Franchising your business is a big step to take. But there’s no denying that franchising offers a great route to expansion with less risk. Your franchisees provide the initial investment for their franchises allowing you to grow your business with minimal capital investment. If the company that you have built and developed is classed as ‘franchisable’, then it’s certainly worth considering franchising your business to expand in ways that you could not achieve by yourself.
What is the official franchisor definition?
A franchisor is a person or company that grants the license to a third party for the conducting of a business under their marks. The franchisor owns the overall rights and trademarks of the company and allows its franchisees to use these rights and trademarks to do business.
As well as the necessary branding, the franchise agreement states that the franchisee has access to all the components of the franchised business required to prosper. This consists of elements such as products, equipment, designs, marketing, and business development support. The support continues for the duration of the franchise contract.
In return for all of this, the franchisor receives an initial upfront franchise fee and, depending on the structure of the franchise agreement, the franchisor may also continue to receive regular royalties and other fees.
So, what does this really mean?
The true franchisor definition covers more than just granting use of license and trademarks. From an entrepreneurial perspective, becoming a franchisor is about working alongside your franchisees to develop and grow the business in ways that you wouldn’t be able to do without franchising your business.
By creating a culture of trust, your franchisees can own and operate successful and profitable franchises by following your business model. By protecting the integrity of your brand, both you and your franchisees benefit from the success that operational consistency can bring.
Supporting the franchisor definition, several characteristics are usually found in successful franchise owners:
- You understand that the success of your franchised business depends on the quality of the franchisees that you recruit. Your franchisees are your biggest asset, and you are willing to invest time, money and effort into ensuring that they receive the right training and support when they need it.
- You appreciate that you need to create and maintain robust relationships with your franchisees so that you can work in partnership to grow and develop your business. This means that as well as supporting your franchisees when necessary, you also need to act accordingly to protect your franchise brand and system. This may mean issuing breach notices if your brand integrity is jeopardised.
- You can see the bigger picture and are focused on achieving long-term goals, rather than being motivated by short-term results. You have a growth strategy that is based on realistic and achievable timelines.
- You recognise the need to review performance metrics regularly so that you can provide your franchisees with accurate and timely feedback.
- You are committed to building a franchise system that enables your franchisees to achieve an adequate return on investment.
What will you receive as a franchisor?
As a franchisor, the rights and obligations between you and your franchisees will be ruled by the terms of the franchise agreement. The contract states that you will receive:
- Payment of an upfront franchise fee
In return for granting your franchisees the right to use your brand, trademarks and franchise system, they will pay you an upfront franchise fee. The cost of the franchise fee varies hugely from business to business, ranging anywhere from £500 to £500,000. The fee is basically a payment made to join your franchise system. To keep your franchise fee affordable for prospective franchisees, you shouldn't make any profit from the franchise fee. The fee should cover the costs and expenses associated with recruiting and training your franchisees. Providing your investors with the right quality and quantity of training to enable them to run a successful franchise is one of your critical obligations as a franchisor.
- Payment of continuing royalty fees
This ongoing fee is also often known as a management fee and is paid on a regular basis, usually weekly or monthly. The fee is paid in return for the support and ongoing training that you provide. Again, the amount of the royalty fee depends on your type of business but is generally based on a fixed percentage of the franchisee's gross sales. You may decide not to charge any ongoing fees if you’re able to make a profit through the mark up of prices for your goods. No royalty fees can be appealing to prospective franchisees, but you should always make it clear to any potential investors how your business model works as well as the source of your income.
What’s expected of you as a franchisor?
So, when you become a franchisor, it isn’t just about receiving fees. You will also have an obligation to support your franchisees so that they can run profitable businesses. Part of the attraction of the franchise business model for franchisees is the access they get to initial and ongoing training to improve their skills in the areas of recruitment, people management, business planning, and marketing. By providing this training you’re not only developing your franchisees, but you’re also strengthening and improving your business.
As well as providing guidance on how to develop local marketing campaigns effectively, your franchisees will also have been drawn to franchising for a couple of marketing related reasons. Firstly, your ability to produce advertising campaigns to attract new customers and your well-established, well-known brand. Both of these would take an independent business owner a significant amount of money and time to create.
Training and brand are essential factors for franchisees, but so is being profitable. Your franchisees will expect you to negotiate deals with suppliers that will reduce their operating costs and therefore increase profitability.
Before you decide on franchising your business, it's vital that you seek advice from experts to understand if it’s the right choice for you and your business. Franchising isn’t always the solution to business expansion for everyone but done correctly and with the proper guidance, it can be a great way to grow your business.
The Editorial Team, Point Franchise ©