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 collaboration between:
- A franchiser, an existing business that sells the rights to use its brand and idea;
- And a franchisee, an individual who buys the right to sell the franchiser’s goods or services under their name and trade marks.
The franchisee will usually pay the franchiser an initial 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 franchiser’s business idea, products, or services.
Three models of franchising
There are several different models of franchising. These include business format franchises, product franchises, and manufacturing franchises.
Business format franchises
A business format franchise involves an existing and established business giving individual owners the rights to their business – including their 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.
Fast-food chains and hotels and common examples of business format franchises.
Manufacturing franchises
Within a manufacturing franchise, the franchisee is a manufacturer that 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.
Product franchises
Within a product franchise, the franchiser is a manufacture and the franchisee is a retailer that sells the franchiser's 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.
Car dealerships and branded technology stores usually follow the product franchise format.
Advantages and disadvantages of franchising
As with any business structure, there are advantages and disadvantages to buying into a franchise rather than 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 franchiser 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.
