The word franchise is an English/French noun – and verb – which derives from the word franc (meaning ‘free’). This hints at the nature of franchising ie that a company (franchisor) gives an individual or company (franchisee) the right to use its branding, business model and products/services practically for free initially, provided they later give them a percentage share (known as a ‘royalty’) of their profits on an ongoing basis. The business is conducted under the banner of the franchisor who guarantees only one franchisee per geographical location.
The Franchise Agreement and Operating Licence
The franchisee signs a Franchise Agreement which means they now have a licence to operate for the brand. The Agreement states a list of obligations ie how the products or services should be displayed or delivered, the way staff should dress and behave and even how the toilets should be cleaned, and when.
Famous franchises, which have breached international waters and so can be found around the globe, include McDonald’s (80 per cent of its restaurants are franchisees), Dunkin’ Donuts and Starbucks. Although it’s not just in the restaurant and café trade that franchising excels – Curves is a popular fitness club for woman while here at iSell we ourselves offer the opportunity of signing up to a lettings agency franchise.
In a way franchising is a partnership. But it’s not an equal one in that the franchisor gets to set the rules regarding pricing, quality, promotions etc. But then, he or she came up with the concept in the first place.
Benefits to the franchisor
Franchising is recognised as an excellent means of expansion for a company. That’s because they can gain recognition by their brand appearing in various locations, and on their own terms. If their products were to appear in chain stores, for instance, then they would have to abide by the store’s rules and policy for displays etc.
This expansion also reaps rewards in terms of royalties from franchisees.
Benefits to the franchisee
The franchisee gets to set up a company which has already proven to have a successful business model. This lessens the risk for him/her and means they don’t have to fork out on marketing materials etc. In other words, it’s possible to start up a franchisee with less money than if they were starting from scratch. And, in addition, they can benefit from the franchisor’s ongoing marketing promotions at no extra cost to themselves.
Not only that, but the franchisor’s operations manual and the franchise contract will explain how the business runs. At the same time training and support is provided from the franchisor. It’s the support side that many franchisees are grateful for – especially those who have never set up in business before. Being part of a large operation can bring confidence to a ‘newbie’, after all.
The role of the British Franchise Association
Franchising is regulated in many countries around the world, including here in the UK. The British Franchise Association (bfa) is the trade body for franchisors and franchisees, and lobbies on their behalf in parliament. Formed in 1977 it set out to establish how franchising was different from the then-discredited pyramid schemes around at the time. Today its members include representatives from some of the biggest franchise bodies in the UK and worldwide.