Definition
Franchise as a business model has become more and more popular in today economy. But what does franchising mean exactly? It is an arrangement where one party (the franchisor) grants another party (the franchisee) the right to use its trademark as well as certain business system and processes, to produce and market a good or service according to certain specifications, against the payment of a fee.
Licence vs. Franchise
Franchise should not be confused with the Licence agreement: the latter only involves the rent of the trademark or other intellectual property. Differently, a franchise has a much wider application involving the use of the business system. In the case of the Licence, the Lincesor typically makes the product and has direct control over the product quality. Differently, the Franchisor doesn’t make the product but teaches other to make the products or to provide the service and it has indirect control over the product quality.
BENEFITS
FRANCHISOR
- Allows to grow a brand with limited capital
- Allows to benefit from local market knowledge and expertise of he franchise without putting resources on site
- Accelerated growth
- Parallel growth in multiple territories
- Reach out part of the world where we would not want to go with direct investment
- Lower expenses
- Limited losses (as royalties calculated on top line)
FRANCHISEE
- Higher sales driven by the brand name
- Allows to buy an already proven concept
- Limit business risk
- Quick implementation/start up of a new business
- Benefit from the expertise of the franchisor
- Be a part of a system and benefit froth system expertise
CONS
FRANCHISOR
- Give away potential income upside (limited to the fix% of royalty income)
- Delegate control of the brand with all the risks and implications
FRANCHISEE
- Margin impact of royalties (need to ensure that sales upside given by use of brand can justify payment of royalties)
- Set of rules to respect
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