Lesson 1: What is franchising?

4) Considerations

(A) Advantages of franchising

• You are buying a proven business system.
• You are benefiting from the success of a recognised brand name. This is a huge advantage.
• The Franchisor will be able to buy in bulk; deals can be negotiated together.
• There is a support structure; the Franchisor is the first tier, fellow franchise owners the second tier, supporting each other.
• You join a developing business unit; franchisors can look several years ahead, their research & development departments. can provide the new products. Franchise outlets want to stay as market leaders; an individual business just starting has not the time or the resources for major market development.
• Reputable franchisors will provide initial and on-going training. You will need to check with them and fellow franchise owners as to the level provided.

(B) Situations that must be faced when considering franchising

• There are strict systems to follow; you can be creative, but if you are overtly entrepreneurial, you may come up against problems later, if you start to operate outside the system.
• You must consider the cost of the investment, the initial Franchise fee, which is not negotiable and your start up costs. Franchisors should be making their profits from the on-going royalties; payment is usually a percentage of profit or turnover. Your on-going fee must be acceptable to the Franchisor and be practical to you the Franchise owner ; it must not be a drain on your cash flow.
• You will have to work hard and put in long hours to get your franchise up and running.

As a prospective franchise owner, consider the relevant points listed in (A) and (B) above, but always remember, you will have to grow your business; the Franchisor cannot resolve all your problems. Ten per cent of franchise owners fail, because they do not develop their businesses.

5) What is the special relationship between the Franchisor and the Franchise owner?

Where a business has been successful, the Franchisor takes it to another location and allows someone else to replicate the same successful operation in an identical way. It is a 'partnership' but not in a legal sense.

It is a licence to use the intellectual property owned by one party, called the (Franchisor) to another party called the (Franchise owner) with a predetermined series of on-going commitments between both parties. This creates the legal relationship known as a franchise.

Once a franchise is established and franchise owners have joined the network, both parties are "joined at the hip", as it were, with the Franchisor's success depending on the success of his franchise owners, and vice versa. Indeed, an old saying that "a chain is only as strong as its weakest link" applies. In addition to building the brand and the network, the Franchisor's ongoing responsibilities include product development, market research. Some franchisors initiate joint purchasing programmes enabling franchise owners to purchase goods and services at preferential prices; they also provide a level of training and quality control.

'Franchising can be described as a' business marriage' between a 'franchise owner' and a franchisor'. As the Franchise owner, the purchaser of the Franchise, you pay an initial investment for the licensed rights to operate under the established brand and be trained and supported by a central franchisor. The 'marriage' is protected by an Agreement which provides an exclusive territory for a set period of time on a renewable basis.

Remember there is a difference, when you buy a franchise you do not own the business, in the same way an independent businessman owns his business. You own the right to trade using the trade mark, the brand name; sell the product, or provide the service using the approved operating methods. Typically you own the physical assets, land and buildings and the equipment, but you have no claim on the brand name nor can you call the systems your own. Situations vary; the Franchisor may claim rights to purchase your assets if your relationship with him ends.

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