success and reduce risks of failure.

Despite the benefits, there are many considerations to think about before buying a franchise. The biggest consideration is cost. Startup fees for franchises can be high, so before choosing where to invest one needs to research more about affordability.