Starting a business on one’s own can be quite challenging and costly. To reduce the risks involved in starting a business from scratch, many people buy a franchise instead. 31 Under the license, the individual acquires the right to use the big company’s brand name and agrees to sell its products.
The concept of the franchise dates back to the 19th century in the U.S. 32 Then, in the 1930s, Howard Johnson restaurants skyrocketed in popularity, paving the way for restaurant chains and the subsequent franchises that would define the unprecedented rise of the American fast-food industry.
There are many advantages to investing in a franchise. One of the benefits is the ready-made business operation. 33 Depending on the franchise, the franchisor company may offer support in training and financial planning. Some even provide assistance with approved suppliers. To new business owners, the most recognized advantage of a franchise is perhaps the well-established brand name of the franchisor such as that of McDonald’s. 34
Disadvantages include heavy start-up costs as well as ongoing royalty costs on the part of the franchisee. To take the McDonald’s example further, the estimated minimum cost for a franchisee to start a McDonald’s is US$500,000. And it has to pay an annual fee equivalent to 12% of its sales to McDonald’s. 35 Other disadvantages include lack of territory control or creativity with one’s own business.
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