What Is A Franchise? And How Does It Work?
If you are in the world of business, you likely have already came across the term franchise. You might not understand exactly how franchising works, but franchising is not new in business. Though it is not new, it is often misunderstood. In this article, we’ll take a detailed look at what franchising is.
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What is a franchise
A franchise is a business system in which a big company (franchisor) licenses a small company (known as a franchisee) to sell its products, goods or services under its brand name.
In return, the franchisee pays an initial franchise fee and regular royalties. Once a franchisee purchases a franchise, the franchisee must comply with the franchisor’s rules and guidelines in order to maintain brand consistency.
The term franchise can used to describe either the business system itself or the licence (contract) that the franchisor and franchisee.
How A Franchise Works
In simple terms, a franchise is a relationship between two companies in which one company (the franchisor) allows allows another company (the franchisee) to use its trade name and its system of doing business. The franchisor also provides the franchisee with support, and exercises a certain level of control on the franchisee in order to protect its intellectual property and maintain brand consistency.
Let us look at a simple example of how you can benefit from being a franchisee.
Let us say you are an entrepreneur and you want supplies dairy products but you are not a recognised brand. You know that building a customer base from scratch is very difficult and takes a lot of years because you will be competing with well established companies such as Dairyboard Zimbabwe.
You can approach Dairyboard Zimbabwe to buy their franchise. If they agree, then they will allow you to brand your products as Dairyboard Zimbabwe Franchise. In return you will have to observe the requirements of the franchise agreement, such as
- Pay the franchise fee
- Pay the regular royalties
- Comply with their product requirement standards.
One of the most important benefits to you is that your product is now branded Dairyboard Zimbabwe, which means their customer base is now your customer base too. However, one of the drawbacks is that if Dairyboard Zimbabwe somehow loses its credibility you suffer to.
Does a franchisee have business control in a franchise
Despite the franchisee using the franchisor’s brand, the franchisor has little or no role in the day-to-day management of the franchisee’s business. That is because the franchisee is still an independent business operator, not a joint business operator with the franchisor. Though the franchisor may still provide some guidance and information on human resources best practices according to the franchise agreement, the franchisee is free to hire, compensate, schedule, set employment standards and practices, and discipline their staff independent of the franchisor.
It is important to note that a franchise is not a joint business venture. As such, the franchisor and franchisee are different business in a legal and practical sense.
Generally, the franchisors require the franchisee business model to stay the same as theirs. For example,
- the franchisor will require the franchisee to use the uniforms, business practices, and logos particular to the franchisor.
- the franchisee is also usually require to have to adopt similar pricing models in order to keep the advertising streamlined.
The agreement between the franchisor and the franchisee is governed by a contract known as the franchise agreement.
The franchise agreement defines everything under the franchising operation for an agreed period. This includes:
- marketing assistance
- brand value
Types Of Franchise
There are three types of franchise:
- Product franchise
- Manufacturing franchise
- Business franchise
In this type of franchise, the franchisor gives a franchisee permission to sell their product using their logo, trademark and brand name. The franchisee is required to exclusively sell the products of the franchisor. In return, the franchisee receives franchisor support that may include provides national marketing and advertising campaigns.
The product franchise concept is similar to a supplier-distributor relationship because franchisor provides the product and the franchisee sells the product. The franchisee has to:
- follow the franchisor’s guidelines when selling the products.
- to pay royalty fees for using the trademark name and trademarks and the products they are want to sell.
In this type of franchise, the franchisor gives the franchisee permission to manufacture products and sell them using their logo, trademark and brand name. Many food and drink companies use this form of business.
This is the most popular type of franchising. The franchisor licences their brand to a franchisee with regulations surrounding how the business is managed. The franchisor provides to the franchisee not only its trade name, products and services, but the whole system of operating the business.
The franchisee also usually receive site selection, business operating manuals, training, brand standards, quality control, a marketing strategy and business advisory support.
Examples of some of the well know franchises include:
- McDonald’s Franchise
- KFC Franchise
- Burger King Franchise
- 7 Eleven Franchise
- Domino’s Pizza Franchise
- Ace Hardware Corporation
- CENTURY 21 Franchise
- Papa John’s Franchise
- Taco Bell Franchise
- Pizza Hut Franchise
- Wendy’s Franchise
- Chick-fil-A Franchise
Advantages Of A Franchise
There are many advantages in franchising, including:
Advantages for the franchisor:
- Franchising provides the franchisor a source of income, through franchise fees, franchise royalty fees, training fees, service fees.
- Having franchises allows the franchisor’s brand to be noticed in multiple locations where the franchises are operating. This gives the franchisor a competitive advantage in terms of brand reach.
- Franchisees are usually entrepreneurs who are full of the motivation to succeed and carry the franchisor’s brand forward.
Advantages for the franchisee:
- A greater chance of quick success than other people who start from scratch. This is because the franchisee will be using a recognised brand.
- The franchisor may provide support needed to setup quickly, such finding the right premises, decorating, shelving and equipment.
- Staff training from the franchisor.
- Being part of a well recognised brand and proven business model.
- A franchisee can enjoy the independence of small business ownership while working with a tried and proven business idea.
- Benefits from any advertising or marketing it carried out by the franchisor.
Disadvantages of franchising
Disadvantages for the franchisor:
- A franchisee is like a branch the franchisor has no ownership over.
- A franchisor will have to divulge confidential information about their business to franchisees. Even though a franchisee signs a confidentiality agreement, monitoring and enforcing it can be expensive.
Disadvantages for the franchisee:
- A franchisee usually loses a certain level of business independence. For example, the premises is decorated in a certain way and the range of products available for sale are restricted by the franchisor.
- The franchisee usually has little control over product pricing. For example, if the franchisor embarks on a nationwide discount on products this will affect the franchisee too.
- A franchise can be expensive due to franchise fees and on-going royalties involved. This can restrict the net profit the franchisee is able to make in the long run.
Do you have further questions about franchising?
While there are many advantages of in franchising, there are drawbacks as well as we outlined above. If you are considering buying into a franchise, you should contact an experienced franchise attorney for further assistance, or you can contact the best franchise consultants, MSA worldwide.