Franchising is a method of expanding a business where the franchisor licenses its trademark and business system to a franchise in exchange for payment to the franchisor for the right to operate the franchise using the business system and trademark. The franchisor owns or has the exclusive rights to the franchise system for the franchise business whether it be a product, business format or a manufacturing franchise. A key component of the franchise system is a strong brand name, trademark and logo.
The franchisee enters a contract or agreement with the franchisor which grants the franchisee, under certain conditions, the right to use a business brand name or trademark and the right to produce or distribute the franchisor’s product or service. Franchising can be divided into one of, or a combination of:
(a) Product Franchising – where a distributor supplies the product of a manufacturer, often with exclusive right to sell within a specific market;
(b) Business Format Franchising – where a unique system of doing business is undertaken in a controlled manner usually with a trade name, trade mark, specified decor; and
(c) Manufacturing Franchise – where an essential ingredient or technical information is supplied.
There are various ways franchised businesses work:
(a) traditional retail businesses
(b) mobile products/services
(c) work from home
(d) Internet based
Some businesses require hands-on operation by the franchisee and others are designed for a passive investment. Some businesses operate part-time and others require a full-time commitment.
There is nothing to stop franchisors and franchisees from negotiating the terms of a franchise agreement. Often, Franchisors will say that the franchise agreement is non-negotiable. But often franchisors are willing to negotiate some of the commercial aspects of the arrangement, and certain terms are often more negotiable than others.
Most franchisors will not negotiate the initial franchise fee royalty or marketing fund contributions but they may agree to waive royalties for a short space of time when establishing a new franchise business. Generally, whether or not the franchisor is willing to negotiate terms — and if so, which ones and to what degree — is a matter of leverage. Newly established franchisors are often more willing to negotiate the franchise agreement, particularly if they are eager to sell a franchise. Franchisors also tend to be more negotiable if the franchisee has particular skills or experience that will make them particularly good franchisees.
Franchisees purchase into a franchise system because of the perceived benefits from being associated with a Franchisor’s business system and a network of other franchisees. What are the key benefits?
- franchisors will have a vested interest in the success of the franchisee
- the business system and its place in the market should have been already tested
- collective buying power
- collective marketing and advertising
- franchisor training and support.
Whilst franchises have many advantages there are also, at times, disadvantages which must be carefully considered by prospective franchisees before purchasing a franchise. So what are some common disadvantages?
- generally more expensive to purchase
- more ongoing costs (royalties paid to franchisor)
- the franchise is only granted for a limited time
- there is a lack of flexibility because franchisees must follow the franchisor’s system
- the franchisor’s problems can become the franchisee’s problems
- the franchisee is not in control of their business (there is a separation between ownership and control)
- a franchise is like a cross between business ownership and employment.