What is Franchising?
Franchising, broadly speaking, is a means of running a commercial operation using some or all aspects of another business, including its name, brand and products.
How franchises work
Companies use franchising to widen the reach of their brands, usually into geographical areas that they don’t wish to trade themselves. As the franchisee pays all of the capital costs of setting up the shop and is responsible for the lease and employing the staff, it’s also a very effective and low-cost way for brands to widen their consumer offer at minimal cost to themselves.
The company who grants the licence is called a franchisor. The person who gets the licence to run a business is called the franchisee. The agreement means that the franchisee gets all the elements of the successful franchised business necessary to succeed. This includes everything from branding, products, supplies, designs and even marketing and advertising support.
The support runs for the length of the franchise agreement, which is included in the initial agreement.
The franchisee agrees to pay the franchisor for this privilege. This is usually in one of either two forms. As well as assuming all the set up the costs, the franchisee also pays, either a weekly commission to the franchisor on its sales or alternatively the cost of goods supplied are marked up to provide a higher profit margin for the franchisor (a cost-plus model). The agreements also contain very strict guidelines relating to the operation of the brand which must be adhered to. Failure to achieve brand standards (usually monitored by regular mystery shopper visits), can mean that the franchise is withdrawn.
Pros and cons – a general outline
The most attractive aspect of franchising is that the risk is limited. The business is not a new one but a tried and tested venture that has succeeded elsewhere. This means you do not have to spend a lot of time telling people what the business does because they already know.
The downside is that the franchisor will want to protect his brand and therefore places very strict guidelines on how the brand must to be operated to ensure it conforms to their brand standards. Obviously, franchisors carry out a very detailed vetting process on any potential new franchise partner. It is also a relatively expensive way of starting in business because you are buying into a proven concept.
If you fancy being your own boss and taking a lot of decisions about how to manage things, you might find you have less freedom than you anticipate because the legal agreement spells out what you can and can’t do.
For the relative safety and protection of a trusted brand, there are certain sacrifices that you have to make.
Franchising is now a flourishing industry boasts nearly 1,000 brands in a multitude of different sectors. Nowadays it is an eclectic mix of businesses encompassing everything from hairdressing to photography, pet care to children’s sports coaching.
In Jersey, we have several franchises in operation offering us well known UK high street brands; the model of franchising gives Jersey business & consumers the opportunity to access brands and products which may not otherwise be available in Jersey.