Franchising is a business relationship where a franchisor (a company or individual who owns the franchise system) grants a licence to a franchisee (a company or person who contracts to use the franchise system) the right to use the franchisors trademark, brand and operating system for an initial fee (initial franchise fee). In return the franchisee provides a share of the income back to the franchisor (a royalty). The licence is contractual and is usually for a fixed period of time, often five, 10, or 20 years. The franchisor selects candidates to become strategic-partners in implementing the business plan and selling products and services to the franchisor’s customers using the proven franchisors business model and/or their proprietary products. A franchise system has policies and procedures in place so as to create consistency from one franchise location to the other.
As a growth strategy it provides franchisors the ability to gain market share by increasing their points of distribution. Increased points of distribution result in greater exposure and brand awareness. Franchisors are able to grow and have committed individuals operating and driving the location. From a franchisee perspective, it allows the franchisee to get into business with support, a brand name and a proven business model. This helps to reduce the risks involved with getting into business.
It has become a part of almost every industry. Although people most often think of fast food when they think of franchising, it is also found in many other sectors including retail, service, automotive, business services, real estate and lodging.
There are several things that one must understand about a franchise. You are not buying the franchise. Instead, you are acquiring a licence to operate a franchise. You do not own the name, but instead have a licence to use the name. You do not own the business model, but instead have the rights to use the business model for a period of time. It is a little like being a tenant and renting. You do not own the space you are renting, but instead have the use of the space for a period of time.
Uniformity is a fundamental principal to the success of a franchise. There must be consistency from franchise to franchise within a given business. By having the same product in similar outlets, with consistent levels of service, the franchise is able to build confidence in the mind of the customer and this drives people to the brand. Customers gravitate to what they know, what is familiar and what they trust. The uniformity is often created through operating standards and procedures that are clearly documented in operation manuals. Franchisees are required to follow an operating system and use the same suppliers of product, take the same training. The system, suppliers and training are all designed to create a consistent experience to the end user of the product or service and thus create an expectation and impression in the mind of the customer.
The uniformity is enforced through a franchise licence. This licence gives you the right to use the brand and operating system. The licence also comes with obligations, to follow the operating standards and systems, as clearly defined in the business model. If you fail to follow the standards you may lose your licence. With compliance to the system it drives the market and enhances your investment. When you first look at a franchise agreement it may seem controlling and one sided in favour of the franchisor. This is normal and required to allow the franchisor to control the integrity of the brand. As a franchisee, it is important to understand that you are required to conform to the franchise system business model. The success of the system as a whole to build a brand is dependent upon consistency.
Although you cannot simply do what you want, strong franchise organizations value franchisee input and often create advisory groups to provide feedback and input to the franchisor to assist in the strategic direction of the company. They view the franchisee and franchisor relationship as a partnership. Franchisees are on the front lines and have strong knowledge of the needs of the customer. At McDonald’s it was the franchisees’ input that led to the development of the Egg McMuffin® and the McFish® sandwich. Strong franchisors listen and value the input from franchisees.
Franchising provides numerous benefits:
- An established brand and proven business model
- Mass purchasing power
- Co-operative advertising
- Operational support and training
- R&D, marketing new products and services
- Access to financing and site selection
Hallmarks of a strong franchise include:
- Strong leadership
- Participative management with Franchise Advisory Councils enhancing communication
- Continuous training
- Evolving brand development
- Continuous improvement to the operating system
- A positive corporate culture
To qualify for Canadian Franchise Association (CFA) membership, a franchise system must meet the CFA’s definition of a franchise:
The CFA defines a franchise as a business operated by a franchisee under a contractual licence from a franchise,
- which is identified by a trade-mark, service mark, trade name, logo, advertising or other commercial symbol that belongs to the franchisor;
- in which the franchisor provides or offers significant ongoing assistance to the franchisee or prescribes significant ongoing requirements for the establishment and operation of the franchised business in a uniform manner, such as training, goods and services, methods of operation, location, building design and furnishings, advertising and promotion, business or marketing plans, specifications and quality standards; and
- in which the franchisor receives a payment or ongoing payments from the franchisee, usually in the form of franchise fees, royalties, and/or product mark-ups or fees. It is not necessary for a business to use the terms “franchisor” and “franchisee” in its contracts or other material to be considered a franchise. “Franchisor” includes affiliates and associates of the franchisor.
Glossary of Terms
A fund held by the franchisor where franchisee advertising dollars are pooled together for national and/or regional advertising.
The right to use the trademarks, know-how and business systems of the franchisor, and to promote and market products and/or services using such trademarks, know-how and systems.
The company or person who contracts with the franchisor for the right to operate the franchise in return for payment of an initial fee and/or an ongoing royalty.
A way of doing business in which the franchisor gives the franchisee the right to offer, sell or distribute goods or services identified by the franchisor’s trademark.
The company or individual that owns or controls the trademarks and the franchise system and grants the right to operate the franchise using the trademarks, know-how and business systems of the franchisor.
A system of marketing and distribution in which an independent businessperson, for a fee, is granted the right to market the goods or services of the franchisor according to the established standards and practices of the franchisor.
Initial Franchise Fee
A one-time fee paid by the franchisee to the franchisor in payment for the right to operate a franchised business (also known as an Initial, Up-Front, or Licence Fee).
A business model that has in place policies and procedures to create consistency from one franchise location to the other.
An ongoing fee paid by the franchisee to the franchisor often calculated as a percentage of sales.
A name, symbol or other device identifying a product or service of the franchisor that distinguishes them from similar products and services supplied by third parties.
Disclaimer: The opinions or viewpoints expressed herein do not necessarily reflect those of the Canadian Franchise Association (CFA). Where materials and content were prepared by persons and/or entities other than the CFA, the said other persons and/or entities are solely responsible for their content. The information provided herein is intended only as general information that may or may not reflect the most current developments. The mention of particular companies or individuals does not represent an endorsement by the CFA. Information on legal matters should not be construed as legal advice. Although professionals may prepare these materials or be quoted in them, this information should not be used as a substitute for professional services. If legal or other professional advice is required, the services of a professional should be sought.