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Why franchising?

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Franchising is method of structuring and expanding a business and the distribution of its goods and services. In its simplest form, a business owner (franchisor) grants the rights to another (the franchisee) to distribute the franchisor’s products or services to customers in a defined geographic area or location, using the franchisor’s brand name, systems and support in return for a set fee or royalty. In Australia franchising (as distinct from other distribution models) is strictly regulated – for more detail of what is legally considered to be a franchise system please see what is a franchise.

In order to decide whether franchising is a suitable for your business you need to consider whether you have a business with a successful and proven track record in which other people will be willing to invest and replicate. If your business is at an early stage it may not be ready yet for franchising but you can set about getting it ready with some preparatory steps to enable you to grant franchises at a later date.

By franchising your business, it can become more successful by expanding into new markets and areas as the franchise network expands over time. Operating a franchise system is different to simply selling the goods and services to the customers directly. The franchisee is now interposed between the franchisor and the end customers.

A franchisor’s success is a therefore a direct correlation to the success of their franchisees. This is why franchisors are careful when recruiting as they only want to recruit the best people for their business.

While franchisees tend to work harder and be more committed than employees would as, by having a direct stake in the business, they have a greater incentive to do so, it is also important that the franchisor is able to successfully manage the franchise system by providing them with an ongoing successful business model. This includes overseeing the proper operation of the franchises, ensuring supply of stock, providing guidance and policies for franchisees in their businesses. Importantly the franchisee’s business must continue to be profitable if it is to benefit both franchisee and franchisor. A successful franchisor makes its money from the profitable ongoing operation of the franchises not from the upfront fees received in granting the franchises.

Many companies choose to franchise their business to harness the extra energy brought by franchisees but also to take advantage of their financial investment to enable expansion of the reach of their business.

Not all businesses can be franchised successfully. Businesses for which franchising works best possess the following elements:

  • A good track record of profitability
  • The business has systems, processes and procedures that can easily be duplicated
  • The business is competitive
  • A distinct and recognisable brand which is protected legally
  • The business has appeal across a broad geographic area and/or over time

All sorts of businesses can be franchised including professional services and business to business arrangements as well as the traditional food retail or ‘man in a van’ type of businesses. These traditional franchise businesses have in common that they allow almost anyone with no business experience to be trained to operate the business and they are often relatively inexpensive to establish. While this means these franchise systems can grow to an enormous size with hundreds or even thousands of franchisees, other franchise systems are quite specialised and require franchisees with certain qualifications or substantial financial means.

Whether you wish to grant only a few franchises or have visions of becoming the next McDonalds or Subway, franchising is a method for you to consider when planning the future growth of your business.

Prepared by Corinne Attard | Partner
Holman Webb Lawyers | Sydney
T: (02) 9390 8354
E: [email protected]