What is franchising?
Business format franchising is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to own and operate their own business under the brand, systems and proven business model of the franchisor.
The franchisee also receives initial training and ongoing support, comprising all the elements necessary to establish a previously untrained person in the business. The legal contract, or franchise agreement, between the two parties sets out the obligations and rights of both franchisor and franchisee, and determines how long the franchise arrangement will last (including renewal options).
The principle is simple - rather than developing company-owned outlets, some businesses instead expand by granting a franchise to others to sell their product or service. There are clear advantages to both franchisors and franchisees, just some of which are:
- 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
- You grow the business and, when you are ready to move on, can sell it for a profit
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 ongoing 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, marketing and advertising, promotional activities and with a specialist range of management services.