What is franchising and how can I choose the right company to be a part of?
What is meant by franchising?
Franchising covers many different forms of business relationships, including licensing, distributor and agency arrangements. However, the most popular use of the term has developed from the business practice of business format franchising.
What is meant by business format franchising?
Business format franchising is the granting of a licence by one person – called the franchisor – to another – called the franchisee. The licence then allows the franchisee to trade under the trade mark or trade name of the franchisor and to make use of an entire package. This entire package will comprise of all the necessary elements to establish a previously untrained person in the business and to enable them to run it with continual assistance on a predetermined basis.
For example many successful fast food companies, such as Domino’s pizza will operate a system of franchises. This means that a Domino’s pizza establishment in your area is likely to be a franchise meaning the individual who owns and controls the establishment has paid for a licence to trade as Domino’s pizza.
What are the advantages of operating a franchise?
There are many advantages in operating a franchise rather than starting up a new business. They are as follows:
- There is no need to come up with an original idea – there is an already existing successful idea in place
- A large and well established franchise operation will in many cases have national advertising campaigns and a solid name – looking at the above Domino’s pizza example there is a national advertising campaign and people are already aware of the brand, this creates instant custom for a franchise
- There will often be comprehensive training programmes in place in relation to sale and other required business skills
- Franchisors can also help secure funding for the investment by the franchisee such as discounted bulk-buy supplied for outlets when they are in operation
Which person is in control of each individual franchise?
Each individual business outlet will be owned and operated by the franchisee. This means that they will have control over the way the business is run including such aspects as staffing and accounting.
However, they will not have total control over all aspects of the business. For example, the franchisor will retain control over the way in which products and services are marketed and sold and will control the quality and standards of the business.
Why does the franchisor retain control in this way?
The reason why the franchisor retains control in this way is that it is their product which is being sold. If each franchisee were to conduct their own marketing and sales campaigns there would be an inconsistency in the market between the different franchises. It is also imperative that the quality of the product is maintained as it is the franchisor’s name which goes against the product which could open them up to potential legal claims if the standard of the product is below par.
How will the money side of the franchise be calculated?
When an individual takes on a franchise they will initially pay a fee to the franchisor payable at the outset when they take on the franchise. Further forms of payment will be required to be paid to the franchisee in the form of management services.
How will these management fees be calculated?
The management fees will usually be calculated on the basis of a percentage of annual turnover or mark-ups on supplies. This means the more the individual franchise makes the more will be paid to the franchisor in the form of management fees. This is an essential part of this business model.
Does the franchisor have to do anything in return for the management fees?
In return for the management fees the franchisor will be under an obligation to support the franchise network in the following ways:
- Product development
- Promotional activities
- Specialist range of management services
Is there any form of regulatory body which will help me if I want to become a franchisee?
The British Franchise Association was set up by many franchising companies in 1977 in order to protect the reputation of all franchise companies. The British Franchise Association acts in the interests of the industry as a whole in assessing and accrediting franchising companies.
In order to be accredited by the British Franchise Association a franchise company must meet criteria in relation to the following:
- Structure of the business
- The terms of the contract between franchisor and franchisee
- The testing of the system
- The success of the company as a franchise
How will the British Franchising Association help and individual who wants to take on a franchise?
Franchise companies which are accredited by the British Franchising Association must adhere to certain criteria and adhere to certain policies and guidelines.
If a franchise company is accredited by the British Franchising Association this will then show any individual business that wishes to take on a franchise of that company that things will be done in the correct manner, they will not be exploited and they will receive the required assistance to operate the franchise.
Since franchising first came into operation it has moved from a small number of markets to many different and markets bringing with them many different business characteristics. Accordingly the British Franchise Association is required to achieve uniformity in standards and business practices across the many different markets.