The world of commerce is huge. It has gone through many transitions and transformations over the centuries but one thing that drives it is the profit motive. A business can have many forms and types. And franchising is one of these. But what is a franchise business and what does franchising mean? We take a closer look.
Table of contents:
Franchise business – definition
When it comes to the question of what does franchising mean in business, you’re likely to come across various definitions and explanations for what is essentially a relationship between the franchisor and franchisee.
The franchising relationship governs how business is conducted. The franchisee takes the franchisor’s business model and replicates it in various locations and territories. In exchange for using the franchisor’s business model, support systems, brand name, systems and processes, the franchisee not only pays the franchisor an initial fee and ongoing royalties, but they’re also able to capitalise on their investment and earn a profit, too. This is, in essence, the franchise meaning governing these parties in the relationship.
Types of franchising relationships
In terms of how a franchise works, it’s important to look at and better understand the types of franchising relationships that are involved. These are:
- Traditional or Product Distribution/Trade Name Franchising: the owner of the franchise owns the right to a name or trademark and this is subsequently sold or licensed to franchisees. Some examples of this type of franchising include the bottling, gasoline, automotive and other manufacturing industries.
- Business Format Franchising: the franchisor and franchisee have “an ongoing relationship” through which the franchisor provides services. These may include aspects such as site selection and development support, training, marketing plans and strategies, operating manuals, training, brand standards, quality control, business advisory support, etc.
Relationships
One of the most crucial aspects of franchising is the relationship between the franchisor and the franchisee. As the owner of the business, the franchisor usually provides the franchisee with varying levels of support to ensure that quality standards are met, that the business of the franchisee is successful and that the franchisee is trained and exposed to everything they need to help their business thrive. On the other hand, franchisees can not only rely on the franchisors for their support, but they also have duties and obligations to fulfill in terms of ensuring that the business is run according to the franchisor’s guidelines and that there is no veering off into different waters as the franchisee sticks to what is required of them in the Franchise Agreement. Franchise agreements can last anywhere from five to 30 years.
Brands
Franchising, in large part, entails the use of the franchisor’s brand name and intellectual property by the franchisee. This licence to operate the business comes with certain responsibilities on their part. They will be required to maintain high-quality standards the franchisor has set as well as ensure that they are consistent in terms of the brand’s usage throughout the duration of their contract. In many cases, franchisors allocate a pool of resources to a mutual or common marketing and advertising fund which is used throughout the entire franchising network. In such cases, franchisees are usually expected to pay a certain amount for this purpose.
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Systems and support
For a franchisor to franchise a business, they will need to ensure that the franchisee is fully up to speed with all the requirements of the business in order to ensure that the business model is followed to a “T”. This means sharing knowledge, experience and expertise when it comes to operational aspects of running the business. Franchisors should also provide franchisees with certain levels of support in varying forms so that the franchisee can conduct the business to the best of their ability. Systems and support may involve anything from customer relationship management help to establishing a network of franchisees for mutual assistance.
Contracts
A franchise business in the UK and in other parts of the world requires a contractual relationship between the parties involved. Although it may at first appear that franchises are merely chain stores across the country, this is not really the case. The reason for this is that the franchisor does not serve customers or sell directly to them. Instead, the franchisee is responsible for managing the relationships with the customers. As a result, the franchisor grants the franchisee a licence to operate the business under the parent company and the franchisee is then responsible for fulfilling their contractual obligations to the franchisor, including paying royalty and other fees. Other aspects of the franchisor-franchisee contract may entail include the levels of control which the franchisor may exercise over the franchisee, the terms of operation, training, trademark and copyright obligations, renewal and termination options, etc.
Wrapping up
When looking for franchise business ideas, it’s always important to familiarise yourself with all the technicalities and aspects of franchising so that you can perform your due diligence effectively. There may sometimes arise confusion as to what the difference between franchises and chain stores are but we hope we’ve clarified the main aspects that make up franchising as a whole. Franchising comes with many benefits and it’s a worthwhile endeavour, especially for those business-minded entrepreneurs who wish to minimise their risks and maximise the returns on their investment. As a franchisee, you’ll be able to benefit from a wide support network while you earn your living in a business you can call your own. Few things in life will be as rewarding as this.
