Franchising is the most popular business strategy in the world, but do you know what franchising is?
- A strategic partnership focused on getting and keeping customers.
- A business strategy.
- A marketing and distribution system.
- A method of distributing products and services.
- A method of dominating markets.
What each party brings into the relationship
The franchisor provides:
- The brand
- The operating system
- Administration and field support
- Market share
The franchisee provides:
How franchising works
Franchising has been used by companies to expand rapidly without having the benefit of an unlimited source of funds. With the franchise model, the franchisor has developed a recognizable brand name and operating system which delivers on its promise to the customer. The franchisor uses franchising to expand rapidly, using the franchisee’s capital to build the location and operate the business. In return, the franchisee gets to use a proven, successful operating system and brand together with the franchisor’s ongoing support and training to get into business for himself/herself without having to go it alone. The fact is that franchisees who follow their franchisor’s operating system generally have profitable businesses.
The franchisee normally pays an initial franchise fee as an “entrance fee” to gain access to the franchisor’s system. The franchisee also pays an ongoing royalty for the continued use of the brand and operating system.
For its part, the franchisor trains the franchisee on how to operate the franchise business within its proven system. It also provides the franchisee with general business training, helps select a suitable location and provides guidance on the location buildout. The franchisor’s personnel are fully engaged with the opening of the location and the training of the franchisee’s employees. Once the location is open, the franchisor normally provides ongoing support to help the franchisee with the operational, financial and human resource management of the business.
The franchisee/franchisor relationship
A franchisee enters into a license agreement (the franchise agreement) with the franchisor to use the brand, operating system and on-going support, in a defined market, for a specific period of time. The franchisee is tasked with using the brand, operating system and ongoing support to build the business and increase the brand’s overall market share.
The ultimate reason for a company to franchise is to use its operating system to get and keep customers by providing quality, consistent products and services, which leads to satisfied and loyal customers. By doing this, a business can dominate the market and gain disproportionate market share.
A license to operate the franchise
There are many misconceptions about the franchisee/franchisor relationship, not least of which is that the franchisee “buys” the franchise rights. This is not correct. In fact, the franchisee is granted a license to operate within a territory for a specific period of time, usually five years, after which the license may be renewed if the license agreement provides for renewal, and so long as the franchisee isn’t in default of any of the provisions of the license agreement.
The license agreement specifies the rights and obligations of the franchisee and franchisor. The most important aspects of the license agreement spell out the obligations of the franchisee. It is important that the franchisee understands that he/she is joining a standardized operating system that has been proven to work at getting and keeping customers. The obligations which the franchisee must perform ensure that the standards of the franchise system are not compromised.
The sections of the license agreement dealing with these obligations are not only important to ensure a solid working relationship between the franchisee and the franchisor, but also with all the other franchisees. When one franchisee operating under a brand decides not to maintain the standards of the system, then all other franchisees are negatively impacted. The obligation of the franchisor is to protect the system and the investment all other franchisees. Franchisees who do not maintain the system standards are dealt with fairly swiftly by high quality franchisors.