Posted on: 30 January 2015

Franchising is a type of business strategy that involves a business owner (the franchisor) giving permission to other individuals (the franchisees) to use their brand and trademarks to expand the business, in return for a fee.

The business owner provides ongoing support to the individual in the way of advertising and marketing, training and sometimes finance.

How is franchising different to other company structures?

For the business owner (the franchisor), a franchise is a route to expansion that avoids opening new offices or recruiting more staff. It also often requires less upfront capital investment. Essentially the franchisor is selling the rights to market their product or service to others (the franchisees).

For the franchisee, investing in a franchise means that the work of building up the brand and establishing the systems and processes that will make the business successful have already been done. The franchisee can then focus on finding new customers and satisfying customer needs, with the support of the franchisor.

The table below summarises the key differences between franchising and other business models;

Business model type Difference
Partnership The two or more people involved in a partnership manage and run the business together under a Partnership Agreement. In a franchise, one individual enters into a license agreement with another, the franchisor, who owns the brand and operational processes.
Limited company Limited companies tend to expand by recruiting employees and opening offices in new locations. Franchises keep their headcount down by selling the rights to sell their products and services to others, who operate in new markets.
Joint venture Joint ventures involve two businesses agreeing to work together towards a common goal that they would not be able to achieve separately. A franchise is when one business buys the right to operate a clone of another.

Franchising as a strategy also has similarities to licensing and contract manufacturing but they mustn’t be confused, as the following table explains:

Business strategy Difference
Licensing Licensing is giving someone permission to use your intellectual property or trade secrets in return for a flat fee, royalties or both. It doesn’t involve giving permission to use operating systems or marketing activity, as in the case of franchising.
Contract manufacturing Contract manufacturers are hired to produce and ship goods on behalf of another company - they do not own the goods. Franchisees own the goods and services and pay a fee to the business owner for each unit they sell.

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How can I finance becoming a franchisee?

Business Guidance

How can I finance becoming a franchisee?

30 January 2015

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