Franchise

Definition

A franchise is a business arrangement in which one party, known as the franchisor, grants another party, known as the franchisee, the right to operate a business using the franchisor’s established brand, business model, and support systems.

What is a franchise?

This arrangement allows the franchisee to replicate a proven business concept, leveraging the franchisor’s brand recognition and operational expertise. In return, the franchisee typically pays fees or royalties to the franchisor for ongoing support and the right to use their brand.

The franchise model allows for the replication of a successful business concept. The franchisee benefits from the franchisor’s proven system, including operational processes, marketing strategies, and product or service offerings.

Franchisors often provide comprehensive training and ongoing support to franchisees. This may include initial training on business operations, marketing strategies, and ongoing assistance with day-to-day challenges.

The franchise model allows a brand to expand quickly and reach new markets without the capital investment required for opening company-owned locations.

Types of franchises:

1. Product or trade name franchises: These involve the distribution of products or services under the franchisor’s brand, with the franchisee typically providing a specific product or service.
2. Business format franchises: These include a complete business format, including the product or service, branding, operational processes, and support.

While franchising offers a proven business concept, success is not guaranteed. Factors such as location, market conditions, and the franchisee’s management skills play a significant role.

Example of franchise

Imagine XYZ Corporation is a well-established fast-food chain with a successful brand and business model. They decide to expand their business by offering franchise opportunities.

1. Franchisor (XYZ Corporation):
   • XYZ Corporation has developed a popular fast-food concept, including a recognised brand, standardised menu, and operational procedures.
   • They offer individuals or investors (franchisees) the opportunity to operate their own XYZ Fast Food restaurant using the established brand and system.
2. Franchisee (John Doe):
   • John Doe is interested in owning and operating a fast-food restaurant but doesn’t want to start from scratch. He decides to become a franchisee of XYZ Corporation.
   • John pays an initial franchise fee to XYZ Corporation for the right to use the brand and system. Let’s say it’s $50,000.
   • Additionally, John agrees to pay ongoing royalties, perhaps 5% of his monthly sales, to XYZ Corporation.
3. Ongoing Support:
   • XYZ Corporation provides John with initial training on running the business, assistance in site selection, and ongoing support in areas like marketing, supply chain management, and business operations.

By becoming a franchisee, John gets the benefit of operating under a recognised brand with an established customer base and support from the franchisor. XYZ Corporation, in return, expands its brand presence without directly managing each individual restaurant.