What is a Franchise?

A franchise in its’ simplest form is an agreement or license entered into by two parties, the franchisor and the franchisee.

  • A franchise gives a person or group of people – the franchisee – the rights to market a product or service using the trademark of another business (the franchisor). The franchisee:
  • The franchisor has the obligation to provide these rights and generally support the franchisee, both initially and on an ongoing basis.
  • has the right to market the product or service using the operating methods of the franchisor.
  • has the obligation to pay the franchisor certain fees as explained under the heading ‘Financial implications of franchising’ in exchange for these rights.

Strictly speaking, franchising is not a business or an industry. Rather, it is a method used by businesses for the marketing and distribution of their products or services. Both franchisor and franchisee have a vested interest in the success of the brand. Ultimately, this can only be achieved by keeping their customers happy.

Modern-day franchising comes in two variants:

  • business format franchising
  • product and trade name franchising

Business format franchising

In a business format franchise, the franchisor offers the franchisee a clearly defined package of deliverables and services. Included are, for example:

  • A strong corporate identity including the use of trademarks and logos.
  • A complete system of conducting the business at optimal efficiency.
  • Hands-on assistance with site selection, store layout and design, sourcing of equipment, hiring and training of staff, initial promotional activities, sourcing of products and more.

In return for access to this package of services, the franchisee pays an upfront fee, also known as an initial fee, usually upon signing the franchise agreement. Furthermore, the franchisee agrees to pay continuing fees to the franchisor in exchange for ongoing business assistance in the widest sense of the word.

Business format franchising is by far the most popular franchise format, and opportunities are available in many different industry sectors, including:

  • quick service and sit-down restaurants
  • automotive services
  • real estate agencies
  • business services
  • home repair services
  • convenience stores and other retail outlets, to name just a few.

The opportunities section of whichfranchise lists a veritable cross section of tried and tested franchise opportunities.

Distinguishing Characteristics

Business format franchising displays three distinct characteristics:

1) The franchisee sells goods or services which meet the franchisor’s quality standards (in cases where the franchisee operates under the franchisor’s trademark, service mark, trade name, advertising or other commercial symbol designating the franchisor (“mark”) or which are identified by the franchisor’s mark in some other way.

2) The franchisor offers the franchisee significant assistance in operations and exercises significant control over the way the franchisee conducts the business.

3) The franchisee is required to make a substantial investment into the business and subsequently owns the business. (The ownership issue notwithstanding, the franchisee is obliged to operate the business in accordance with the franchisor’s guidelines as reflected in the network’s operations and procedures manual.)

Product & trade name franchising

Product and trade name franchising is the original franchise format which has largely found wanting. To a certain extent, it continues to be used in industry sectors such as automotive, petroleum and soft drink distribution. This type of franchising does not always require the payment of ongoing fees. The franchisor provides trademarks and logos, national advertising campaigns and a limited range of initial and ongoing support services. In return, the franchisee is obliged to purchase a specified product, or range of products, exclusively from the franchisor.

Due to the clear advantages business format franchising offers franchisors and franchisees, a growing number of existing product and trademark franchises are converted to fully-fledged business format franchises.

Summary

Franchising may seem like an easy way to start one’s own business and many times it is just that. However, investing in a franchise is no guarantee that you will be successful. Your success will ultimately depend on three key factors:

1) Your ability to make the investment to secure the franchise, open it for business and provide working capital.

2) The care with which you select the franchise.

3) Most importantly, your passion for the product and your determination to build the business into the best of its kind within your territory.