Franchising Fundamentals – Basic Principles to Know

date icon 5 minutes to read date icon 29th July, 2021

Before entering the world of franchising, it is important to understand what the fundamentals of franchising are.

What is franchising?

Franchising, a term widely used in business, is simply a license made by the franchisor and given to the franchisee. This license gives the franchisee the right to use the franchisor’s ‘intellectual property’. The franchisee can take advantage of the brand recognition, gain full access to marketing materials and business plans etc. 

Franchising is open to all industries. There are no limits! A few to name are: gyms, restaurants, cleaning services and the list can go on. 

What is a franchising business?

Franchising is an umbrella term that can be further broken down into the following types:

  • Business franchising: The franchisee is given full access to the business plan and the name of the brand, in exchange for a fee. Both parties sign a franchise agreement in terms of agreement length, costs and fees, usage rights and training programs.
  • Product franchising: The franchisor has the right to own a brand, trademark or product. The franchisor sells the licenses of their franchisees to use the brand trademark for business purposes.
  • International franchising: The franchisor aims to expand their business beyond local borders, reaching customers worldwide. 

Who is the franchisor and franchisee? 

The franchisor is the owner of the existing brand trademark and is responsible for: developing the business plan, preparing marketing materials, and offering training courses for franchisees. The franchisor establishes the terms and conditions in the franchise agreement.

The franchisee is licensed by the franchisor to run a unit of the franchise brand for a specific time period. Owning a license allows the franchisee to gain access to the ‘intellectual property’ of a business and contribute to the growth and expansion of the business. The license is valid for a set period of time, once expired, it needs to be sent for renewal.

What are the benefits and drawbacks of franchising?

It really depends if you are on the giving or receiving end.  

As the franchisor

Benefits:

  • You are the business owner of the ‘intellectual property’ and have the right to set the terms and conditions to the franchisee. The franchisee can either accept, withdraw or ask for further negotiation for the needs of both parties to be met.
  • You will see new opportunities arising for local and international expansion of your business much faster as you will have franchisees on board with you who share the same vision to promote the business through the use of effective marketing strategies.
  • You will have accessibility to the latest technology and updated on latest industry trends.

Drawbacks: 

  • You are the owner of the business and with this, brings a number of responsibilities, from supporting and offering training programmes for franchisees to managing the day to day affairs. The workload can get too much sometimes, this is why it is important to be on top of your game and to evenly distribute the tasks among franchisees to maximise efficiency.
  • You should be knowledgeable and understand the financial, legal and business terms prior to finalising the franchising agreement with the franchisee. Withdrawing from a franchise agreement at such an early stage after making one can look unprofessional and depict you in the bad light.
  • You should lead by example and invest time in supporting your franchisees. At times opinions will differ in terms of what’s best for the growth of the business, but you should ensure you strive to respect and support your franchisees.

As the franchisee

Benefits:

  • You have the opportunity to work on an existing business and don’t need to start from scratch. You will have full access to ‘intellectual property’. With experience you will gain independence, become your own boss and be in charge of your own future.
  • You are on a flexible schedule. You are in control of how many hours you put into building the business. It’s simple,  the more time and effort you invest into the growth of the business, the quicker results will be seen. 
  • You will come across a number of franchise opportunities to choose from that meet your personalised goals.

Drawbacks:

  • You are given a license and in exchange guidelines set by the franchisor must be followed. 
  • You are expected to pay a percentage of your earnings to the franchisor.

What are the 4 R’s of franchising?

Following the 4 R’s of franchising is the secret to success in the franchising world! 

  1. Research: All business options should be explored before the final decision is taken – You should ask yourself if you have the necessary resources and a supportive team for business expansion. Doing your homework before diving into franchising is definitely recommended if you want to be successful.
  1. Reach: As a new franchisee, stepping into the world of franchising can be daunting. Finding the most suitable franchisor and reaching out to experienced franchisees who have a successful franchise brand up and running can open up many opportunities in terms of gaining knowledge and insights into expanding a franchise brand and help you establish a franchise network. 
  1. Reflection: Taking time to weigh out the pros and cons on the information you have collected is important to draw up a business plan for expansion. In which capacity do you wish to expand your business? What resources are needed for expansion? Are you ready to take the business to a whole new level or is more time needed? Taking time to reflect and plan, helps you stay focused on running a successful business.  
  1. Reaction: Once you have reflected and undergone the necessary research, it is about time to make a decision. If you have been faced with an opportunity to expand a franchise deal currently running, it is important to liaise with the franchisor in what ways your plans can be implemented in helping the business grow. One needs to ensure the franchisee and franchisor are on the same page. 

The fundamentals of franchising must be understood from day one!  Read on to find out more about franchising.

Get the PDF

Consistency-Theory-in-Franchise-Network-Communication