Franchising is a marketing process used to improve and extend the distribution of a product or service. The franchisor supplies the product or teaches the franchisee how to deliver the service. The franchisee then sells the product or service on to the designated market. In return for this, the franchisee pays a fee and a continuing royalty, based usually on turnover.
For the franchisee, this is a relatively safe and quick way of getting into business for themselves, with the support and advice of an experienced organisation. The franchisors can expand their distribution with minimum strain on their own capital and have the services of a highly motivated team of owner-managers working with them. Franchising is not a path to great riches for the franchisees, nor does it offer true business independence since policy decisions will still come from the franchisor.
These factors need to be covered in any franchise agreement:
- The nature and name of the activity being franchised. This includes details of any trademarks, recipes, specifications or processes associated with the product or service
- The franchise territory on offer needs to be specified. So should the location of the nearest outlets of the same franchise
- The duration of the agreement, usually at least five years, together with any renewal terms and conditions
- The franchise fee, royalty and any other payments to be made
- What the franchisor agrees to offer in terms of training, marketing, the provision of materials and so forth
- What the franchisee agrees to do, which may include specific minimum sales targets to be met
- The conditions under which the franchisee may sell or assign the franchise to a third party
- The conditions under which the franchise can be terminated by either party and what their obligations are should that happen.