What is a Franchise?
Starting a franchise can be an intimidating concept if you aren’t informed. Did you know that there are two types of franchises? Franchises can be product and trade name franchises or business format franchises.
In the former, the franchisee has use of a product or trade name, but no supporting relationship with the franchisor. The franchisee basically pretty much operates the business independently but does benefit from the marketing and advertising efforts of the business system. Product and trade name franchises are most commonly auto dealerships and gas stations
The other type of franchise, the business format franchise, is the more popular today. It is characterized by an on-going business relationship between franchisor and franchisee. The franchisee is offered not only a trademark and logo, but also a complete system of doing business. Business format franchises are famous throughout Canada and include names such as Tim Hortons, McDonald’s, Mary Brown’s and many more but are not restrictive to the fast food sector.
How Franchising Works
In the best of all worlds, the business format franchise is beneficial for both franchisor and franchisee. What does a franchisee give and what does he get?
The Franchisee gets a business package which would take years to develop and refine; an ability to compete through an established brand identity and the marketing power of the franchise system; and the cost benefits and clout associated with the franchisor’s collective purchasing power.
The Franchisor gets paid an initial fee from the franchisee and usually an ongoing royalty fee which gives the franchise system a continuous supply of working capital to develop and expand the organization. In addition, many franchise systems will collect advertising and/or marketing fees to build and promote the brand.
“Buying” a Franchise
This may surprise you: Actually you are not “buying” a franchise. Starting a franchise is more like a “leasing” transaction because the franchisee receives the assets upfront but there is a time clause. This is the “term” of the franchise agreement. The term may run five, ten, or maybe only one or two years. Renewals of the agreements are at the option of the franchisor. Franchisees must be careful to read carefully the Franchise Agreement to find out reasons why an agreement may not be renewed.
By Peter Thompson