A company that has developed a successful business may decide to license other companies to operate silimar busineses unde the same name. That license is called a franchise. The original company is known as the franchisor, and the licensed companies are franchisees. Each franchisee pays the franchisor for the right to use the franchise name and ideas. The franchisor assists its franchisees in selecting a site for the business, purchasing equipment, learning how to run the business and so on. Advertising is done on a national basis in the name of the franchise. The franchisor controls the products that its franchisees sell so that the consumers can be assured that their McDonald's hamburger will taste the same whether they buy it in Atlanta, Georgia or Atlantic City, New Jersey.
There are more than 500,000 franchises operating with sales of more than $600 billion annually. That is more than one-third of all retail sales in the United States. Although the most well-known franchises are fast-food businesses, franchises also include almost every category of business, such as real estate brokers, automotive parts, and employment agencies.
Why do people buy franchises? Buying a franchise is the least risky way to go into business for oneself. The franchise's national reputation, advertising, training program, and business experience give the franchisee a big advantage over independent enterprises. As a result, the failure rate of franchised businesses in only 4%, while most nonfranchised businesses fail within their first five years. These statistics encourage many people with no prior experience in business to invest in a franchise, which will guide them toward success.
American capitalism, with all its problems, has proved to be one of the most productive economic systems in history. In a capitalistic system, people try to produce better goods and services because there are financial rewards for doing so. In addition, the freedom of choice that capitalism provides appeals to the independent American character. With few exceptions, no outside power tells any enterpreneur how much to charge for goods or services, and people are free to decide how they will earn and spend their income. The American economy is based upon the belief that every individual knows what is the best for himself or herself and must take responsibility for his of her decisions. Risks exists, but so do opportunities for advancement. Most Americans gladly accept both.