All about Franchising- A Quick Guide

30 May 2022

Franchising describes a form of relationship for a business. A type of franchising is business format franchising, this is where a license is granted by a franchisor to a franchisee; enabling the franchisee to trade as their own business, under the brand of the franchisor. For example McDonalds is a business formatting franchise, where the trademarks, products, businesses processes, and the system of the franchiser is followed tightly by the franchisee. The franchisor has heavier involvement in a business format where there is more uniformity expected between each franchise compared to a distribution or licensing franchise.

Distribution franchising (also known as licensing franchising) is an arrangement where a manufacturer or supplier appoints a third-party distributor to sell goods. An example of this is the Greene King pub franchise. This is deemed a looser form of franchising where the franchisors products are sold from the franchiser. In this arrangement, the franchisee will have more freedom over the way that their part of the franchise is run, while still adhering to the selling of the franchisor’s products.

Franchisors can benefit from franchising as they are able to expand their business. Expansion can happen through creating more locations for the business to run, which, if cost-effective will result with greater profits. Businesses have chosen franchising as a cost-effective and efficient means of expansion. This is a clear advantage for the franchisor to create more revenue and profit for the company. As well, there will be an increase of staff members within the business, which can then enable the reduction of management demands over the franchisor, allowing more time for the franchisor to focus on the company as a whole.

Although expansion within franchising is beneficial, if it is not cost-effective and this can be a disadvantage for the company. The franchisor will need to ensure that staff costs, revenue and profits are well managed for expansion to be beneficial to the company. As well, having franchisees can create a lack of control for the franchisor as there is more work spread across the franchisees. This may risk the reputation of the company: you have to trust your franchisees with their management skills.

Being a franchisee can be incredibly beneficial as guidelines are already set in place for the business as a whole, while allowing you to have a high value role within the company. The business remains yours to run and manage; with the added benefit that franchising allows you dedicated assistance, through both format and distribution franchising agreements. You as a franchisee in a licensing/distribution agreement will also have many opportunities to use your own free choice within the business, allowing you to still be your own boss in relation to certain aspects of the company. In addition, there is considerably less stress due to the lower failure rate, the franchise itself will already have many methods that have been ‘tried and tested’ by the experts who created the brand, meaning it is likely to be successful for your business as the ‘leg work’ has already been done. This is especially the case with business format franchising, where you will reap the benefit of the franchisor’s ongoing support if something doesn’t seem to be working out or you have a query. This arrangement can offer a successful working relationship as well as a support network for your business.

Although, franchisees may have more free rein over their franchises when they have a distributor or licensing agreement, a disadvantage of being a franchisee is the potential lack of flexibility when conferring with the franchisor. Being a franchisee, you will have guidelines that have to be adhered to, some more strict than others. This means that you will not have full charge of all aspects of the business. Additionally, if your franchise is succeeding and thriving, if the business as a whole starts to fail, this can affect your franchise entirely and may, in a worst-case scenario, result in the shutting down of your franchise.

When taking the role of franchisor, it is important that you have a franchise agreement in place, creating a binding contract between you and the franchisee. This agreement outlines the rights of both the franchisor and franchisee as well as the obligations in the contract. A franchise agreement is unlikely to cover manufacturing, however, the trademark of the franchisor may be discussed. It is also worth noting that the contract will cover the geographical side, as franchisors may spread internationally.

As well as a franchising agreement, there is another document called a franchise manual, which can also be called a franchise model. This is created by the franchiser for the franchisees. It details the responsibilities of each party and explains the way the model of the franchise works to the franchisee. This allows the franchisee to understand the business as well as the standards that are expected of them, such as a training guide to ensure swift sailing.

If you think that franchising affects you and your business, or if it is something that you wish to gain more information on then please feel free to get in touch with our team by telephone on 01273 447 065, or email [email protected] or alternatively click here to fill out an enquiry form.

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