Franchising is just one of many methods of “distribution” and many prospective business owners often don’t understand or are misled into buying a business which is clearly not a franchise business or don’t quite understand the implications of investing in a franchise. Franchising, therefore, is:
NOT an Idea
An idea is not a franchise and cannot be franchised. The inherent elements of a franchise revolve around a tried and tested concept and it is the franchises responsibility to pilot the concept, set out the business format and make it work as a viable business venture.
NOT an Investment Instrument
Investors in a franchise does not refer to investors in the common sense who rely on corporate efforts for dividends or income. A franchisee is very much an owner/operator, playing an active role in the business and through his hands-on efforts reaps the rewards of his investment.
NOT a Partnership or Joint Venture
In a franchise agreement between franchiser and franchisee there is no common ownership of the business and neither party is responsible for the other’s debts or liabilities. The Franchiser provides the business format system, the trademark and name and the franchisee owns and operates his own business for the number of years specified in the contract.
NOT a Distributorship or Dealer
Both a distributorship and a dealer run independent businesses and are in essence, middlemen for the companies on whose behalf they are operating. Unless contractually bound, they have the right to buy and sell products and/or services from anyone to anyone and are not prescribed by any business format system (as in a franchise).
NOT an Agency
In an agency arrangement there are two parties – the principal and the agent. The principal grants the agent the right to distribute the product or products, usually in a defined geographical area and under his own name and not that of the principal. The agent is not required to follow a specific business format and does not have the stringent controls that a franchiser has over his franchisees.
NOT Multilevel Marketing
Multilevel marketing is just that – the establishment of an unlimited number of levels where members sell products or services and promote the registration of other members as part of the system. Members at the upper levels receive payment according to sales generated and payments made by those lower down on the payment scale.
This concept, seen in movie franchises, character/celebrity licensing, technology transfer and trade mark licensing, involves the licencor giving the licensee the right to use the licencors name. Although there is a similarity to franchising, the relationship in franchising is more active, with the franchiser having more authority and control over the franchise operation, to ensure the business is carried out in accordance with the business format system.