The word “franchise” in French means “privilege” or “freedom” – in essence giving an individual the “right” to something – in this case the right to operate a business or licence under specific conditions.
Franchising is, without doubt, the most “public” of business formats. You recognise a franchise because it carries a strong brand, has a distribution mechanism that reaches far and wide and provides a uniform product, service and image to the public. The word franchising, however, can apply to many “rights” – from the franchising rights of cartoon characters like Mickey Mouse or movies like the Matrix to the franchise “rights” of soccer clubs like “Ajax”.
Business Format Franchising is defined as a distribution network operating under the shared trademark or trade name with franchisees paying the franchisor for the right to do business under that name for specified period of time. In exchange, the franchisee is able to use the franchisor’s business system or format, including the name, goodwill, product and services, operating manuals and standards, marketing procedures, systems and support facilities. The franchisor, in turn, is obliged to give initial and ongoing services and support.
Product & Trade Name Franchising is characterized as a sales relationship between a supplier and a dealer, product and trade name franchises can be found most commonly in car dealerships, petrol service stations and cold drink bottlers. The dealer is granted the right to sell its products in exchange for fees and royalties and has an obligation to sell only the franchisor’s products.
Get the Facts on Franchising
On a more basic level, franchising is really just an extremely good distribution method. The “franchisor” or person who starts a company or develops a concept, uses others (franchisees) to duplicate his concept and distribute it on a large scale. This inter-dependency forms the basis to the business format and its success lies in the effective implementation of certain basic but clearly defined business principles. The juxtaposed relationship between franchisor and franchisee needs to be fully understood and accepted for the overall business to succeed.
The responsibilities of each side include:
- Is the originator of the concept
- Provides an established and tested business system
- Has an established name, brand and trade mark
- Sells “clones” of his concept in order to grow the business and build the brand
- Supplies the know-how, training and support services
- Expands his network rapidly and cost-effectively
- Benefits from pooled operational efficiency
- Buys a ready-made business package
- Buys the rights to operate under a well-established brand name
- Invests capital, time and effort to replicate a proven concept
- Must follow the franchisor’s standards, methods, procedures, techniques & marketing plans
- Must pay a fee to the franchisor for the rights to use the trade mark and business systems for an agreed period of time.
- Benefits from skills transfer, training and business support
- Invests in a viable business that will prove to be a good investment.