What is Franchising?
Business format franchising is the granting of a licence 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 – the 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 usually 5 years but can be longer. This will include renewal options.
The principle is simple. Instead of developing company-owned outlets, some businesses expand by granting a franchise to others to sell their product(s) and/or service(s).
Who is in control?
Each franchise business is owned and operated by the franchisee. However, the franchisor retains control over the way in which products and/or services are marketed and sold, and controls the quality and standards of the way in which the business is operated.
What are the cost implications?
The franchisor receives an initial fee from the franchisee – payable at the outset – together with ongoing management service fees. Usually, these fees are 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 this includes training, product development, marketing and advertising, promotional activities together with a tailor-made range of management services.