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Franchising

Franchising

Franchising is the granting of rights to a franchisee to use an existing business model. It can be a great way to rapidly expand and grow a business. To be successful the existing business model must be suitable for franchising, meaning that it must be possible to replicate in its entirety elsewhere.

The franchisor normally takes an upfront payment for purchasing the franchise together with a royalty calculated as a percentage of sales. Usually the franchisee then bears the actual cost of opening the new franchise. The franchisee will then manage his individual franchise, removing the need for a large bureaucratic structure of managers,

A franchisee benefits from a ready developed system of doing business and through support from manuals and training. However, a franchisee should first engage in due diligence to ensure that the franchise is suitable. This involves evaluating all aspect of the franchise, from who bears the liability for advertising and marketing the brand, through to an examination of the accounts of existing franchises. The franchisee should also ensure that a right to use the IP rights of the franchisor are granted.

Franchising is often attractive to the franchisor as they avoid large capital outlay and the risks associated with expansion. Quick expansion can lead to better economies of scale making the franchised business more efficient and profitable. However, as the franchisee is able to use the franchisors IP rights and brand name, it is essential that a franchisor retains adequate control over the franchisee. This can be achieved through a well drafted franchise agreement, setting out the rights and responsibilities of all parties and by requiring all franchisees to follow business manuals to the letter.

Before deciding to franchise a business several factors should be considered. Firstly, as a franchisor the nature of one’s business is likely to change, from restaurant manager or store owner to a business consultant. Consequently, the necessary infrastructure to run a successful franchise needs to be put in place and the skills of the franchisor as a business consultant will need to adapt quickly. Secondly, whilst a franchised business is able to grow quickly, the margins received will often be lower than if expanding yourself. Finally, there is a risk you could simply end up training your competitor, as once a franchisee learns how to operate the business, they could sell the franchise and setup on their own.

Overall, franchising is a good way to quickly expand an existing business, but all parties must be aware of the need for due diligence.


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