Understanding Business Franchising
Business franchising is a business model widely used around the world. It involves acquiring rights to operate a business or the use of someone else’s business model and brand for a specific period. Simply put, a business franchise is a legal and commercial relationship between the owner of a trademark, brand, or business model (the franchisor) and a company or an individual (the franchisee) who operates a business following the franchisor’s business model.
Before delving into the inner workings of this ubiquitous business model, let’s first get familiar with the two key players – the franchisor and the franchisee.
What are the Roles of a Franchisor and a Franchisee?
The franchisor is the original business entity or the brand owner who allows the franchisee to use their trademark and proven business model. In exchange for these rights, the franchisor typically receives a one-time franchise fee and a continuous royalty fee.
The franchisee, on the other hand, is an individual or company interested in starting a business but wants to reduce the risks associated with launching a brand new venture. By purchasing a franchise, the franchisee benefits from operating under a tried-and-true business model and a recognized brand.
The Functioning of Business Franchise Model
To understand how franchising works, let’s break down the process into four key steps:
1. The franchise agreement: The process of franchising starts with a contractual agreement between the franchisor and the franchisee. This agreement, known as the franchise agreement, outlines the terms and conditions, duties, and responsibilities of both parties. This document often includes details about the fees to be paid, rules around the usage of the franchisor’s brand name, operational standards to be met, and commercial rights and limitations.
2. Payment of franchise fees: After signing the agreement, the franchisee pays a franchise fee to the franchisor. This fee serves as payment for acquiring the business model, branding, and rights to operate a franchise. The price of franchise fees depends on the brand’s popularity and profitability. Usually, there is an initial fee for the rights to the business, followed by ongoing franchise fees, which are often based on a percentage of the franchise’s profits.
3. Training and support: One of the significant benefits of investing in a franchise is the training and ongoing support provided by the franchisor. After the agreement is signed and the fees are paid, the franchisor offers essential training to the franchisee. This training typically covers everything from the day-to-day running of the business operations to marketing, sales, customer service, and financial management. The franchisor also provides ongoing assistance even after the new franchise launch to ensure its success.
4. Operation and royalties: Once the franchise is up and running, the franchisee starts to operate the business under the franchisor’s brand name. As the business generates revenue, the franchisee pays a portion, typically referred to as a royalty fee, to the franchisor. The franchise agreement generally specifies this fee, and it’s typically a percentage of the gross sales revenue.
Franchising is an attractive venture for many aspiring business owners due to its formula of operating an independently owned business while leveraging an existing established business model and brand. Also, the continuous support from the franchisor contributes to lower business failure rates. However, it is crucial to thoroughly read and understand the franchise agreement and consider potential risks and rewards before investing in a franchise. With adequate research and a clear understanding of the franchise model, business franchising can be a stepping stone to successful entrepreneurship.