Have you ever wondered how franchising works? The term ‘franchising’ is used to describe many different kinds of business relationships, but in its most common use refers to Business Format Franchising.
In Business Format Franchising, a company licenses its trademarks and proven business methods to others in exchange for a recurring payment, a percentage of gross sales or a fixed fee. A company that licenses its trademarks and methods is called a franchisor. An individual who pays to use a franchisor’s trademarks and methods is called a franchisee. Franchisees open clones of the franchisor’s business, and run them with the continual assistance of the franchisor for a pre-determined period.
The relationship between a franchisor and a franchisee is governed by a contract called the Franchise Agreement. This agreement outlines the privileges, terms, conditions, restrictions and other details of the arrangement. The business operated under a Franchise Agreement is often called a franchise outlet or franchise location.
The Franchise Agreement typically entitles the franchisee to initial training, an Operations Manual, a start-up package, a delineated area of operation (the ‘territory’), ongoing support, national and/or regional marketing support, and the trademark licence. The Agreement entitles the franchisor to various payments and fees, and asserts their control over the trademark(s), the way in which the products and services are marketed and sold, and the quality and standards of the business as a whole.
Franchising allows previously untrained people to own and operate a tried and proven business, and provides companies a profitable means of expanding. The benefits to both parties and to the economy as a whole are significant.
The Origins of Franchising
The origins of franchising can be traced back to the middle ages, but it is generally recognised that the early 20th century saw the first real Business Format Franchise. This was developed by the Singer Sewing Machine Company in the United States, which set up a service and maintenance system for its machines. General Motors was also involved in franchising later in the 20th century, laying the foundations for a franchised motor dealership network, a system which still predominates motor vehicle retailing to this day.
One of the most successful early franchises was the soft drinks bottling industry, where Coca-Cola, Pepsi and 7-Up initiated the use of franchising as an economic method of expansion for the sales and distribution of their brands. As the idea of franchising gathered further converts in the United States, so the number of franchisors grew: oil companies franchised their petrol filling stations and wholesalers franchised their retail grocery stores.
The 1950s saw an increasing interest in franchising and the concept was adopted by companies in ever increasing sectors of the economy. McDonald’s is today one of the best examples of Business Format Franchising. In 1960, the International Franchise Association (IFA) was founded in Washington, DC, with the aim of protecting, enhancing and promoting the interests of the franchising industry. The IFA is today the world’s oldest (and largest) franchising organisation and represents more than 1,500 franchise systems, 10,000+ franchisees and more than 500 firms supplying goods and services to the industry.
The British Franchise Association (bfa) was formed in the late 1970s to promote high standards in the industry and to educate the public about franchising. bfa accreditation today provides credibility and respectability to deserving franchise business opportunities and service providers.
Franchising is based upon a long-term business relationship between franchisor and franchisee. The franchisor has the proven business formula, method and model. The franchisee has the drive and wherewithal to use, follow and build a business. Both must collaborate for the franchise business to reach its potential and both have an interest in seeing this succeed. As we progress through the 21st century, an ever growing number of owners of successful businesses will create new franchise opportunities.
These are going to fall into one of these categories:
A Job Franchise– These require an investment level of £7,500 to £20,000 and can best be described as a self-employed one person operation, frequently vehicle-based and are in areas like cleaning, motorist services, craft or skill related.
Sales & Distribution Franchise – Investment ranging from £10,000 to £45,000. Selling and distributing products or services in a territory.
Management Franchise – Investment of between £35,000 to £100,000. Normally controlling and managing a region with a team of operatives.
Retail Franchise – Investment from £75,000 to £300,000. Acquiring premises, rental and shop fittings to the franchisor’s specification, then recruiting and training staff, all following the franchisor’s strict guidelines.
Food & Beverage Franchises – Investments of £100,000 to £800,000. Varying primarily upon location. Franchisors work with franchisees from site approval through shop fitting and professional launch.
Investment Franchises – Capital of £1 million to £5 million. The franchisee retains overall strategic management while hiring others to run the franchise outlet on a day to day basis. Most investment franchises relate to hotels and multi-unit restaurant franchises.
More definitions can be found in our Terminology in the Franchise Industry.
Further Information on How Franchising Works
In a nutshell that is how franchising works – do you want to dig a little deeper?
Perhaps you want to know more in terms of franchising your business? Find out more via our Why Franchise Your Business page.
Or perhaps you would like to do some further reading about how franchising works – please see below for franchise websites and publications.