What is the franchising business model?
Franchisors often say that owning a franchise is about being in business for yourself, but not by yourself. Franchising is essentially the granting of rights from one party to another. For example, if you wanted to grow your business in another location through franchising then you would grant the rights to your brand name to another person or company who would then replicate your business in their location with your help.
The entity granting the rights are referred to as the Franchisor and the person, people or company that are replicating the business are referred to as the franchisee. The business system that is being replicated is the franchise. In practice there are some fundamental elements to all franchises.
An agreed term
Franchises don’t last forever, they last for “a term”. A common term is usually five years and then after five years the parties might agree to another term. Or renew the franchise as it is often called. Some brands choose longer terms though, maybe seven or ten years, some are several decades but the majority are five years. Many franchises roll along like this for several renewals, but the typical average period a franchisee runs a franchise for is around eight years for various reasons, but mainly because the franchisee has generated a capital value that they wish to cash in and after eight years or so many are simply ready for a change anyway!
Control of standards
Companies that are successful have got there through some trial and error, usually a lot of time and by doing things in a certain way to a certain standard. So, for any franchisee to be successful they need to replicate that system and format of working accurately. It’s also true that for reputational reasons franchisors want to be sure that franchisees can and will closely follow the format. Rather than trust this will be the case, franchisees and franchisors have a legal agreement between them to ensure compliance to a certain way of working.
An initial investment
Many businesses need assets, stock and inventory, maybe a shop or office etc. That needs to be paid for. So in franchise land there are often two figures quoted at the outset which are the franchise fee and the total investment. The franchise fee is a sum that buys the rights and initial training, the total investment is the whole cost of launching which might include a shop fit out and/or stock for example.
An ongoing royalty
The inherent deal in franchising is that in exchange for help setting up the franchise and training the franchisee and disclosing all trade secrets etc that the franchisor will receive a share of the revenue. This is usually in the form of a royalty which is often a percentage of net vat turnover payable each month. This means that each franchisee becomes a profit centre for the franchisor without the costs of doing it themselves.
Some exclusivity
Franchisors will usually agree not to compete with their franchisees. Quite how far that promise goes is most often defined within an exclusive geographical region. So if you were a courier franchisee you might get the rights to a region like Bristol for example. But if you were a café, if might be a small part of Bristol.
Working together
The agreed term, the fees involved and the extent of exclusivity are all wrapped up in a legal franchise agreement.
Franchisors and franchisees work together. It is a relationship where both parties help each other and mutually benefit. Day to day the franchisor is coaching best practice to the franchisees, and keeping everything up to date branding wise. Franchisors take responsibility on a national or international level for the brand and all that it stands for. Every franchisor is responsible for growing the dranchisee network so that the brand grows and everyone is part of a bigger brand.
This content was written for FSB by Lime Licensing Group
Lime Licensing Group is an expert provider of professional franchise consultancy and brand licensing services.