The term ‘franchise’ is used to describe a wide variety of business relationships. However, most franchise experts agree that the key features of a ‘franchise’ are the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade as their own business using the brand of the franchisor, following a proven business model. The franchisor will seek to impose a set of rules on the franchisee via a franchise agreement.
A franchise could be a fast food business (McDonalds, Subway, Dominos) services (Molly Maid, Specsavers), business services (Tax Assist, Action Coach) or estate agents (Belvoir, Winkworth). See: Top 100 franchises in the UK 2023.
The franchisee receives an operations manual, with know how comprising all the elements necessary to establish a previously untrained person in the business and to run it with support assistance from the franchisor.
A franchise will usually have the following key features:
1. The franchisor allows the franchisee to use a brand name which is owned by or licensed to the franchisor and which has some brand recognition amongst target customers
2. The franchisor provides initial training to the franchisee on how to operate the business
3. The franchisor exercises continuing quality control over the franchisee
4. The franchisor provides support and assistance to the franchisee
5. The franchisee makes royalty payments to the franchisor
6. Often, the franchisor will grant an exclusive territory to the franchisee
How is a franchise different to a distributor?
A distributor is typically a re-seller of products or services of a company that manufactures those products. The key difference is that no royalties are payable by the distributor. The manufacturer or supplier makes its profit solely on the mark up on the goods it sells to the distributor. However, the franchisor will expect a royalty from the profits of the franchisee in return for the knowledge and brand it has shared with the franchisee.
How is a franchise different to a sales agent?
A sales agent typically acts as a facilitator or sales person between the business and the customer to help them agree a contract for sale. The franchisee typically runs its own business and at his own risk, whereas the commercial agent acts in the name of the principal.