Franchising


Franchising is a method of doing business enabling others to generate revenue by the use of a brand name, trademarks and proprietary systems. Effectively if a system makes money and operates under a business name then it may be able to be franchised. Franchising is a cost effective way of expanding a business without the Franchisor incurring the expense of establishing lots of expensive outlets. An incoming franchisee pays a franchise fee, all set up costs required to establish their franchise business, a training fee to be taught the franchise system and an ongoing fee for continuing support. A marketing fee may also be charged to pay for advertising and promotion on both a national and local basis benefitting both the individual franchisee and the franchise group.

Franchising enables Franchisors to provide their goods and services to a much larger customer base than if they operated the business themselves and it allows franchisees to benefit from a system that is proven and supported by the Franchisor. The relationship can be very profitable as it allows the Franchisee to concentrate on the day to day activities of running their business knowing that the Franchisor is responsible for building and improving the system. As well as the initial investment there may also be an ongoing franchise fee charged as either a fixed amount or calculated as a percentage of revenue. This is where the Franchisor makes their ongoing income and is rewarded for the growth of the business. For this amount they are responsible for providing support to the Franchisee and also for looking at ways to increase or improved the goods and services offered by the franchise network to increase the profitability of the business. There are many different types of franchises but all of them follow a similar pattern in that the Franchisor allows the franchisee to supply products and or services under a written down method controlled by the franchisor for a fee. Each aspect of the business from store design, day-to-day operation and products offered are controlled by the Franchisor and written down in Operations Manuals that are continuously updated to ensure that all franchisees offer exactly the same products in exactly the same way in every branch of the Franchisors network.

As all aspects of the business are developed and then controlled Franchising can enable a Franchisee to utilize software and methods that would not normally be available to him if he operated a similar business outside the Franchisor Franchisee relationship.

A franchise can expand into areas where the Franchisor could not on their own due to capital investment constraints. Each party to the Franchising Arrangement depends on the other and thus forms the business relationship, a relationship governed by the Franchise Agreement, which outlines each and every aspect of the rights and obligations of both parties.

When reading a Franchise Agreement it will seem that they are very onerous and in favor of the Franchisor but this is because every stage of the Franchise operation that forms the system needs to be controlled by the Franchisor. Before one product is sold the business already has a value, which is the value of the goodwill of the Franchisors systems and methods, these are jealously guarded as one recalcitrant franchisee can damage what the franchisor has built hence the lengthy agreement. This makes it very important that the Franchisee does due diligence into the Franchise offering as once the agreement is signed there is little recourse without incurring a financial loss if the change their mind and regret their choice.

A franchise is like any other business and the same due diligence should be followed to determine the viability or otherwise of the venture. There is no such thing as “the best Franchise”; there just may be a best franchise for you. A franchisee just needs to find one that matches their criteria, usually determined, by investment budget and the type of business that they would like to be part off.

Exploiting a niche can be profitable but the Franchisee must make sure that the Franchise they choose will provide them with the opportunity of making money and not just give them something to do. Investigate the Franchise offering, look at the Disclosure Documents, which outline costs of setup and ongoing operation and talk to the businesses current Franchisees about the experiences in the business. Look carefully to see if there have been terminations of franchisees, which may indicate problems in the system. There is little chance in anything that everyone will be 100% happy, that is not human nature but by talking to a good cross section of the current franchisees it will help determine the strengths and weaknesses of the Franchise and also help to know whether to proceed with interest in that particular business.