What is it? What are the different forms of franchising?
If you’re looking for the best approach to grow your business and expand your services, then you need to consider franchising in exchange for a fee. To learn more about the franchising process, how to sell a franchise and when to consider franchising, check the following guide.
A franchise is a commercial legal relationship defined in a contract between two entities that are legally and economically independent. Under this contract, the franchisor (the license owner) grants the second party (the licensee) a franchise which involves:
- Management rights, rights to use the operating system, intellectual property rights, trade or industrial marks, and technical knowledge relating to the production of goods or the distribution of certain products or services related to the trademark or tradename. The franchise shall be used and exploited in accordance with the instructions and supervision of the franchisor. The franchisee shall be restricted to a specific geographical area such as a particular country or several countries or to a region such as the GCC region or other area.
- The Franchising agreement is limited in time and the franchisor shall provide technical assistance, training and disclose its trade secrets and business operations to the franchisee. There is no doubt that franchising offers great business advantages both for the franchisee and franchisor. Franchising is a safe investment in a business activity that has proved successful over a long time.
Franchising is often divided into two main categories:
The first relates to the goods, brand, and trade name.
The second relates to the operating system of a franchise business.
These two categories are considered the most known forms of franchising. The first form of franchising a product or brand is considered to be a simple and easy one where the authorized party is entitled to use the name and product. This form of franchising is popular for instance when it comes to soft drink products or bottled soft drinks.
The second form involves franchising the entire business system and its operation so that the licensed party has the right to use and exploit the business owner’s concept and system, which includes: the trade name, trademark, intellectual property rights, technical knowledge or trade secrets, and other matters related to the business, its rights and success basis.
Issues to consider when franchising:
Before you decide to franchise your business, there are several things you should ensure:
- You should have a successful business, with a concept that others can adopt.
- You should choose who will be granted the franchise so that they are able to commit to selling the goods or services you provide.
- Implement procedures that will maintain consistency between your franchise units.
- Demonstrate strong management skills and embrace a healthy institutional culture.
- In addition to paying the initial franchising fees, franchisees will be obliged to pay other fees based on their earnings. The value of these fees is often calculated as a percentage of the total sale proceeds but this value can also be calculated based on net sales (after deduction of expenses); business models differ from one activity to another, so there is no specific value for these fees, Franchise fees are usually paid on a monthly basis.
On the other hand, as a franchisor, you can use these proceeds to provide the necessary support to your franchisees:
- Research and development
- Trademarks and promotion
- Computing and accounting systems