Franchising is where a business runs under the same name, brand and operation of another business. It is one way that a business can increase its market share. Common examples of franchises are fast food chains such as McDonalds and KFC.
Legally speaking, franchising involves a business owner (the franchisor) licensing the right to operate a business using the franchisor’s name and system to another party (the franchisee) in exchange for a fee.
Franchisee’s should consider:
- Franchises often have strict conditions on the running of the business to ensure uniformity.
- Franchise agreements may have restrictions preventing a franchisee from opening a competing business after the agreement ends.
- A franchise agreement will generally have an initial upfront fee as well as ongoing fees to the franchisor.
- The franchisor will often provide training and assistance which can help you succeed.
- It may be easier to open a franchise than start your own business and you may profit from the initial investment faster.
- There are a number of protections for franchisees under the Franchising Code of Conduct.
Franchisor’s should consider:
- Franchising is a way for your business to grow even when you do not have the capital (or do not want more debt) to expand yourself. However, it does require capital to set up the franchising system and cover associated legal fees.
- Franchisor’s often benefit from the upfront fees as well as regular and ongoing royalty payments.
- The franchisor’s brand benefits from development and expansion.
- A franchisee, who has invested in the business and depends on its success, may manage the franchised business to a higher standard than paid employees.
Franchising is a method of business expansion which can be highly beneficial for both the franchisee and franchisor. The system allows the franchisee to begin operating a business with an established brand and allows the franchisor to expand in a low-cost manner.