The Franchise Business Model – Introduction and How Does It Work
The franchise business model is not new. In fact, franchising is an ancient distribution model that dates back to the middle ages and ancient China. “In the middle ages, the local titled landowner would grant rights to the peasants or serfs, probably for a consideration, to hunt, hold markets or fairs or otherwise conduct business on his domain. With the rights came rules and these rules became part of European Common Law, explained FranChoice.
The Origins of Franchising
The origins of franchising as it is now defined can be clearly traced to one man: Isaac Singer. After the US Civil War in the 1860s, Singer had achieved the ability to mass-produce his famous sewing machines, but had no economically viable way of repairing and maintaining them across a country as geographically vast as the US. He began to license out servicing and repairs to local merchants around the country, who were later permitted to become regional salesmen for the machines too. Singer’s use of a contract for this arrangement introduced the earliest form of franchise agreements, and the first modern franchise system was born.
Franchising grew rapidly during the Second World War, propelled by companies looking to expand quickly like soft drinks giants like Coca-Cola and Pepsi. This was the beginning of business-format franchising as we now know it; offering a turnkey package from franchisor to franchisee in many instances. In the 1950s and 1960s, the popularity of franchising really took off in the UK, in tandem with huge growths in population, economic output and social change. An early UK practitioners was food giant J Lyons & Co., who franchised the hamburger chain Wimpy in 1955, as well as ice-cream brands Lyons Maid and Mr Softee in the 1950s.
By the mid-1960s some of the largest fast-food brands had become well-established international franchises, led by McDonald’s and KFC. Eight of the largest franchise brands in the UK at the time decided they needed to do something to differentiate their own ethical business practices from those companies with bad ones, and as a result in 1977 the British Franchise Association (bfa) was formed.
The authoritative annual research into the state of the industry, the NatWest/bfa Franchise Survey, has shown both short- and long-term growth trends to be very strong in the sector, including prior to and since the economic downturn in 2008. After a slight downturn in that year, every year following has shown growth in terms of numbers of brands franchising, numbers of franchisees, numbers employed in franchise businesses and the overall turnover of the franchise sector.
Research has shown the UK’s franchise sector is operating at record levels with all-time highs reported in turnover, employment and numbers of franchisee-owned businesses. Franchising contributed £17 billion to the economy in 2018 and employed 710,000 people, according to data from the British Franchise Association and NatWest. Both figures are up more than 14 per cent since 2015. The number of franchisee-owned businesses amounted to 48,600 in 2018, with 4 in 10 systems being run from home and 18 per cent of all franchisees under 30. Women are a force to be reckoned with since they account for 37 per cent of new franchisees, a 20 per cent jump from 2015. The performance of those businesses also set new benchmarks, as 90 per cent reported profitability for the last 20 years and 6 in 10 turned over in excess of £250,000 per year. Franchising, therefore, has proven itself to be an industry that is both Brexit- and recession-proof.
Franchising: A Definition
According to the International Franchise Association (IFA), franchising is defined as an agreement or license between two legally independent parties which gives:
- A person or group of people (the franchisee) the right to market a product or service using the trademark or trade name of another business (the franchisor).
- The franchisee the right to market a product or service using the operating methods of the franchisor.
- The franchisee the obligation to pay the franchisor fees for these rights.
- The franchisor the obligation to provide rights and support to franchisees.
What is a Franchise? Understanding the Franchise Business Model and How Does It Work
A franchise is a type of business that is operated by an individual(s) known as a franchisee using the trademark, branding and business model of a franchisor. In this business model, there is a legal and commercial relationship between the owner of the company (the franchisor) and the individual (the franchisee). In other words, the franchisee is licensed to use the franchisor’s trade name and operating systems.
In exchange for the rights to use the franchisor’s business model — to sell the product or service and be provided with training, support and operational instructions — the franchisee pays a franchisee fee (known as a royalty) to the franchisor. The franchisee must also sign a contract (franchise agreement) agreeing to operate in accordance with the terms specified in the contract.
A franchise essentially acts as an individual branch of the franchise company.
The Franchisor and Franchisee Relationship
The Franchisor is the parent company that sells the rights to franchise their brand to prospective franchisees. The franchisor is the one who has developed the company, brand and operating systems. Upon the decision to franchise their business, the franchisor offers franchisees the rights to their proven business model, recognizable trademark, established business systems, and their training and support.
The Franchisee is the individual who buys the rights to sell the products or services and utilize the proven and established business systems mentioned above. Although the franchisee is, in essence, buying a pre-established business, franchisees must work hard in order to gain loyalty in their market, attract talent and grow their franchise business. After all, it is the franchisee that runs the day to day business.
The franchisor/franchisee relationship should be one built upon mutual respect, understanding, and support. Of course, as with all relationships, no two are the same. Although relationships between franchisee and franchisor will differ from brand to brand, one thing always remains the same: the franchisee/franchisor relationship matters.
What Franchisees Can Expect from Their Franchisor
The Franchise Agreement
The Franchise Agreement is a legal agreement that defines the relationship between a franchisor and a franchisee. It is signed by both parties at the time of the sale of a franchise.
In addition to establishing the franchisee’s obligations, the franchise agreement also establishes the obligations of the franchisor to the franchisee in terms of ongoing support, training, and more.
For interested and serious buyers, some franchisors offer financing programs that can assist franchisees alternative methods of payment.
Franchisors also provide franchisees with an operating sales manual and in-person or online training to understand how the business runs. The training is including a training online modules and in-person call training.
Marketing and Advertising
Franchisors also supply their franchisees with marketing and advertising. This could be through social media and email campaigns. When using third party companies for online advertising and marketing materials (for example printing posters, fliers) Franchisees are usually charged direct from the printing company for printing costs.
As a franchisee gets their business up and running there are bound to be questions and concerns that arise. The franchisor will provide varying levels of support throughout the life of the franchise agreement. Not to mention, franchisee also have access to an online training modules.