What is a franchise?

A franchise is the right to use a successful business model and trademark in return for a fee, It is the granting (by the franchisor to the franchisee) of the right to use an identified business system, with a particular name or trade mark, within an agreed territory, for an agreed term. The license grants the franchisee the right to use the franchisors trademarks, processes and systems, logos and signage, software, and other tools and systems defined in the franchise contract.

Types of franchise

There are several forms of franchising, varying with product and sector. Two most common are product distribution and business format.

Product distribution franchise

This type of franchise would include car dealerships, petrol or gas, kiosks and soft drinks. The franchisee sells or distributes the franchisor’s products, using its trademark and logo. There is not usually a tightly controlled agreement as to how the business is run. Some high profile product distribution franchises are most car manufacturers, Coca-Cola, Goodyear Tires.

Business Format franchise

In this type of franchise, the franchisor licenses their brand to a franchisee for use in a predetermined, tightly prescribed way. There will be a manual specifying training, IT systems, and marketing literature and plans, and operations manuals. Most franchises available are business format opportunities, such as Wendy’s,
Comfort Inn, McDonalds, Subway, 7-eleven.

How does a franchise work?

The franchisee must run the business as defined in the business operation manual and the contract .There will be set up fees and ongoing royalties. Franchise fees can range from 25,000$ right up to 100,000$, and royalties range from about 4% to 9%. Marketing fees are often charged in addition, and can be around 2%. Some Franchisors charge a fixed monthly royalty fee which has to be paid whether the franchisee turns over enough to cover it or not.

A franchise is a temporary business investment. The franchisee leases an opportunity to use the model, rather than purchasing ownership of a business. Franchising is a popular business model, because it is relatively easy to become a franchise business owner.

However it is not clear whether failure rates for franchisees are significantly different than for more traditional businesses.

The franchisee takes a tried and tested model, and uses the franchisors experience to mitigate the risk. In return the franchisee pays fees for the duration of the franchise. They never own the business outright. An analogy would be renting a house, rather than buying it outright.

Franchising could be considered a joint effort, with the franchisor contributing expertise and experience, and franchisees contributing capital investment, local market knowledge, and their efforts. The relationship is important, the two parties are mutually dependent.

For the franchisor, this is one of the easiest ways to expand the business without having to access capital. They retain control of the operation.

Franchise statistics

According to Wikipedia , In the USA in 2005 there were 909,000 franchise businesses accounting for revenues of 880$billion, 4.4 percent of all private sector output, 11 million jobs ,8.1% of all non-private farm jobs. 44% off all businesses are franchisees.

On the other hand, Statista, a statistics portal ,estimate that there were770,835 franchise establishments in operation in the U.S. in 2007, and 757,857 in 2013, showing that the figure has not altered significantly, other than a slight dip in the recession years of 2009-2012.

Statista also estimate that the Economic output of franchise establishments in the United States was 675 billion US dollars in 2007 and will be 889 billion US dollars in 2015 .And that an estimated 7.94 million people were employed by franchise businesses in the USA in 2011

Whichever set of figures is correct, Franchising is huge business!

Many countries have laws that regulate franchising, and this will vary from country to country. We will keep these articles general rather than specific, so please check out the law and the regulatory authority in your own region if you are interested in the franchise model.