Basic Text

Franchising can be defined as a business system in which a company (or franchiser) sells an individual (or franchisee) the right to operate a business using the franchiser’s established system or format.

As part of the contract (or franchise agreement) the franchisee pays an initial sum of money, known as a franchise (or front end) fee, to the franchiser and, in addition, agrees to pay a management services fee, which is usually calculated as a percentage of the annual turnover. In certain cases the franchisee may also pay an advertising fee to contribute to the franchiser’s annual advertising and marketing costs. Once the contract has been agreed, the franchiser provides an operations manual which is a document containing all the information that the franchisee requires in order to manage his or her business.

There are franchises in many different industries. Franchising has been a rapidly growing part of the economy throughout the world. What we do know is that franchising has had a much higher success rate than that of the ordinary small business sector. Surveys show that nine out of ten franchises succeed. Why is it so?

1. Management assistance. A franchisee has a much greater chance of succeeding in business because he or she has an established product, help with choosing a location and promotion, and assistance in all phases of operation.

2. Personal ownership. A franchise operation is still your store and you enjoy much of the freedom, incentives, and profit of any sole proprietor. You are still your own boss, although you must follow more rules, regulations, and procedures than you would with your own privately owned store.

3. Nationally recognised name. With an established franchise, you get instant recognition and established customers from around the world.

4. Financial advice and assistance. A major problem with small business is arranging financing and learning to keep good records. Franchisees get valuable assistance in these areas and periodic advice from people with experience in these areas.

Could you name some?

1. Of course, there are costs associated with joining a franchise that must be considered . You must be sure to check out any such arrangement with present franchisees and to discuss the idea with a lawyer.

2. Shared profit. The franchiser often demands a large share of the profits, or a percentage commission based on sales, not profit. Often the share taken by the franchiser is so high that the owner does not make a profit that matches the time and effort involved in owning and managing a business.

3. Management regulation. Management assistance has a way of becoming managerial orders, directives, and limitations. Franchisees may feel burdened by the company's rules and regulations and lose the spirit and incentive of being their own boss with their own business.