Franchising

The big name franchises are often to be found along our high streets, including the likes of Costa Coffee, McDonald's, Pizza Hut, KFC, Burger King. Other franchises include Snap-on-Tools, Drain Doctor, Anytime Fitness and Right at Home. Franchise Direct has a long list of familiar and some not quite so familiar franchise names.

But what is a franchise?

At its core, franchising is the grant of specific rights by one party (the franchisor) to another party (franchisee), in return for a fee. 

Under the main method of franchising, a franchisor grants a franchisee a licence to distribute its products and/or services, using the franchisor's well developed business model and technology and also using the Franchisor's trade marks and other intellectual property. 

The Franchisor will usually insist on monitoring and supervising that use by the Franchisee, and will provide suitable training, technical assistance and other support such as marketing materials, to help the Franchisee run the franchise successfully. 

A franchise therefore amounts to a licence to use a well developed and documented business method for a set period of time in a specific area or territory, subject to a regular royalty payments by the franchisee to the franchisor.

Franchises can be granted on exclusive basis as to a particular territory or be non-exclusive, depending on how the franchisor wants to develop its market.

Franchisees are independent contractors and not acting as agents of the franchisor. This is an important distinction and affects the rights and obligations of franchisees.

A franchise is established under a Franchise Agreement, which sets out the multiple terms and conditions that apply to the grant.

The franchisor may grant a variety of rights to a franchisee, depending on its objectives, but the main ones are:

• run and operate a single franchised outlet or service;
• run and operate a number of outlets; 
• run and operate outlets in a particular ares as a master franchisee, and to grant sub-franchises, or 
• as an alternative to a master franchise, open a number of franchised outlets itself.

Payments to the franchisor are normally: 

• an initial up-front fee to buy the rights to the franchised business; and 
• an ongoing royalty fee, usually based on a percentage of turnover or mark-ups on supplies.

A franchisee will be given an operations manual containing the relevant know-how required to run the franchise. The manual will set out relevant performance standards and is usually incorporated into the franchise agreement and will typically include: 

• relevant formulae and service standards;
• trade marks and intellectual property rights;
• staff qualifications and presentation; 
• customer service standards; 
• complaints procedures, 
• sales targets and pricing;
• premises layout; 
• operating times;
• technical requirements for advertising and marketing; 
• royalty calculations and payment provisions; and 
• accounting procedures.

See also our articles of Dealerships and Joint Ventures.

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