What Is Franchising?
The basic principle of franchising is relatively straightforward. A company (The Franchisor) wishing to grow may grant a licence to others (the Franchisee) to sell its product or service under the Franchisor’s brand, in line with its proven business model, systems and procedures and often within a specified and exclusive territory.
The traditional method of franchising, known as “business format franchising”, grants the rights to operate the Franchisor’s brand and business model within a specified territory. Additionally, the Franchisor will typically provide ongoing support to its Franchisees in terms of training, updated operating procedures and manuals, group advertising and marketing, the provision of operating and accounting software and, in some cases, accounting services and business mentoring.
The franchising business model adopts a partnership approach, whereby each party relies on the other for business growth and success. Ultimate control of the brand is retained by the Franchisor with regard to trademarking, marketing and quality assurance. However, the Franchisee benefits from owning and managing its own local or regional business under the umbrella of an established and supported brand.
Following a rigorous recruitment and selection process, carefully selected Franchisees can expect to pay an initial franchise fee to the Franchisor for licensed rights to operate the brand name within the specified territory; the use of the Franchisor’s intellectual property, such as the trademark and operations manuals; initial training and a level of start up stock; and materials and equipment required to operate the business. Franchisees will also need to secure sufficient working capital to operate the business for at least the first 12 months of trading, in order to cover operating costs such as rent, salaries and utilities.
A monthly management fee or royalty is also paid to the Franchisor by the Franchisee for the ongoing use of the brand name. It is normally a percentage of the Franchisee’s monthly turnover. It is also typical to pay a monthly marketing levy to the Franchisor as a contribution towards a group marketing fund.
Through the implementation of correctly managed and monitored franchising procedures, and through the requirement for both parties to operate in line with a formal business contract for a set but renewable period (the Franchise Agreement), the Franchisor will provide a range of ongoing support services to enable Franchisees to concentrate on growing businesses on a local or regional level.