What is Franchising?
🕒: Four minutes
Franchising is a Partnership
Franchising is fundamentally a partnership between a company (the franchisor) and an individual or in some cases another company (the franchisee), for the purpose of distributing a product or service in a given market.
Franchising is Mutually Beneficial
A franchise partnership is designed to be mutually beneficial for both the franchisor and for the franchisee.
For the Franchisor:
Using the franchise model allows companies to expand rapidly into new markets at a lower cost and risk than through company-owned-and-operated unit expansion. This is because much of the set-up cost is absorbed by the franchise fee paid by the franchisee upon entering into the franchise agreement.
In addition, having a locally-owned franchise unit is advantageous as the franchisee generally knows the local market conditions and can adapt more readily than through remote management. Finally, a franchisee shares in the success and profits of the franchisor often making them more motivated for success than a standard employee manager.
For the Individual Franchisee:
Entering into a franchise agreement has a number of benefits for budding entrepreneurs, including the following:
- A franchise provides the opportunity to establish and run your own business but with the added benefits associated with a ready-made business model.
- A franchise gives the franchisee the opportunity to sell an established brand and benefit from all associated brand recognition.
- A franchise allows franchisees to keep the majority and occasionally all of the profits from their individual franchise unit.
- Most franchises provide set-up support, training and ongoing assistance to franchisees within their partnership network.
- Many franchises allow franchisees the flexibility to operate and market their own business in a way that suits their locality.
For the Company Franchisee:
Entering into a franchise agreement can allow an existing business to expand upon and enhance their current market offering, align themselves with a more established or niche brand and benefit from the expertise of the franchisor's business.
Franchising is About Give and Take
As discussed above, when done correctly, franchising is mutually beneficial and this is enabled through compromise and through carrying out the terms of the franchise agreement signed by both parties. Like all healthy relationships a franchise partnership is governed by the principles of give and take.
What the Franchisee Offers the Franchisor
- Franchise Fee - a one-time franchise license fee paid by the franchisee at the start of the franchise agreement.
- Renewal Fees - a recurring fee paid by the franchisee typically every 5 or 10 years to renew the franchise license.
- Royalty Fees - an annual fee based on a percentage of the franchisee's unit profit that is paid to the franchisor.
- Commitment - a legal commitment to distribute the franchisor's product or service and operate in accordance with the franchise agreement.
What the Franchisor Offers the Franchisee
- Distribution Rights - the right to market a product or service using the trademark or trade name of the franchisor.
- Business Model - the right to market the franchised product or service using the operating methods of the franchisor.
- Training - online or in-person training for the franchisee and sometimes key staff members prior to opening.
- Set-Up Support - support with the location selection, fit-out, first stock, opening announcements and launch of a new franchise unit.
- Ongoing Support - ongoing support with day-to-day business operations, stock, sales and marketing promotions etc.
Every Franchise is Different
Whilst in certain countries such as the U.S.A. franchising is regulated meaning a more uniform approach, in many others including Singapore, it is not. In these cases, local franchise associations often implement a code of practice amongst their members. Either way, every franchise partnership is unique. Some may include all the 'give and take' elements listed, others might only include a few or offer variations on these terms.
It is recommended to examine each franchise opportunity individually, take nothing for granted and ask as many questions as you can before proceeding further with any opportunity. When you are close to the point of reaching a franchise agreement be sure to engage legal and financial advisors to see you safely through to the other side.