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Understanding Business Franchising: An Insider's Guide

Sep 14, 2008
Franchising is a business term that is often used more loosely than was originally intended. Business media may refer to franchising and mean licensing, distribution and agency relationships. However, when using the term franchising, there is usually an understanding that the person is referring to business format franchising. In this article we look at business format franchising, here in referred to as franchising, and how this benefits the franchisor and the franchisee.

A franchisor will grant a license to a franchisee to use their trading name, leverage their brand, and sell their products. The franchisee will usually pay a one-off fee for this right, and an on-going management cost which is often linked to revenue.

From the franchisee's perspective, they will be able to gain the following benefits from entering into a business franchising agreement:
  • They will be able to leverage a business idea that has already been proven to work. This means that you will be able to save money when it comes to product testing, and market research.
  • Larger franchisors will usually be able to invest in national advertising, and have an established brand already. That is why many franchisees are able to report strong sales within a short period of setting up their business, where as their competitors may have to develop brand recognition before seeing similar results.
  • Franchisors will often offer training in all areas of business. This will not only provide a franchisee with an improved skill set, but it should also provide them with an opportunity to see tangible results for their business.
From the franchisor's perspective, they will be able to gain the following advantages from entering into a business franchising agreement:
  • They will be able to save money in growing their business. Rather than diluting equity, or gearing the business to a greater extent, it's possible to use franchisees to fund business development.
  • Franchisees will have far more interest in running the business effectively, than other managers, because they have an equity position in the franchise. This means they are often willing to work longer hours, be far more prudent with expenses and wages, and also deliver improved revenue - which will usually lead to more management fees for the franchisor.
  • With a franchising agreement, the franchisor has far less risk than if their company owned all of the assets that they sell to their franchisees. This is because they take a percentage of revenue from their franchisees. It's therefore not possible for the franchisor to lose money directly from a franchisee. They can only earn less money from them than they were expecting. Furthermore, this means that franchisors can afford to ignore the profit margins of their franchisees and focus more on improving revenue - although many would argue this is not a good long-term strategy. It also means franchisors do not have to worry about cannibalisation. That is why franchisees will often request that they are given an exclusive licence within a certain area.
About the Author
CityLocal's a UK business directory which is able to offer franchisees an opportunity to leverage their brand and enter into the rapidly expanding online advertising marketplace. www.citylocal.co.uk & www.citylocal.ie
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