Franchise or franchising is a business transaction or contract between a Franchisor and a Franchisee. Franchisors are the business owners, whereby, Franchisees are the potential business owners who pays a royalty and often an initial fee for the right to do business under the franchisor's brand and system.
By entering into a contract agreement, the Franchisee would have the rights to sell the franchisor's produces, goods and/or services. Also, given the rights to use the brand, designs, promotions and marketing materials. but also uses the franchisor’s designs, quality control, training, and also benefits from his/her advertising and promotions, accounting systems, and operating procedures. Franchisees help you expand the reach of your brand and the markets that you serve. Your franchisees supply their own capital and efforts to open new locations, and, in turn, you provide them with the initial training and on-going support to succeed.
Often the supplier of the franchisee’s goods or services is the franchisor. If it is a hotel or travel agency business, the franchisee is also part of the franchisor’s worldwide reservation system.
When done correctly, franchising creates win-win relationships. As your franchise system grows, everyone should benefit from economies of scale, growing brand recognition, and ongoing system improvements.
As a franchisor, you grow new revenue streams consisting of initial franchise fees, ongoing royalties, and other system generated revenues. As a business relationship, franchising can help you scale and grow your business far beyond your current operations. Franchising is one of three business strategies a company may use in capturing market share. The others are company owned units or a combination of company owned and franchised units.
Franchising is a business strategy for getting and keeping customers. It is a marketing system for creating an image in the minds of current and future customers about how the company's products and services can help them. It is a method for distributing products and services that satisfy customer needs.
Franchising is a network of interdependent business relationships that allows a number of people to share:
- A brand identification
- A successful method of doing business
- A proven marketing and distribution system
- For individuals (franchisees) or investors keen to take on business entrepreneurship by franchising a business, we highly recommend you attend the WSQ Franchise & Business Ownership course to understand roles and responsibilities between franchisors & franchisees, perform investment appraisal techniques to assess the suitability of franchise investments, as well as to implement, oversee and evaluate procedures for franchise setup and operational plans.
Franchises can be seen as an alternative model to chain stores with a number of distinct advantages. Franchises lets a company distribute their goods in many locations while at the same time avoiding large investments and liability.
Franchising allows companies to expand faster and quicker compared to the chain store model, since the costs for the franchisor are much smaller when new branches are owned and operated by a third party.
The franchisor receives two initial payments:
- A royalty fee that covers use of the trademark
- Payment for training and other services that the franchisee receives
- A drawback to the franchising model is that the potential for revenue growth is more limited because the franchisor only gets a percentage of the earnings from each branch.
- Franchisee benefits
- With the franchising model, franchisees can set up a company quickly based on a proven trademark and has immediate access to the tools and infrastructure needed to succeed.
- The franchisees normally have a greater incentive to be successful than direct employees of the franchisor since they hold a direct stake in the business.