These days franchising is a very prevalent business model and it continues to grow in popularity across the globe. More and more people are opting to purchase a franchise business, instead of striking out alone and growing their own business from the ground up. The reasons for choosing to invest in an existing franchise are clear, particularly in these economically volatile times. Insofar as certainty is possible in business, purchasing a franchise offers the franchisee the security of knowing they are working with a tried and tested business model. In addition, a franchise business usually comes with at least some basic support from the franchiser. This ongoing support and training is another way to significantly reduce exposure to risk, and ensure that the business grows with the times. At the end of the day, the franchisor wants you, as the franchisee, to succeed just as much as you do!
What are the defining features of a franchise business? Although the basic concept of franchising is quite simple, it is surprising how many people are unfamiliar with the basics.
Simply put, franchising is a way of expanding a business through a model of distribution. The franchiser develops a business and perfects the business model, including establishing clear operational systems, staffing guidelines, and product specifications. Once this business model is perfected, the business can be turned into a franchise. The franchiser sells the right to operate the business within a specific territory or location to the franchisee. Generally the franchiser sells satellite businesses but will retain at least one so-called company owned unit. Keeping at least one unit under their control allows them some ability to tweak franchise business practices, and try out new systems and ideas, before dispersing them throughout the franchise. Retaining complete control of a business unit can also be an important source of revenue, as once the other businesses have been franchised the franchiser only collects a certain percentage of the franchises’ profit as income. The franchise model can be applied to business of all sizes or scales. Some of the world’s major hotel companies follow a franchise model.
Franchising is an attractive alternative to expanding a business through growing a chain of stores, for example. In many countries the legal restrictions surrounding franchising are quite lenient. Therefore, for some, the decision to develop a franchise is based on legal considerations, as it allows the franchiser to circumvent certain legal restrictions. However, the move to develop a franchise model of expansion is usually at least in part motivated by financial considerations. The franchiser is able to leverage significant capital through selling off franchise businesses to franchisees. Ideally, by expanding the business in this way the franchiser will ultimately reap the financial rewards. Of course, the franchiser’s success is very much dependent on the quality of franchisees. For this reason there is usually a rigorous selection process for those who wish to purchase a franchise. In addition the franchise agreement will stipulate a great many conditions, which outline the franchisee’s obligations.
While the franchise sector is extremely diverse there are key characteristics, which can be said to be indispensable attributes of a successful franchise business in most contexts. First of all, in order to be turned into a franchise, the business must be demonstrably profitable. The business must also have a highly recognisable trademark, brand or business model. One of the most famous franchises in the world is, of course, the McDonalds franchise. This is an excellent example of an instantly recognisable brand, and a highly transferable product. The prospective franchise business must also be easily relocatable. Ideally, it will be suited to a variety of geographical contexts, although this is not always the case.
The franchisee earns money through making their franchise profitable. They must pay royalties to the franchiser. The amount paid to the franchisor varies across franchise agreements, markets, industry etc. However, once franchisees have paid their allotted dues to the franchisor they are free to pocket the remaining profits. The incentive to operate a successful business is therefore clear for both parties.