What is franchising in business?
Have you ever walked into a McDonald’s or Subway?
Have you wondered how they manage to look and operate the same way no matter where you go?
The answer is franchising!
Franchising has become a popular way for companies to expand while being consistent with their products and services.
But what exactly is franchising, and how does it work?
Well, in this article, you’ll learn a lot of important things about this concept.
- First, you’ll learn what franchising in the business world means.
- Also, the components of franchising in business.
- You’ll also discover the different types of franchising.
Above all, you will understand how it could be a potential option if you’re looking to start your business.
What Is Franchising? – What Is Franchising in Business
Franchising is a business model in which a company or a franchisor grants the right to use its business system, brand, etc., to an independent operator or franchisee.
The franchisor does this in exchange for a fee and ongoing royalties.
With this business model, the franchisee operates their business using the franchisor’s established systems.
The franchisee, while doing this, enjoys the benefits that the franchisor provides.
For example, the franchisor provides the franchisee with training, support, and a proven business model to follow.
Component of Franchising in Business – What Is Franchising in Business
Franchising in business has several key parts critical to the success of the franchisor and franchisee.
These include:
Franchise Agreement
This is the legal agreement between a franchisee and a franchisor.
The agreement states the terms and conditions under which the franchisee can use the franchisor’s trademark.
In addition, this agreement gives the franchisee the right to use the business system to operate their business.
It covers many topics, such as rules, duties, and fees.
One of the features of a franchise agreement is that it provides the franchisee with access to the franchisor’s knowledge and expertise.
This includes their trade secrets and business methods.
In exchange, the franchisee pays the franchisor an initial franchise fee and ongoing royalties.
This fee helps cover the cost of training and support and the right to use the franchisor’s brand and intellectual property.
Another key element of a franchise agreement is an operations manual.
This provides step-by-step instructions for running the business.
Ultimately, this prevents the franchisee from competing with the franchisor for a certain period.
The agreement may also set out both parties’ specific rights and duties, such as rules for advertising and financial reporting.
So, this agreement is a complex legal document that serves as the foundation for the relationship.
Hence, both parties need to fully understand the terms and conditions of the agreement before entering into the relationship.
This will ensure that it is successful and benefits both parties.
Franchisors and franchisees can enter into several different types of franchise agreements.
This depends on the specific need and goals of both parties.
A common example of a franchise agreement is:
Product Distribution Agreement
This agreement allows the franchise to distribute the franchisor’s products under the franchisor’s trademark.
However, the franchisor has control over the manufacturing of the products.
Business Model – What Is Franchising in Business
A business model is a blueprint for how a business operates and generates revenue.
It states the key aspects of a business, such as:
- First, the products or services it offers.
- Next, the target market.
- Also, the pricing strategy.
- Finally, its distribution channels.
So, the franchisor provides the business model to the franchisee as part of the franchise agreement.
Hence, as a proven business model, the franchisor can help the franchisee get their business up and running better than they will.
The franchisee benefits from the franchisor in areas such as operations and financial management.
Overall, this can help them avoid many risks that new businesses often face.
Training and Support
Training and support are critical parts of franchising that help to ensure the success of both the franchisor and the franchisee.
When franchisees sign on with a franchisor, they buy into a proven business model.
However, they still need to learn how to use that model in their business.
This is where training and support come in.
Franchisors provide training to their franchises before and after the business opens.
This can include training on everything from the products or services being offered to financial management and operations.
The franchisor may also provide ongoing training and updates to ensure the franchisee is always updated on the latest industry trends and best practices.
Additionally, the level of training and support a franchisor provides can vary based on the industry and the business type.
Some franchisors may provide on-site training, while others may offer online courses.
The goal is to ensure that the franchisee runs the business effectively and makes the most of the franchisor’s business model.
Brand Recognition – What Is Franchising in Business
Brand recognition plays a crucial role in the success of both the franchisor and the franchisee.
When a business becomes a franchise, it can use the power of a known brand.
The franchisor has already invested significant time, effort, and resources to build a strong brand identity.
So, the franchisee can benefit from that investment by operating under the same brand name and visual identity.
The power of brand recognition cannot be overstated.
Consumers are more likely to do business with a company they are familiar with and trust.
And a strong brand can help to build that trust.
So, by operating under a strong brand name, a franchisee can tap into the brand equity of the franchisor.
As a result, it will help attract new customers and build a loyal customer base more quickly than possible for a new business.
Apart from this, it helps to differentiate a franchise from its competitors.
Therefore, by offering a consistent brand experience across all locations, a franchise can set itself apart from other businesses in the same industry.
This consistency helps build customer trust and make the franchise more memorable.
Ultimately, it leads to increased sales and profitability.
Another benefit of brand recognition in franchising is that it can make it easier for franchisees to secure financing.
Banks and other lenders are often more willing to lend money to franchisees operating under a well-known brand name.
This is because the brand provides security and stability that is less risky for the lender.
Fees and Royalties
Fees and royalties are two important components of franchising that the franchisee pays to the franchisor.
Let’s take a closer look at each of these components.
Franchise Fees
A franchise fee is a one-time payment made by the franchisee to the franchisor to obtain the right to use the franchisor’s system, brand, and support.
However, these fees sometimes vary depending on the type of franchise, industry, and location.
For example, a cleaning service business’s fee may be lower than that a restaurant will pay.
When it comes to location, it also varies.
For example, a business in an urban area may have to pay a higher fee than one in a rural area.
The franchisor uses this fee to cover the cost of initial training, site selection, etc.
It is usually payable upon signing the franchise agreement and can range from a few thousand dollars to hundreds of thousands of dollars.
Royalties – What Is Franchising in Business
Royalties are payments made by the franchisee to the franchisor in exchange for the right to continue using the franchisor’s system, brand, and ongoing support.
They are usually a percentage of the franchisee’s gross sales, typically from 4% to 12%.
The franchisor uses these payments to provide ongoing support, such as training, marketing, and other resources to help the franchisee succeed.
Furthermore, the amount and frequency of royalty payments are outlined in the franchise agreement.
The combination of fees and royalties provides a revenue stream for the franchisor.
Additionally, it gives the franchisee access to an established business system, brand recognition, and ongoing support.
This system provides benefits to both parties involved.
So, the franchisor gains revenue from the franchisee’s use of their business model and brand.
Meanwhile, the franchisee gains the advantage of running their business using an established system with ongoing support from the franchisor.
Legal Compliance – What Is Franchising in Business
Legal compliance ensures that the franchisor and franchisee comply with relevant laws and regulations.
Franchising creates a complex legal relationship between the franchisor and the franchisee.
So, failure to comply with the legal requirements of the franchise can lead to significant consequences for both parties.
Here are some of the ways legal compliance is a component of franchising in business:
Franchise Disclosure Document (FDD)
The FDD is a legal document that is required to be provided by the franchisor to the prospective franchisee before the franchise agreement is signed.
It contains detailed information about the franchisor’s business, including its financial performance, litigation history, and obligation of both parties.
The FDD is required by law in the United States, and failure to comply with its requirements can result in legal consequences for the franchisor.
Franchise Agreement – What Is Franchising in Business
The franchise agreement is a legally binding contract between the franchisor and franchisee that outlines the rights and obligations of both parties.
The agreement covers key areas such as the term of the franchise, fees and royalties, advertising and marketing, and intellectual property rights.
So, failing to comply with relevant laws can lead to legal consequences for both parties.
Intellectual Property
Franchisors own their business’s intellectual property (IP), including trademarks, trade secrets, and copyrights.
The franchisee is granted the right to use these intellectual property assets in exchange for complying with the franchisor’s system and brand standards.
So, failure to comply with these standards can lead to legal consequences for the franchisee.
Here are some of the IPs a business can have and how they can fix it into the franchise:
Trademark
Trademarks include license brand names, logos, and other marks used in a business.
When a franchisee is allowed to use a franchisor’s trademark, they are meant to do this while maintaining the brand’s quality.
Trade Secrets – What Is Franchising in Business
These are confidential information or properties that are important to a business system.
Some examples of this are recipes and customer lists.
When a franchise is given access to the trade secret of a franchisor, they are meant to keep it confidential.
They are only allowed to use it for business operations.
Types of Franchising in Business – What Is Franchising in Business
You, as a franchisor, can use several different franchising models to expand your business.
Here are some of the most common types:
Production Distribution Franchise
This model allows a franchisee to distribute or sell its products under the franchisor’s brand name.
The franchisor provides the franchisee with the products or goods they will sell to customers.
Meanwhile, the franchisee is responsible for selling the products and generating revenue.
In exchange for the right to sell the franchisor’s products, the franchisee pays an upfront fee and ongoing royalties to the franchisor.
And this is based on their sales volume.
The franchisor may also require the franchisee to purchase a minimum amount of products from them.
They do this to maintain quality control across all franchise locations.
Business Format Franchise – What Is Franchising in Business
The franchisor provides the franchisee with a complete business system in a business format.
This includes training and ongoing support, and more.
In this model, the franchisor provides a fully developed business concept and the necessary operating systems and procedures.
The franchisee is responsible for carrying out the business plan and operating the franchise.
Meanwhile, the franchisor provides support systems to operate the business according to the franchisor’s standards.
Business Format Franchises are common in fast food and retail industries.
In this model, the franchisee benefits from the franchise’s established brand and operating system.
They also get to enjoy ongoing support and training.
Additionally, the franchisee is also able to use the franchisor’s experience and skills.
This way, they can avoid common mistakes and operate the business better.
In exchange for the right to use the franchisor’s business concept, IP, and operating system, the franchise has to pay an upfront fee and royalties.
Notably, the upfront fee and royalties are to be paid depending on the franchisee’s sales volume.
Management Franchise
A management franchise grants the franchisee the right to use its established business model, brand, and system.
Also, it requires the franchisee to operate the business according to the franchisor’s rules and procedures.
Under a management franchise model, the franchisor provides support and training to the franchisee in areas such as;
- Operations
- and Business management.
Additionally, the franchisor provides ongoing support and assistance to the franchisee, such as updates to the business model, materials, etc.
In a management franchise, the franchisee is responsible for hiring and taking care of the staff, getting supplies, and handling the daily operation of the business.
A great benefit of a management franchise is that the franchisee still has a degree of control over the business’s operations.
This does not stop them from enjoying the benefits of a known brand and reputation from the franchisor.
Furthermore, the franchisor provides ongoing support and training to help the franchisee succeed.
This can be especially helpful for people new to the industry or who may not have experience running a business.
Conversion Franchise – What Is Franchising in Business
A conversion franchise happens when an independent business is changed into a franchise location.
In other words, the business owner decides to join a franchisor and become a franchisee.
However, they will still keep operating under their business name and location.
A few key steps exist to changing an independent business into a franchise.
First, the franchisor will review the business and determine if it fits the franchise system well.
The franchisor will check factors such as the financial performance, location, customer base, and reputation of the franchisee.
So, if they determine that the business is a good fit for their system, they will go on to sign the agreement.
Once the agreement is signed, the business owner will receive training and support from the franchisor.
In other words, the franchisor guides the franchisee on how to use their system.
Also, they support the franchisee’s marketing and sales.
In most cases, they even go as far as train and supporting employees from the franchise.
Joint Venture Franchise
A joint venture franchise is a business relationship between two or more companies.
In this relationship, the businesses jointly own and operate a franchise location.
In this model, the joint venture partners share the duties, risks, and rewards of operating it.
Also, under it, the partners work together to make decisions about the operations.
This may involve joint decision-making on inventory management and overall business strategy.
One of the main benefits of a joint venture is that it allows the partners to use their strengths.
It allows them to build a successful business.
So, by working together, the partners can achieve better results than they could on their own.
However, it can also be complex and require careful planning and management.
Every partner will need to work in the best interest of every partner and understand their roles and duties.
They also need to be able to communicate to resolve conflicts.
Concepts Similar To Franchising
There are a few concepts in business that are similar to franchising but are often mistaken for it.
Here are a few:
Licensing
This is a business arrangement in which one company grants another the right to use its intellectual property in exchange for a fee or royalty.
While licensing and franchising both involve intellectual property, franchising is a more comprehensive business model and ongoing support from the franchisor.
Business Opportunity Ventures
These are similar to franchises offering a business model with training and support.
However, they do not involve the same ongoing support or strict operating procedures.
Business opportunity ventures may not be subject to the same requirements as franchises.
Conclusion on Franchising in Business
To wrap up franchises offer a unique opportunity for people to start their businesses.
With this business model, both parties win.
Franchise owners can access proven business models and ongoing training and support.
This makes it easier to succeed in the fast world of business, especially for those who are putting in the hard work required to make it a success.
So, considering this business model a viable business option is certainly worth it.
