FRANCHISE – To Buy or Not to Buy

Phil Birch

Phil Birch

Franchising is a system of business that has grown steadily in the last 50 years and is estimated to account for more than one-third of the world’s retail sales. There are few of us how who are not aware of some form of franchising. Franchises range from the ubiquitous McDonalds to valet services, medical, dental and book keeping services.

The fact that franchise arrangements have grown so rapidly in the last 10 or 20 years (world wide) is due largely to the fact that franchises are an effective way of combining the strengths, skills and needs of both the franchiser and the franchisee. In most instances, franchising combines the know-how of the franchiser with the where-with-all of the franchisee and, in the more successful franchising systems, the energy of both.

The franchise arrangement is an arrangement whereby the franchiser permits, that is licenses the franchisee, in exchange for a fee, to exploit the system developed by the franchiser. In general terms the franchised “system” is generally a package including:

* the intellectual property rights – such as the rights to use the Trade Mark
* trade names and logo’
* start-up/set up facilities associated with the business;
* marketing support and updates
* training of staff (may be ongoing or “one-off)
* any inventions such as patents or designs, trade-secrets
* know-how of the business
* relevant brochures, advertising or copyrighted works relating to the manufacture, sale of goods or the provision of services to customers.

The Intellectual Property is unique to the Franchiser and provides the Franchisee with its inherent competitive advantage and market niche. So, bearing in mind the increasing popularity of franchising and the ever-increasing scope of products and services being offered, it is probably worth attempting a single definition;

Franchising may be defined as a business arrangement which allows for the reputation, (goodwill) innovation, technical know-how and expertise of the innovator (franchiser) to be combined with the energy, industry and investment of another party (franchisee) to conduct the business of providing and selling of goods and services.

By definition, a franchise is a business model that has, on the whole, been proven to be successful. In a franchise you not only purchase the business model, but also the rights to sell particular goods and/or services. Both parties sign a franchise agreement, detailing what the franchiser provides and also what is expected from the franchisee. The franchisee must follow the business model exactly. Any deviations would need the prior approval of the “main office”. The franchiser charges the franchisee ongoing royalty and marketing/advertising fees. Although this venture is a bit more expensive than the license, additional benefits such as brand recognition are most likely to be intrinsic.

How does it Work?
In a basic franchising arrangement the franchiser has developed methodologies and practices for conducting business. The system, on the whole, has been found to be successful but there is no guarantee of the “level” of individual franchisee success! The franchiser, wishing to emulate the success of the original business system, usually in a different geographic area, establishes a blueprint for others also wishing to emulate this success to operate the same business using the same name and same systems. That is, operating essentially a “clone” of the business, its products, services and methods, in a different geographical area.

There is no legal definition of franchising but a franchise is a contractual relationship where the franchiser:

* allows a franchisee to use its trade name, marks and brands
* exercises continuing control over a franchisee
* is obliged to provide training and assistance to a franchisee
* requires a franchisee to make an initial and ongoing payments to the franchiser

So, in the absence of a strict “legal” definition, what are the alternatives to franchising and how do they operate?

Distribution Agreement
A manufacturer or a supplier of goods appoints an independent third party – the distributor – to market its goods. The independent third party purchases the goods on his own account and trades under his own name as an authorised distributor. His business name will usually have no connection with the name of the supplier of the goods nor will the supplier regulate the way in which the distributor operates his business other than, perhaps, to oblige the distributor to reach minimum turnover levels, to maintain advertising and PR material, to maintain minimum stocks both of goods and spare parts and to employ experienced servicing representatives.

The obligations on a distributor are ostensibly significantly less when compared to the much more extensive restrictions which a franchiser seeks to impose on its franchisees, for example, no royalties are payable to the supplier by the distributor. The manufacturer/supplier’s profits are made from the difference between the price at which he manufactures/pays for the goods and the price at which he is able to sell the goods to the distributor.

Franchising has evolved through the development of distributorship agreements to provide more direct and formalised support to the “distributor” whilst imposing stricter operational constraints.

Agents, as opposed to a distributor, do not purchase products in their own name. All contracts are made either directly by the supplier and the ultimate/end customer on behalf of the supplier. A supplier imposes relatively few restrictions on his agents but these typically refer to: –

* what the agent can say about the supplier’s products
* the price at which the products are sold
* the terms and conditions of sale

A licensed business opportunity is similar to a franchise; however there are some differences;

* typically less expensive than a franchise.
* royalties are not a requirement.
* since the license is the only purchase made, rather than an entire business model, franchise fees and marketing fees are not charged.

In addition, the licensed business opportunity contains fewer restrictions. For example, not all decisions have to be approved by the main organization. Also, many licensed business opportunities come with graphics and instruction for use, but licensees are not required to use them. Intellectual property rights or “know how” are frequently licensed to another manufacturer to enable it to manufacture and/or sell goods.

Whilst most franchise agreements contain a licence to use the franchiser’s trade mark, brand names and know how, franchise agreements are unlikely to relate to the manufacture of products, and a franchiser will seek to regulate the way in which the franchisee actually operates his business rather than simply being limited to quality control/manufacturing restrictions in relation to the goods to be manufactured and provide far more detail than a simple licence agreement.

So, what makes a franchise different, then, is that the franchise is a standard offering to multiple people, and is a program that continues for years. There are many franchisees that can buy into the same standard franchise agreement. The rules and obligations in the franchise generally apply to all of the franchisees. Most of the time, a franchise is a “package” deal.

Advantages of Owning a Franchise
The main advantage of owning a franchise is the feeling of freedom that being self-employed brings. This freedom is enhanced by the knowledge that the owner has invested in a proven system and has the training, support and encouragement of other franchisees and the franchiser. Owning a franchise could also provide a monopoly-like environment in which to conduct business in a particular and unique area and where there may even already exist an informed ready-made customer base. There will of course be competitors but the franchisee will be granted the sole franchise for a given area and often will be given potential client listings that have been established by the Franchisers ongoing marketing activities.

Most importantly though, being part of a franchise ensures the franchisee is part of an instantly recognisable brand, the product or service expectations that a brand brings, and the reputation gained by the brand over time. A franchise also offers the franchisee with the ability to capitalise on the know-how and systems that have been proven to be successful. The quality of the product or service provided is therefore in many ways guaranteed.

Some of the advantages a franchise offers are:

* Freedom of employment
* Proven product or service outcomes
* Semi-monopoly; defined territory or geographical boundaries
* Proven brand, trade mark, recognition
* Shared marketing, advertising, business launch campaign costs
* Industry know-how
* Reduced risk of failure
* Access to proprietary products or services
* Bulk buying advantages
* On-going research and development

Buying a franchise is a popular choice for starting a business because the assumption is that the franchiser is selling business success; he or she has created a successful business, and therefore, the franchise business you buy will automatically be successful, too. This is not necessarily so, so shop around and ask pertinent questions on proven franchisee successes !!!

Buying a franchise is also popular because most franchisers offer some degree of ongoing marketing and operational support. On the other hand, the degree of ongoing control that some franchisers exert may be excruciating and restrictive to the franchisee’s natural entrepreneurial tendencies!! Anyone considering buying a franchise needs to carefully investigate all aspects of the franchiser – franchisee relationship, as well as the track record of the particular franchise To the untrained eye, franchise and other licence-type investments look pretty much the same. Both invite you to purchase a package of goods and services and business concepts. Both offer you the chance to capitalize on a business idea that has already proved to be successful. Both provide some training, handholding and access to a valuable marketplace.

In reality, though, there are huge differences between the concepts. While these fundamental distinctions sometimes appear subtle, detecting and understanding them can help you protect yourself when you take the plunge into your new venture. If there’s one telltale difference between a franchise and other similar business opportunities, it’s the role of a trademark. The licensing of trademark rights is the hallmark of franchising: If a program grants you the right to operate under a trademark owned by the seller, you’re most likely looking at a franchise rather than a licence/agency opportunity.

Never underestimate the value of that trademark. The power of a franchise trademark is that it promises consumers consistency and constancy.

So, I hope that helps! Essentially a franchise offers more, provides more, expects more and controls more than a simple licence. A franchise may, in fact, contain many of the traditional “licence” conditions. My advice is simple; look around, ask for a copy of the agreement and terms, seek council !!! The investment in a franchise is typically larger but in turn can offer far more support and even that illusive “brand awareness” and trade mark created from years of expensive marketing investment.

Try these sites before making any decision;
and there are many more . . . .

If you require further discussion, please use our youcubed forum.

If you are thinking about starting a franchised business and want more detailed advice on the options available to you, please contact me via BusinessIQ button and I will try to expand further on the topic.
Good luck!

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