What Is a Franchise? (2019 Update)
A franchise may mean business, but in actual fact it's not a business. Read about how a franchise works and its benefits and pitfalls here.
Contrary to popular belief, a franchise is not a business. It is a way of doing business. A franchise is a business relationship between the owner of the business (‘franchisor’) and those who get the right to market and distribute the product (‘franchisee’). This relationship is intended to be mutually beneficial and is set out in an agreement. This is because it allows you to run a business and allows the franchisor to expand their business.
If you see a store that has locations elsewhere, chances are that it’s a franchise. Some of the most famous brands in the world are franchises – McDonalds, Subway, Anytime Fitness, 7-Eleven – and almost any other large chain store you can think of.
One of the things that makes these businesses so successful is the benefits that franchising offers which we will detail below.
Franchising is an excellent way to tap into talent. People with strong business acumen often look to run their own business, rather than work on site. Getting talented individuals to manage your stores in various locations will help grow your business and build up your brand. Another benefit is that franchisees pay you to get a franchise. This means you can receive capital for further expansion without having to take out loans, or look for investors.
In addition, the managers of your franchises are likely going to work hard at making the store grow and succeed. If you have a good business model, you can grow your business at relatively low risk. Further, you can grow your business at a rate exponentially faster than if you ran it alone.
Entering a franchise agreement can be advantageous for those wanting to get into the business market. One key reason is that most franchise brands are well-established, so you don’t have to start from scratch. You’ll also become a part of a franchise team that can provide you with support for similar challenges that you will face.
Things to consider
There are two sides to a coin, and with the advantages, come the offsetting disadvantages.
There is potential for conflict between a franchisor and franchisee, arising from different situations. For example, a non-compliant franchisee may damage your business’s brand name. In the social media age, any misstep gets amplified quickly and may cause the reputation of your whole business to drop. Alternatively, if you have any ideas for your business, you will need to consult your franchisees.
There are several drawbacks to buying a franchise, with the main one being a lack of autonomy. Business decisions will have to be made in conjunction with the franchisor, and you will have to follow their rules. You will also have to pay a fee to purchase to franchise which can be costly. Further, you will also have to pay continuing royalties to the franchisor. You will have less autonomy with some business decisions, and you generally have to follow the rules set by the franchisor. Finally, franchise agreements can be difficult to terminate without the consent of the franchisor.
Whether you’re ready to franchise your business, or want to purchase a franchise, it’s worthwhile doing some research or consulting a franchise lawyer to see if it’s right for you.
Don’t know where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.
Dominic is the CEO of Lawpath, dedicating his days to making legal easier, faster and more accessible to businesses. Dominic is a recognised thought-leader in Australian legal disruption, and was recognised as a winner of the 2015 Australian Legal Innovation Index.