Similar to licensing, franchising involves relatively little risk. The franchisor licenses its trademark, products and services, and operating principles to the franchisee for an initial fee and ongoing royalties. Franchises are well known in the domestic fast-food industry; McDonald's, for example, operates primarily on this basis. For a large up-front fee and considerable royalty payments, the franchisee gets the benefit of McDonald's reputation, existing clientele, marketing clout, and management expertise. The “Big M” is well recognized internationally, as are many other fast-food and hotel franchises, such as Holiday Inn. A critical consideration for the franchisor's management is quality control, which becomes more difficult with greater geographic dispersion.
Franchising can be an ideal strategy for small businesses because outlets require little investment in capital or human resources. In fact, through franchising, an entrepreneur can use the resources of franchisees to expand; most of today's large franchises started out with this strategy. An entrepreneur can also use franchisees to enter a new business. Higher costs in entry fees and royalties are offset by the lower risk of an established product, trademark, and customer base, as well as the benefit of the franchisor's experience and techniques.
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