What is franchising a business? Well, franchising a business is expanding a business as a part of a franchise model. A franchiser (original owner) allows the franchisee (an individual who buys the rights to the business) to have permission to use their established brand and work under it and run it.
A great example for you to understand a bit more is McDonald’s.
For instance, they have 39,000 restaurants across the world. Now Chris Kempckinski (owner of McDonald’s today) doesn’t really have the time to run these 39,000 restaurants altogether.
So he allows people such as Reema Mavani (a franchisee), who in which pays a licence from McDonald’s to be able to use their branding products, operation structure and can then run the restaurant as their own business.
This enables McDonald’s owner (Chris Kempckinski) to have a less stressful time trying to run 39,000 restaurants.
Taking a closer look at franchising a business
To take a closer look at franchising a business it gets a bit more technical.
There is more than one type of franchising than the one briefly explained above.
The three main types of franchising are business format franchises, product franchises and manufacturing franchises.
Business format franchising is the granting of a license by one person to another this being the franchisor to the franchisee entitling the franchisee to use the trademark and products under their running.
Whereas, product franchising is the agreement between a manufacturer granting retailers to distribute products. Product distribution franchising most commonly deals with large products like cars or vending machines.
Lastly is manufacturing franchising. This is the agreement made between the franchisor and the manufacturer. The franchisor allows the manufacturer to produce products using the franchisors trademark and name. This is quite common in the food and beverage industry.
Now understandably the three main franchising models might not suit every business. A business needs to be suitable for franchising to succeed in the first instance.
What makes a business suitable for franchising?
Plenty of factors plays a part in a business building a successful franchise. These factors include the business already being popular and successful. This is highly attractive to potential franchisees as they don’t want a business that needs to start from scratch. They need something that will generate worthwhile profit for them.
A business that is suitable:
- has a product/service that’s expected to have long-term demand
- a healthy profit margin
- a clearly defined business model
- resources and finances that keep up with the demands of the business and the franchisee
- has a unique selling point
Indifference to this, a business is unsuitable:
- if the business is tied to a specific location
- requires specific training that is hard to transfer or learn
- if the business relies on unique attributions from the originator of the business.
A business that’s easily replicated won’t appeal to a franchise as well.
If a business is suitable for franchising; a business should then focus on preparing for franchising their business. The main purpose of this is to attract franchisees.
Preparing to franchise
A business needs to offer that the service/product will provide a viable way for the franchisee to generate revenue. Other important factors that a franchisee will be looking for is more than just a business idea, they need a offered a proven method of operating the business.
The business originator needs to offer a business model that outlines benefits to the franchisee. It’s important that the franchisee is aware of the distinct advantages to the business and that it’ll provide a benefit to those working under it.
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The franchisee will be in the unknown so the business originator should set out to make sure to explain all the operating systems in place. This should be clearly documented for the franchisee so it can be easily understood and transferred.
One fundamental area the franchisee will be looking for is support. Typically franchisors will provide the appropriate training programmes, administrative services and marketing support for the franchisee. The responsibility of keeping product/services updated and quality correct. The franchisee needs to feel that support won’t be slacking.
For a franchisor to make sure these areas are stated in the business model it will hopefully help to secure a franchisee to sign the franchise agreement.
The franchise agreement
The franchise agreement is a written agreement outlining the terms and conditions of the arrangement between the franchisor and franchisee.
Here’s what is usually covered in the agreement:
- The rights of the franchisee- brand names and trademarks etc
- The right of the franchisor- quality and customer service must be done to their satisfaction.
- Location– the area the franchisee is allowed to operate in.
- Support- the franchisor must provide support to the franchisee.
- Training- the franchisee will receive the correct training.
- Length- when the agreement ends or needs renewing possibly.
- Fees- payment scheduled and what the franchisee owes to the franchisor.
- Termination clause- the grounds on which either party can terminate the agreement and said consequences of termination.
The franchise agreement can be an in-depth and comprehensive document and is fundamental for the franchisor and franchisee.
Fees and payments
Lastly, is the fees and payments. They’re two fees that usually operate when franchising a business between the franchisee and franchisor.
These are the franchise fee and continuing fees.
The franchise fee is an initial fee paid at the start of the agreement, this can be paid upfront or over a period of instalments. This amount could vary depending on the business.
Secondly is the continuing fee. A franchisor can charge a monthly fee to cover ongoing support for the franchisee. This monthly fee from the franchisee is usually the monthly income for the franchisor.
Overall, to franchise, a business can provide many benefits if the business is suitable. If you’re somebody who is considering franchising or being a franchisee, a great way to begin is to research the topic further and get in touch with EMS, we’d love to support you!
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