Franchising - The basics for beginners

Franchising: A Definition

The Oxford Dictionary's definition of a franchise is:

“An authorisation granted by a government or company to an individual or group enabling them to carry out specified commercial activities, for example acting as an agent for a company’s products”.

Beyond this however and more generally it can be considered as somewhat of a hybrid that mixes the best of large businesses with small businesses so that they can mutually benefit from one another.

For the franchisor it provides capital to expand, an untapped talent pool and minimalised growth risks; and for the franchisee it provides an instantly recognised brand to work with, support and a somewhat prebuilt business.

For the potential franchisee

If you are considering becoming a franchisee then there two main forms of franchise, with these being a product distribution franchise and a business format franchise.

Product Distribution franchises:

This form of franchise would involve you selling the franchise’s productsonto your own clients within a territory for a profit.

It’s pretty comparable to any supplier/dealer arrangement, although you benefit from support in growing the business as your own.

Business Format Franchises:

This form of franchise is altogether more comprehensive in that there are methods that are provided for operating the business on a day to day basis.

Further to these two main franchise forms, are three main formats of franchise agreements that are available:

• Single-Unit (also known as Direct-Unit Franchise) - This form of franchise is where you are provided with the rights to operate as a singular business unit.
• Area Development Franchise - This franchise arrangement would provide you with plenty of options for unilateral growth; this then provides the rights for more than one unit within a set area.
• Master Franchise - This form of franchise is the ultimate business format in terms of flexibility; it would allow you the rights that are enjoyed through an area development franchise, but would also allow you to go on to sell franchises to others.

For the Franchisee: The drawbacks of franchises

Whilst there are my benefits to becoming a franchisee, so too are there drawbacks, which include:

• Upfront investment and a defined Agreement term - To receive the benefit of a proven business system so you need to pay upfront to tap into somebody else success.  So that’s understandable. You are committing yourself often for a five or ten year term, so you can't just walk away.  Bear in mind that because of the commitments provided by the franchisor, so you can sell your business onto somebody else though – so ten years doesn’t mean ten years without options to move on.
• Being successful takes dedication - Many start out with an illusion of how much work success takes. No business is successful without hard work and dedication. A franchise is no different.  When business planning there is a fine balance between a franchisor selling the success of what could be, against conservative planning to provide realism.  Beware of ‘new’ franchise opportunities that may be more liberal with the former, with less experience of what is realistic.

Despite these downsides however franchising is a form of business that has seen unpanelled growth and if you dedicate yourself to the right franchise there’s a world of success that awaits.

For the Franchisor

If you are thinking about franchising your business then, for starters, you need to consider factors such as:

Is your business suitable to franchising?

To franchise your business it will need to meet certain criteria, such as:

• Your business being financially stable,
• Your product or service being one that can be rolled out to any area, with the same or similar success,
• Your business affording a margin level that is healthy enough to franchise and still afford you and your franchisees a healthy share.

We hope that this has started you on your way to understanding franchises.

Read more about franchising on our resources page or the search facility to find a franchise that suits you.

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