Franchising 101 –
The Basics
Franchising is a business model in which the franchisor grants the franchisee the right to operate a business using the franchisor's brand name, trademarks, business systems and support. This is done in exchange for certain fees and ongoing royalties which are paid to the franchisor by each of their franchisees.
It’s an increasingly popular way for entrepreneurs to own their own businesses while benefiting from the security of the already established business model of a well-known brand.
Below you’ll find some key elements to franchising:
Franchisor: The franchisor is the body that owns the original business concept, the brand and all the relevant trademarks. They develop the business model, provide training and support to franchisees as well as set the standards for operating the franchise.
Franchisee: The franchisee is the person or entity that buys the rights to operate a business using the franchisor's brand and systems. Franchisees are responsible for managing the day-to-day operations of their franchise location in accordance with the standards set out by the franchisor.
Franchise Agreement: Is a legal contract between both the franchisor and franchisee that outlines the terms and conditions of the franchise relationship. It forms the base on which the relationship between the franchisor and franchisee is built and includes details about fees, royalties, territory, training and other important aspects of the business.
Fees and Royalties: Franchisees typically pay an initial franchise fee to acquire the rights to the franchise. They then also pay ongoing royalties, also known as management service fees, which is usually set at a percentage of their revenue. These fees help cover the franchisors cost of providing the necessary training, support and marketing assistance.
Training and Support: Franchisors provide training to franchisees to ensure they understand the business model and can operate the franchise successfully. Ongoing support may include marketing assistance, supply chain management and updates to the business system.
Brand Recognition: One of the main advantages of franchising is that franchisees benefit from the established brand recognition and customer base of the franchisor. This can make it easier to attract customers and generate revenue.
Consistency: To ensure consistency in product or service quality and customer experience across all franchise locations, franchisors maintain a high level of control over how their brand is represented and how their businesses operate.
Territorial Rights: To achieve fairness, franchisees often receive exclusive or protected territories, which means that no other franchise location of the same brand can operate within a certain geographic area.
Conclusion
Franchising can be found in various industries, including fast food, retail, hospitality, real estate, home care and more. It offers a way for aspiring entrepreneurs to start their own businesses with the added security of having the support and guidance of an established brand. This often increases the chances of success compared to starting a business from scratch. However, it's essential for both franchisors and franchisees to carefully review and understand the terms of the franchise agreement before entering into a business arrangement.
When done correctly, franchising creates a win-win relationship between the franchisor and their franchisees. The franchisor benefits from rapid expansion and an increase in capital, whilst each franchisee benefits from building a profitable business with the support and guidance provided by the franchisor.
