Franchising - What is franchising?
Franchising is a business arrangement whereby an individual buys into an established company.
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A franchise is a joint venture between:
- A franchisor, an existing business who sells the rights to use its brand and idea;
- And a franchisee, an individual who buys the right to sell the franchisor’s goods or services under their name and trade marks.
The franchisee will usually pay the franchisor an inital one-off fee, as well as a percentage of their revenue as royalty. In return, the franchisee will often receive ongoing support and guidance, as well as gaining access to the franchisor’s business idea, products, or services.
Three models of franchising
There are several ways of franchising. These include:
Business format franchises: an existing and established business supplies individual owners the rights to their business, including the name, trade mark, products, or services. The franchiser usually helps the franchisee launch and run their branch in return for royalties. This is the most common form of franchising. Examples include fast-food chains and hotels.
Product franchises: a manufacturer (the franchiser) controls how retail stores (the franchisees) distribute their products. To distribute the manufacturer’s product and use their name and trade mark, the retail store must pay fees or purchase a minimum amount of products. Examples included branded technology stores and car dealerships.
Manufacturing franchises: the franchisee is a manufacturer and pays for the rights to produce and sell the franchiser’s products using its name and trade mark. Some of the most well-known soft drink brands use this format, whereby the franchiser provides basic ingredients to manufacturers who finish the product before selling it on.
Why set up a franchise?
For individual business owners, there are several advantages to buying into a franchise compared to starting a new business from scratch.
Within a franchise, the franchisee gains tried and tested products or services, ongoing support and guidance, existing guidelines and business strategies, as well as immediate name recognition and brand reputation. As such, a franchise usually requires less experience than other business structures.
An established business may choose the franchise arrangement if it is looking to expand quickly at a low cost. Although the franchisor often needs to offer support at guidance to franchisees, franchises require very little capital compared to other expansion options.
However, with all business structures, there are risks involved with franchising. For example, if certain franchises offer poor quality goods or services, this can have a negative impact on other franchises, and affect the entire brand’s reputation. Franchises also have less flexibility that other business structures, as franchisees need to follow a set way of doing things.