Understanding Franchising
Franchising is a business model whereby an established business, the franchisor, grants the franchisee the right to operate under that established business.
The concept of franchising can be difficult to grasp and requires an understanding of the roles and responsibilities of both the franchisor and the franchisee.
Essentially, the franchisee avoids having to start a business from scratch, with all the risks that that entails, and can build on the reputation and success of the franchisor.
In return, the franchisor is able to expand their business with reduced financial risk, as the franchisee bears the bulk of the investment.
Franchisors vs Franchisees
A franchisor is the party which sells the rights to the franchisee, licensing them the permission to use the brand under their name to operate the franchise.
A franchise refers the business that has been licensed to the franchisee from the franchisor.
The franchisor has the responsibility of running the business on a larger scale.
Their responsibilities may include:
- Recruiting franchisees and training them
- Maintaining the brand reputation
- Innovating the products/services of the business
- Maintaining control and quality of the business’s processes
Franchisees are responsible for growing the franchise and managing one or multiple specific franchises of the business such as:
- Adhering to the established business model
- Growing the franchise or franchises that they own
- Ensuring brand reputation is not tarnished
Franchising Agreements
A franchise agreement is a legally binding contract that provides the franchisor and franchisee with specific privileges, rules, responsibilities, payments, and dispute settlement resolutions.
The core of a licensing agreement is the licensing of the rights of the business to a franchisee.
Franchise agreements can be complex to navigate and may require modification,
which is why it is a great idea to use a franchise agreement template or speak to a franchise lawyer to discuss how best to dissect franchising arrangements.
Choosing the Right Franchise
Are you considering committing to a franchise?
There are some key factors to evaluate before committing to a franchise, such as brand reputation, financial viability, and market demand.
Brand Reputation
As a franchisee, you have the role of continuing the brand reputation.
Ultimately, considering you are not starting a business from scratch, the brand reputation and its place across any market is important to consider.
Owning the rights of a franchise with a low reputation can be risky, especially as you, the franchisee, bear the majority of the liability if the purchased franchise doesn’t succeed.
Financial Variability
As a franchisee, it is essential to ensure that the financial variability that comes with the business is considered.
This could mean assessing the fluctuations of revenue, changes in costs or analysing patterns in consumer behaviours.
Choosing a franchise that does not have a good financial record is a sign to not proceed with the transaction with the franchisor.
It is also essential to ensure no financial records you have been provided with are fraudulent, missing information, or are deceptive/misleading.
Market Demand
Choosing a specific franchise should directly coincide with market demand.
Most of the time, franchisors are unlikely to offer you the rights to a franchise unless there is that market demand in the first place.
Consider factors such as business competitors and trends in consumer attitudes to help determine if the purchasing of a franchise is worth it.
Global Franchising: Considerations When Expanding Beyond Borders
Are you a franchisor wanting to expand globally? Global franchising refers to expanding a franchise business beyond the borders of the country it originally operated.
Having franchises in different countries comes with great potential for expansion and generating more revenue.
However, there are some considerations that you should consider when expanding.
Market Research and Demand
There is no point in expanding your franchise business if there is no demand for it outside of the country you are currently operating in.
Expanding into a country with little demand for what your business offers means it is unlikely to succeed. Conducting market research is essential when franchising globally.
This can be conducted through primary research or by secondary research where you sign a market research agreement with a market research business.
Legal and Regulatory Compliance
Franchising law is not regulated by an international body.
Franchising requires consideration of the different legislation, codes and regulations in each country.
The laws that cover the operation of franchises are likely to differ from the country which you are currently operating in.
Seeking advice from a franchise lawyer is a great way to ensure that when you are expanding globally, you are compliant with all legal requirements when expanding beyond borders.
Conclusion
Understanding the roles, responsibilities, and legal obligations of both franchisors and franchisees is essential for a successful partnership.
Whether expanding domestically or globally, careful consideration of factors like market demand, legal compliance, and financial stability is crucial.
Seek legal guidance to ensure a smooth franchising journey.