What is franchising?
The term 'franchising' has been used to describe many different forms of business relationships, including licensing, distributor agreements and agency arrangements. In its most familiar sense, the term ‘franchise’ has arisen from the development of what is called 'business format franchising’.
Business format franchising is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade as their own business under the brand of the franchisor, following a proven business model. The franchisee also receives a package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis (including a predetermined agreement length, with renewal options).
The principle is simple - some companies choose to grow, not by developing in the conventional way but, by granting a franchise license to others to sell their product or service. There are clear advantages to this:
- You don't have to come up with a new idea - someone else has had it and tested it too!
- Larger, well-established franchise businesses will often have national advertising campaigns and a solid trading name
- Good franchise businesses will offer comprehensive training programmes in sales and, indeed, all business skills
- Good franchise businesses can also help secure funding for your investment as well as, for example, discounted bulk-purchases for outlets when you are in operation
- If customers are aware that you are running a franchise business, they will understand that you offer the best possible value for money and a consistent quality of service - although you run your 'own show', you are part of a much larger organisation
Who is in control?
Each franchise business outlet/unit is owned and operated by the franchisee. However, the franchisor retains control over the way in which products and services are marketed and sold, and controls the quality and standards of the business.
What are the cost implications?
The franchisor will receive an initial fee from the franchisee, payable at the outset, together with on-going management service fees - usually based on a percentage of annual turnover or mark-ups on supplies. In return, the franchisor has an obligation to support the franchise network, notably with training, product development, advertising, promotional activities and with a specialist range of management services.