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1.2.1 Franchise

What is Franchising?
A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchiser or that meet the franchiser's quality standards.

Franchising is based on mutual trust between the franchiser and franchisee. The franchiser provides the business expertise (marketing plans, management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee. The franchisees bring to the franchise operation the entrepreneurial spirit and drive necessary to make the franchise a success.

There are primarily two forms of franchising:
Product/trade name franchising and Business format franchising.

In the simplest form, a franchiser owns the right to the name or trademark and sells that right to a franchisee. This is known as "product/trade name franchising." The more complex form, "business format franchising," involves a broader ongoing relationship between the two parties. Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.

Operating a franchise
A company can expand by setting up its own branches. Alternatively, it can become a franchiser and sells its experience and reputation to individuals - the franchisees.

A vast array of franchises is for sale - from fast-food outlets to service industries. The purchase of a franchise enables you to use a particular method to run a particular kind of business and sometimes the right to use and trade under a household name. It also allows you to run your own business and still be part of a large network. You are buying expertise and an image, but the entry price can be high so you must assess whether the potential rewards justify the costs.

A profitable franchise combines a successful business idea with a proper level of support and promotion from the franchiser. The price you pay may give you the exclusive right to distribute goods or offer a certain service within a given area but with no back-up. Decide whether you could set up a similar operation yourself and perhaps save a great deal of money.

You will need to vet thoroughly any prospective franchiser but must expect to be vetted yourself The better the franchiser, the more concerned they are likely to be that only good-quality franchisees are taken on. You will need to make a good impression.

Banks often have specialized departments to deal with franchises and may be able to offer advice. They also know that buying a suitable franchise helps to minimize the risks of a start-up business.

You will need to make your own capital contribution to the initial costs. Banks will generally expect this to be at least 30 per cent of the total, but raising the finance is likely to be easier than in starting a business from scratch.

How franchises work
The diversity of franchised businesses gives rise to various systems. At the core of any franchise agreement is an operations manual covering the essential business techniques that you, the franchisee, are obliged to use. The operations manual is a confidential document and its contents must not be revealed.

When considering whether to take on a franchise, you should bear the following points in mind.

  • Becoming a franchisee often means that you will own the business assets such as premises, equipment and so on although some franchiser prefer to own the business premises and lease them to franchisees.
  • You will not own the business method.
  • You can usually decide whether you want to trade as a sole trader, in partnership or through a limited company.
  • Your trading accounts will be subject to scrutiny and controls set by the franchisor, who may stipulate exactly what accounting systems you are to use. Uniformity among franchisees makes it easier for the franchisor to inspect the accounts and draw management information from them.
  • The franchisor will monitor the way you operate the business. The franchisor may stipulate opening hours and retain control
  • over the decor and furnishings and training of staff The particular methods and techniques of, for example, preparing and cooking the food in a fast-food chain may be laid down. You may be obliged to buy certain foodstuffs and ingredients only from the franchisor.
  • There will generally be strict reporting procedures between you and the franchisor.
  • You normally buy the right to trade for only a limited period, typically five years. This may be coupled with the right to renew the franchise at the end of that period.
  • The cost to you will be the payment of a capital sum on entering into the agreement and probably regular service fees - possibly based on turnover or profits - while the agreement lasts.

Franchise vs. New Business
In deciding between purchasing a franchise and starting a new business, perhaps the best place to begin is to ask yourself why you want to own a business. The answer you give may provide some insight into which path you should choose.

You want to be your own boss. If your answer is that you want to own your own business because of the freedom it will bring you, you probably shouldn't buy a franchise. If you buy a franchise, the franchisor will dictate much of what you have to do, when you do it, and how you do it. You'll have far more control if you start your own business.

You have a business idea that you believe has a lot of promise. If you want to nurture an idea you have into full bloom, you probably shouldn't buy a franchise. You won't have much control or be given much of an opportunity to pursue your ideas (try telling McDonald's that their golden arches ought to be bright green). You may be better off starting your own business.

You want to make lots of money. If your answer is that you want to own your own business because of the financial opportunities it presents, you should look long and hard at a franchise. Franchises don't necessarily make more money than other types of businesses, but they do have higher success rates. Of course, you'll be paying for the higher success rate in the fees you'll be paying to the franchisor. You should look particularly hard at franchises if you don't have a great deal of hands-on experience running a business.