Definition of Franchising
Definition of Franchising - terminology, explanations and definitions
Franchise system
The unique, proven business model or system created by the franchisor that’s provided to franchisees to help them establish, manage, and grow their business.
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Benefits of a franchise:
An established brand and proven business model; mass purchasing power; co-operative advertising; operational support and training; research and development, marketing new products and services; and access to financing and site selection.
Characteristics of a good franchise:
Strong leadership; communication and management participation, with franchise advisory councils; continuous training; evolving brand development; continuous improvement to the operating system; and a positive corporate culture.
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Types of business franchises
Product distribution - involves an agreement between the manufacturer and entrepreneur, granting the rights to sell the manufacturer’s product, but can not operate under the name of the manufacturer;
Business format - the company offering the franchise grants the franchisee the rights to use a brand name and distribute a product or service plus an entire system to operate the business.
Brand recognition
The power of brand recognition offers franchisees an advantage over individual entrepreneurs, because more people are aware of and depend on their franchisee’s products or services.
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Franchise Fee
This is the initial fee you’ll pay to purchase the franchise. Fees are typically paid for the use of the company's trademark, brand and the operating system. Depending on the type of business and franchisor, this fee can be anywhere from a few thousand dollars and up.
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Royalties, licensing fees, and ongoing franchise fees
In addition to the initial front-end franchise fee, this expense category includes all the ongoing fees you’ll need to pay such as ongoing royalties, service fees, training fees, renewal fees, advertising fees, and other similar, one-time or ongoing charges that are payable to the franchisor or it’s affiliates, and depending on the type of business, these fees will be called different things.
As a potential franchisee, do not confuse what is known as the front-end franchise fee with royalties. The front-end franchise fee is paid when the agreement is signed. It is primarily a reimbursement to the franchisor for the costs incurred in setting one up as a franchisee in the system, including selecting a location for the franchise, negotiating the lease, franchisee training, and opening the franchise.
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Royalties
Royalty fees are an obligation that any that any potential franchisee must take into account when they evaluate a particular franchise system.
Ongoing royalty fees will vary and they’re usually based on a percentage of either revenue or profit that your business generates. The amount will vary depending upon the level of ongoing support and services that are provided by the franchisors.
Franchise royalties are the currency that keeps the franchise system growing, and provides support for the franchisee. They also form part of the franchisor's profit.
Franchisors must make some form of revenues and profits in order to provide ongoing support and services. A royalty ensures that the franchisor has a vested interest in your success. Your success results in their success.
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Deposits
Deposits are often collected by franchisors prior to entering into a full franchise agreement. The main purpose of the deposit, from the franchisor perspective, is to differentiate the serious candidate from casual enquiries to the franchise opportunity. A deposit allows franchisors to properly allocate its resources and ensure that there is some compensation in the event that the prospective franchisee does not move forward. The franchisor is also concerned with confidentiality – the provided proprietary information will be kept confidential and that appropriate material will be returned.
From a potential franchisees perspective, deposits will often permit one to put a territory on hold so that the potential franchisee can do their due diligence, arrange financing, have documents reviewed by a lawyer or find an approved location. By paying a deposit, potential franchisees demonstrate their seriousness in the franchise opportunity and are ensuring that their resources are being properly spent.
Deposit agreement
Usually, a deposit agreement is entered into at the same time the deposit is made. This agreement defines how and if the deposit will be returned, provides timelines and typically addresses the issue of confidentiality.
Franchisors should provide deposit agreements that clarify how and if the deposit is refunded. If the franchisor does not provide a deposit agreement, potential franchisees should have one created to avoid dependency on verbal discussions. It is important that deposit agreements are read carefully and are reviewed by a lawyer so that there is clarity as to the terms and conditions.
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Policies and procedures
Uniformity is a fundamental principal to the success of a franchise. There must be consistency from franchise to franchise within a given business. A franchise system has policies and procedures in place so as to create consistency from one franchise location to another.
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Initial training
One of the first things that will happen once you have been granted a franchise is initial training. This training provides you with the knowledge and skills to duplicate the franchisor’s proven business model and to provide a consistent customer experience.
Training is the foundation of a strong franchise system. Successful franchising is all about duplication and consistency.
A good initial training program provided by the franchisor will instill you with confidence and start you off on the right track building a successful business.
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Ongoing training and support
Good franchisors provide ongoing training and support designed to continue to develop the skills of the franchisee and the franchisee’s staff for the duration of the franchise agreement. The ongoing training updates franchisees and their staff on new products, services or system wide enhancements. The duration, costs and where the training is conducted will vary from franchise to franchise, depending upon the maturity of the franchisor, the complexity of the business model and the industry.
Successful franchisors put a heavy emphasis on ongoing training. The goal is to ensure that the franchise system is consistent as a whole and continues to be competitive as industries change and evolve. The quality and thoroughness of ongoing training often has a correlation to the quality of the franchise system and ultimately the franchisee’s success.
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Operations Manual and Content
The operations manual is a book-type document provided by the franchisor that typically contains much of the information a franchisee needs to know in order to establish and operate a franchise-based business. It outlines the business model and system created by the franchisor. Each franchisor’s operations manual is unique, because each successful franchisor has a quality that distinguishes their business from those of their competitors in any given industry.
As part of the operational function in a well-developed franchise system, the franchisor will prepare and provide an effective operations manual that documents the functions of the franchise business in written, chronological order, the steps that complete the operation of the business and details the specific elements that made the business unique and successful. A good set of manuals will serve to reinforce the franchise agreement and those areas that require consistency and compliance in order to preserve the integrity of the brand.
Depending upon the maturity of the franchise, there may be one general manual or, more typically, the document extends over a series of different manuals.
Technology and Franchising
In the past, operations manuals were typically provided in hard copies to the franchises in a series of binders. Today franchisors are increasingly making the manuals available electronically through a secure website. This allows updates to be done more easily and the franchisor can monitor that the changes have been viewed and downloaded by the franchisees. Franchisees can print off appropriate sections as needed.
Many franchisors use the internet to communicate with franchise owners and suppliers through secure extranets in order to share critical information, facilitate discussion among the franchise network, post operations manuals and updates, disseminate news about ad campaigns, engage in supply chain management, and gather sales reports automatically and without the need for more labor-intensive data entry.
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Understanding licensing and franchising
Some companies license their brands but are not structured as franchise systems and have a passive involvement only in the sale of their product or service. Franchisors take a different role and do license the use of their trademark, but they take a much more active role in how the franchisee actually operates his/her business using that license.
What is a Franchise
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