Tips – Introduction To Franchising

Overview of franchising

Franchises are rights or licences granted by a company (franchisor) to an individual (franchisee) allowing them to market and sell products or services in a particular territory.

Franchisees have to follow franchise guidelines and rules as required by the franchisor, in order to maintain and build brand consistency. To start a franchise, a franchisee needs to invest and would usually pay an initial fee plus continued royalties to the franchisor. This would cover brand usage rights, training, sales and marketing material, fulfillment capabilities etc. The parties would sign a franchise agreement, which covers a certain time period, usually from five years to longer. Franchise agreements are normally renewable.

Broadly speaking, there are three different types of franchise:

Product franchise – the franchisor grants permission to a franchisee to sell a product with their logo, trademark or brand

Manufacturing franchise – the franchisor grants permission to the franchisee to manufacture their products and sell them using their logo, trademark or brand

Business franchise – the franchisor licences their brand to a franchisee with contractual terms covering the management and operation of the franchise business. The business franchise model is the most popular type of franchise.

Franchising has many advantages – including being your own boss, but with the structure of a proven business model. A franchise opportunity provides guidance and support and can help business owners achieve their business goals.

The International Franchise Association (IFA), defines franchising as an agreement or license between two legally independent parties which provides the franchisee the right to market a product or service under the trademark or trade name of the franchisor. The franchisee also has the right to market the product or service following the same business operations processes. The franchisor requires payment for these rights which is usually made up of an initial payment followed by annual licensing fees. The franchisor provides ongoing support to franchisees.

There are thousands of franchise brands to choose from, and the franchise business model is a long established proven business model. Franchising spans all industry sectors from business services, to consumer services, and all types of products.

For business owners who have a proven business model, franchising can allow them to expand at low cost and low risk. This allows a business to increase its market share and geographical reach quickly and at low cost. The franchisee gains the right to sell the franchisor's goods or services under the existing business model and trademark, and with ongoing support.

Entrepreneurs get access to a ready business model and proven formula to follow. One of the best known franchises is McDonald’s. However success can never be guaranteed. Some franchise businesses include training, support and fulfilment processes, while others may simply provide a list of approved suppliers. Often there is a formula and track record – but would be franchisee’s need to research and follow a due diligence process in order to minimize risk and increase the chances of success and ROI.

Compared to a startup, franchising offers many advantages. Including reducing the risk of failure, trial and error and increasing the chances of success. Furthermore franchising can be a starting point for new business owners, it can allow you to build your business experience – providing a strong foundation for any future projects or businesses.

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