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Hello sir please explain how does a franchising agreement under which the ‘’franchisor receives loyalties’’ relax capital constraints?
What is a franchising agreement
A good example is McDonalds. Over 90% of the restaurants are run by franchisees and not by McDonalds themselves.
McDonalds buy the land or arrange a lease for the land. They also provide the equipment, seating, signs etc.. However they require the franchisee to pay them 40% of the total cost when the restaurant is set up.
From then on, the franchisor provides guidance and support and in return the franchisee pays McDonalds a % of their revenue – the royalty. (Obviously the franchisee also benefits from being able to use the McDonalds name.)
So both parties have to pay out less initial capital than if they did it on their own – they share the initial cost.
This is McDonalds way of operating. Other franchises might obviously have different arrangements but the basic approach is the same 🙂
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