What is franchising?
Of the many kinds of franchises, a venture usually will fall into one of the two general franchising arrangements:
- Business Franchise: in this arrangement, the franchisee buys the right to use the franchisor’s methods of marketing, operational systems, logos, trademarks, architectural styles, and other features. The franchisor will dictate many of the details of the business such as prices, quality, product and equipment specifications, and the methods and hours of operations. The franchisor drives income from upfront fees, royalties, percentages of gross sales, and advertising pools.
- Product Franchise: in this, the franchisor is a manufacturer or distributor of a product or products, and the franchisee is usually a retailer or wholesaler. The profits to the franchisor come from price mark-ups at the various marketing levels. The question of whether the relationship between the parties is that of a true franchise or a distributorship depends on the amount of control exerted by the manufacturer or the primary distributor on business operations and on the product lines of the retailer or sub distributor.
The most common is business format franchising. In this form, the franchise is a legal agreement between a franchisor and a franchisee, which allows the franchisee to trade using the franchisor’s brand name and business model. Typically, this enables the franchisee to open their own outlet from which to sell the franchisor’s products or services. Franchise offerings are typically restricted to specific geographical areas to prevent competition between franchisees.
- The franchisor is the owner of the original business. They provide the franchisee with the information and resources they need to set up and operate their franchise outlet, for example operating manuals, training programmes, proprietary software, specialist equipment, point of sale items, uniforms, and stock. They usually give the franchisee continuing support.
The franchisee is the independent operator of a franchise outlet. They pay an upfront franchise fee and ongoing royalty or support fee to the franchisor in return for the resources and support they need to run the outlet. They are responsible for financing and managing the outlet. However, they must run the outlet in accordance with the instructions of the franchisor. Many franchisees take the opportunity to expand and operate several outlets.
Other agreements that are sometimes referred to as franchising
These can include:
- Licensing agreements, where a business allows another party to manufacture and sell their products but does not dictate the business model.
- Distribution agreements, where a business allows another party to purchase and re-sell their products but does not dictate the business model.
- Agent agreements, where a business allows another party to sell their products on their behalf but does not dictate the business model.
In summary: the key difference between a completely independent small business owner and a franchisee lies in the degree of influence and control.
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