What Is Franchising?

If you are an aspiring franchisee, you are in the right place. You are about to learn everything there is to know about franchise agreements

It often starts with the niggling ‘What if I was to pack my 9 to 5 job?’ Or with the semi-rhetorical ‘wouldn’t be great if I were my own boss?’ And then, after sifting through the various possibilities of starting up a business, a relatively low-risk answer naturally springs to the mind of the budding entrepreneur, namely, to invest in a franchise business.

So, if that’s you, read on and find out what you’re bargaining for. Discover what it means to take the responsibility of running a business under a parent company, whether it’s a popular brand name or a less known enterprise. Learn about what a franchise is, the different franchise systems, and choose the right path for you. And last, but not least, get to know what is included in a franchise agreement. This way, you’ll be able to make a better and more informed decision, based on the advantages and disadvantages of committing yourself to the rules and conditions of the franchisor.

What is a franchise and how it came to be?

In broad terms, a franchise definition translates into the opportunity for a company to expand its business, on one side, and the opportunity for an individual or a company to sell the products or services under the parent company’s brand name, on the other. The relationship between the two parties is sealed with a legal contract, also known as a franchise agreement.

Historically speaking, the crude roots of franchising date back to medieval times, when feudal landlords delegated tax collection and the appointees benefited from a percentage of the fees. Then, in the late 19th century, the first and most successful franchising enterprise was born, when the licence of selling the soft drink, known today as Coca-Cola, made a handful of venturers rich in a short space of time.

But is this a sure thing for the contemporary newbie business owner, when it comes to buying into a modern franchise model? Well, probably not, as owning a franchise is not immune to risk. On one hand, you’ll be entering the world of earning from an already built, successful business with its recognisable name, loyal consumer base and available marketing resources. On the other, you can expect potentially capped earnings, local franchise competition, initial investment and ongoing fees to keep you on your toes. These will not allow you to just sit back and profit without putting the hard work in.

Let’s get to the core, then, of what it means to make a living out of representing a business while having the freedom of being your own boss.

How does a franchise work?

The principle of how a franchise business operates is not that complex. Two parties, a franchisor and a franchisee, come to an agreement to work together for their own benefit and for the benefit of the established business.

What is a franchisor?

The franchisor owns the business and develops it further by allowing the franchisee to run their own business under the company’s trademark at a cost. The franchisor sells the rights to provide the same services or products to the franchisee. This way, the franchisor sets the conditions for their business expansion and growth with less investment and participation in the process.

What’s in it for the franchisee?

The franchisee pays the franchisor a licence fee for the privilege of using the company’s name and its resources for their own profit. The franchisee may also pay an ongoing royalty fee to the franchisor, which is a percentage of the gross sales. For the franchisee, this is often a lower-risk method of running a business when the product’s demand and their potential client base are not uncertain factors.

Depending on the type of franchise model they have invested in, the franchisee can benefit from ready-set business practices and standards, as well as from training, guidelines and marketing tools, provided by the franchisor.

Popular franchise models

There are 3 basic franchise systems which define the degree of focus that is placed on how the franchisee uses the brand name. Other differentiating factors include whether the business is run from a physical building where you face your clients every day, or whether the said business provides on-site, electronic or event services. Also, franchise systems differ based on the industry (manufacturing, service or retail industry) and on the way the business operates as a whole.

The different franchise models also shape the level of autonomy that is given to the franchisee when running their business. For instance, certain types of product and trade name franchise systems, mobile franchises and home-based franchise business models offer more flexibility to the franchisee. They enjoy more lenient guidelines and are not required to follow a rigid set of rules.  Car dealers or individual home service providers are a good example for businesses that sell services and products without the obligation of meeting a strict set of business operational codes of conduct.

On the other hand, most manufacturing and business-format franchise systems create a more controlled environment, in which the franchisee is required to operate their business. The franchisee follows closely every aspect of maintaining the same business standards for quality, brand exposure, prices, special deals, merchandising and image as the parent’s company does. These standards are well-determined in the franchise agreement between the franchisor and the franchisee.

So, it is a good idea to study carefully all the terms and conditions of the contract before signing it, as well as read the small print.

What is a franchise contract?

The franchise agreement is a written contract that defines the rights and obligations of the franchisor and the franchisee for a specified period of time. What they are, will largely depend on the franchisor, their goodwill and the type of franchise system they are running. The agreement usually contains in-term and post-term non-compete clauses (partially regulated by the Competition Act 1998), which you should pay heed to before signing the document.

Franchising in the UK is self-regulated by The British Franchise Association, which has adopted the European Code of Ethics for Franchising. Both BFA members and non-members should apply the ECEF to make sure that they are running their franchise networks ethically, in a disclosed manner, and with the franchisee’s interests in mind.

• Last update: November 18, 2020

Posted in Industry Insights