The term ‘franchising’ has been used to describe many different forms of business relationships, including licensing, distributor and agency arrangements. The more popular use of the term has arisen from the development of what is called ‘business format franchising.’

Business format franchising is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis.

The principle is simple – some companies choose to grow, not by developing in the conventional way, but by granting a license to others to sell their product or service. There are clear advantages to this:

• You don’t have to come up with a new idea – someone else has had it and tested it, too!
• Larger, well-established franchise operations will often have national advertising campaigns and a solid trading name
• Good franchisors will offer comprehensive training programmes in sales and indeed all business skills.
• Good franchisors can also help secure funding for your investment as well as e.g. discounted bulk-buy supplies for outlets when you are in operation
• If aware that you are running a franchise, customers will also understand that you will be offering the best possible value for money and service – although you run your ‘own show’, you are part of a much larger organisation.

Each business outlet is owned and operated by the franchisee. However, the franchisor retains control over the way in which products and services are marketed and sold, and controls the quality and standards of the business. What are the Cost Implications?

The franchisor will receive an initial fee from the franchisee, payable at the outset, together with on-going management service fees – usually based on a percentage of annual turnover or mark-ups on supplies. In return, the franchisor has an obligation to support the franchise network, notably with training, product development, advertising, promotional activities and with a specialist range of management services.