Understanding franchising

The franchising industry can sometimes be seen as one of mystery to many. It is a term misused on a regular basis and one that many misunderstand. So, what is really meant by franchising and what does it mean to those business owners who choose to use it as a way of building their business?

What defines a business as a franchise?

Business format franchising can be explained as the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire 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.

Time and again, franchising has greatly out-performed other start-up businesses. Its formula of a locally owned and run enterprise, driven by a small business owner, with branding, economies of scale and support from the wider network, gives the consumer the best of both worlds and the business a far better chance of success.

The following key rules must apply to the business model for it to be considered a “Business Format Franchise”:

  • The business must involve a trademark
  • The business must have a defined and proven method of trading (proven system)
  • The franchisor and franchisee must use a license (Franchise Agreement) to use the trademark, which must be adopted and paid for by all franchisees
  • The franchisee must be able to sell the business on to a third party with the benefit of the goodwill derived from developing the business over time


What isn’t a franchise?

A number of businesses will run expansion models which may be very close to franchising but do not meet the specific criteria to be considered a “Business Format Franchise”. These are most likely to be some form of licence agreement or partnership. 

Advantages of franchising

  • You don't have to come up with a new idea - someone else has had it and tested it too! The business format is proven
  • About 90% of all franchisees reported profitability over the last 12 months
  • Good franchisors will offer comprehensive training programmes in sales and indeed all business skills
  • You have the opportunity to build your capital as well as your earnings
  • It is your business and you are the owner manager, providing you follow the system, you decide what goes
  • The major banks are very supportive of good franchising


Disadvantages

  • Running any business is hard work, demanding the highest level of personal and family commitment
  • You make a financial investment, however, no investment is guaranteed, especially when it depends on the efforts of both you and your franchisor as well as the vagaries of the market place
  • You buy into a proven business system for its benefits but you also take on the responsibility for following it – not doing so may result in you losing the business

 

 
 
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    Metal Supermarkets - Franchisee case study

    As a toolmaker, Ian spent years working and training in the manufacturing industry making dyes, moulds, machine tools and cutting tools - learning his trade eventually led him to become a Metal Supermarkets franchisee!

    Read the full case study View franchise details
 
 
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