Are you looking to buy a franchise, or is your organisation thinking about franchising the business model for the first time? There are advantages and disadvantages to joining or selling a franchise, along with all sorts of legal considerations. Is franchising right for you?
What is a franchise?
In short, a franchise is a legal agreement which allows one person or organisation to operate under the banner of another business or government body. Apart from the use of intellectual property, branding and business model, the two organisations stay legally distinct from each other.
What is an example of a franchise?
Some of the biggest global brands operate on a franchise basis, such as McDonald’s and Burger King. Each outlet chain has a strong brand look which clearly identifies it as belonging to that chain, but they are actually owned by different businesses. McDonald’s just owns the rights to the branding, products and model, and so on.
This might mean that individual restaurants are owned separately, or groups of restaurants in one area are owned by one franchise.
How does franchising work?
Company A has an established business model and decides to expand their brand through franchising. Company B buys the rights to the franchise, which allows them to set up their business to look as if they are Company A.
In return, Company A receives money from the initial buy-in amount paid by Company B, and also receives a share of Company B’s profits.
Company A and Company B are still two separate businesses, and are each responsible for their own financial responsibilities, such as filing tax returns and making payroll.
What is a franchisor?
In a franchise agreement, the franchisor is the individual or organisation who is selling the franchise. They’re the party that owns the branding and business model, and is giving permission for another business to use it.
Based on the example above, Company A is the franchisor.
What is a franchisee?
A franchisee is the person or business who buys into another organisation’s model through a franchise agreement.
They are Company B in the example.
What are the benefits to the franchisor when in a franchise agreement?
If a company wants to grow their brand but doesn’t have the spare cash needed for expansion, then franchising can help. The franchisees actually pay to be able to join the chain, whilst the financial responsibility for their business still remains theirs.
For the franchisor, franchising means they can grow a greater brand presence across a larger area, but with less financial risk.
What are the downsides of selling a franchise?
Allowing another business to use your branding is not without risks. If you or your company decides to sell a franchise then it’s important to have a legal agreement in place.
A robust franchise agreement lays the foundation for exactly what you’re agreeing to, such as how the branding or intellectual property can be used. It should also outline the type of support you’ll give to the franchisee such as access to marketing materials and training.
Providing training and business support helps the franchise become a success, whilst retaining close control over your brand identity.
What are the positives and negatives of buying a franchise?
Becoming a franchisee allows you to operate your business under the branding of a more developed organisation. This can be useful, especially if the franchisor is an established brand that potential customers are already aware of.
Adopting a tried and tested business model can also help avoid some of the more common mistakes during start up. Plus, if you join a good franchise you’ll be more likely to get plenty of support.
The downside is that you’ll have much less licence to experiment than you would if running your own business. You’ll also need to share your profits with the franchisor!
How do I find or offer franchise opportunities?
Take your time to explore and research any prospective franchise opportunity. Undertake any due diligence, and make sure you understand what is required of you, as well as what’s on offer.
Organisations such as the British Franchise Association is a decent place to start, with plenty of impartial advice to go with their franchise directory.
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