A Franchise is an organisation utilising a business idea belonging
to another person or business. The Franchise owner will pay the owner (of the business
idea) money to use their business idea, business products and associated branding.
The person selling the idea is known as the Franchiser (Franchiser) and the
person purchasing the right to use the business idea (and/or trade under
the name of another organisation) is known as the Franchisee.
How Does A Franchise Arrangement Work
The firm offering a franchise business will sign a contract with people wanting to open a business under the business name belonging to the franchise owner. The contract will stipulate the terms and conditions that the franchisee must follow. The franchisee will usually pay a lump sum (investment) of money to the Franchiser at the start of the contract and will pay an ongoing percentage (or royalties) from the business. In return the Franchiser will provide the Franchisee with training, business advice, right to use business branding, marketing materials, business equipment and business products.
A good Franchise example is McDonalds; a business that will allow others
to use their trading name for a fee/share of the profit. The contract
stipulates that the business owner must use McDonald’s shop fittings,
equipment and food products. As McDonalds is an international brand,
familiar to many throughout the world, McDonalds is a business that others feel confident about using for their Franchise business.
Franchisees do not
have to build their reputation, unlike a non Franchise new business. It can take a very long time to establish a new business. Whereas a Franchise is usually a successful business (or business idea) that the public know. A Franchisee can use the established firm's reputation and popularity to build their business. A franchise also allows the single business owner to compete with larger businesses as they are operating under a business name belonging to a national (sometimes international) network of outlets.
For the Franchiser it can be a quick way to increase business income, market share and brand awareness, without the responsibility of having to fully manage the businesses created through the Franchising.
Franchise Restrictions And Disadvantages
A Franchisee will not have the decision making power of a non
Franchise business. The Franchiser will want to protect their reputation
and will therefore stipulate terms and conditions within which the Franchisee
Franchisers need effective monitoring and control procedures to ensure that franchisees are providing customers with the level of service they expect. If they do not have these in place they are risking business reputation and business longevity.
A franchise business is a two way relationship; the Franchiser business and Franchisee can affect each other's success and failure. It is therefore very important for Franchisers to select franchisees carefully and vice versa.