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🧾financial accounting i review

Franchises

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

A franchise is a type of business model where a company (the franchisor) grants the right to use its brand, products, and operating systems to another party (the franchisee) in exchange for a fee and ongoing royalties. Franchises are considered an intangible asset that can provide significant value to a business.

5 Must Know Facts For Your Next Test

  1. Franchises are classified as intangible assets because they represent the right to use a company's intellectual property, brand, and operating model.
  2. The value of a franchise is derived from the brand recognition, proven business systems, and ongoing support provided by the franchisor to the franchisee.
  3. Franchises can provide a faster path to business ownership and growth compared to starting a new independent business from scratch.
  4. Franchisors generate revenue through initial franchise fees, ongoing royalties, and potential revenue sharing from product or service sales.
  5. Successful franchises often have strong brand recognition, operational efficiencies, and a proven track record of profitability for franchisees.

Review Questions

  • Explain how franchises are classified as intangible assets and the value they provide to a business.
    • Franchises are considered intangible assets because they represent the right to use a company's intellectual property, brand, and operating systems. The value of a franchise lies in the brand recognition, proven business model, and ongoing support provided by the franchisor to the franchisee. This allows the franchisee to leverage the franchisor's expertise and resources, which can lead to a faster path to business success compared to starting an independent business from scratch.
  • Describe the key components of the franchise relationship and how they generate revenue for the franchisor.
    • The franchise relationship is defined by the franchise agreement, which outlines the terms and conditions between the franchisor and franchisee. Franchisors generate revenue through initial franchise fees paid by the franchisee, as well as ongoing royalties based on a percentage of the franchisee's sales. Franchisors may also earn revenue from the sale of products or services to the franchisee, or through revenue-sharing arrangements. The franchisor's ability to provide a successful, proven business model and ongoing support is critical to the franchisee's success and the franchisor's revenue generation.
  • Analyze the advantages and potential drawbacks of operating a franchise business compared to an independent business.
    • The key advantage of operating a franchise is the ability to leverage the franchisor's brand recognition, operational systems, and support services, which can lead to a faster path to profitability compared to starting an independent business. However, franchisees must adhere to the franchisor's operational requirements and pay ongoing fees, which can limit their autonomy and reduce their overall profit potential. Additionally, the success of a franchise is heavily dependent on the franchisor's ability to maintain a strong brand and provide effective support to its franchisees. Careful evaluation of the franchise agreement and the franchisor's track record is essential for franchisees to determine if the franchise model aligns with their business goals and risk tolerance.