Franchising

What is Franchising?

Franchising is a business structure in which the owner of a business model, the ‘franchisor’, grants to the ‘franchisee’ the right to use the franchisor’s business model, trademarks and branding to sell the same products or services using the franchisor’s business system.

How is franchising different to other business structures?

When a person starts his own business, he will own the business name, its branding and all of its intellectual property rights. He can choose to change them at any time, and they are his to sell or do with what he likes.

Not so with franchising. When a person becomes a franchisee, the business name, its branding and all of its intellectual property rights stay fully owned by the franchisor. The franchisee has merely purchased a right (or licence) to make use of those assets to operate the business.

The franchisee is entitled to carry on its business using these names and branding only for so long as the ‘franchise agreement’ continues. Once the franchise agreement terminates or expires, the franchisee will have no further permission to use the business names and branding, and will usually have to close the business down (unless he is able to sell it on to a new franchisee).

So why bother becoming a franchisee?

Franchising has become increasingly widespread, popular and in many cases very profitable for both the franchisor and the franchisee. The reason is that the franchise owner has created a well-known and valuable brand, and usually a sought after product or service that is associated with it.

This means that anyone starting up a new business from scratch does not have to spend time and money trying to create a new market for a new business that no one has heard of. Instead, they can ride off the back of the existing ‘goodwill’ and brand name of the franchisor.

The franchisor will usually have created a comprehensive ‘Operations Manual’ which sets out in detail exactly how the franchise should be operated, sometimes down to the finest details. This takes the guesswork out of running a business and allows the franchisee to benefit from tried and tested administration, marketing and business operational practices to ensure the success of the franchisee’s business.

The franchisee may also benefit by national or global marketing campaigns carried out by the franchisor for the benefit of all of the franchisees.

So, what are the downsides?

Well, apart from the franchise royalty payments, or commission which must be paid, usually on a monthly basis, there may also be a substantial ‘signing-on’ fee and a contribution to the franchisor’s marketing too.

In addition, the franchisee will be bound by the strict rules of the Operations Manual to ensure the franchise is run exactly in conformance with the franchisor’s rules and regulations. Failure to do so can mean the franchise is terminated.

Additionally, the franchise agreement is usually for an initial limited term, say 5 years. Renewal of the agreement is possible, subject to the franchisee not being in breach of any of its terms, and often subject to paying a renewal fee.

On expiry of the franchise agreement, the franchisee may walk away with no further value for all his hard work, if he is unable to sell the business to another franchisee.

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