What does a franchise look like?Business format franchises can come in all shapes and sizes, and the brands listed above show that these businesses can be either large, consumer facing retail chains or smaller businesses operated from home. There are however a few similarities across most franchise networks, which help define the business as a business format franchise:
The use of a franchisors brand by a franchisee
Whether the brand is controlled rigidly, as is the case with the major food and beverage franchises, or the brand is secondary to the community trading name (such as with the Trussell Trust, where for example franchisees will operate as “Swindon Foodbank” with a sub brand of “seeded by The Trussell Trust”), there will be some element of branding provided from the franchisor to the franchisee. Usually, I’d expect a franchise to control its brand, and ensure that a franchisee’s signage, printed literature and web presence is consistent with the franchise’s brand guidelines.
The use of a franchisors operating system by a franchisee
The second key element of any franchise agreement is the passing of the systems and processes of the business to the franchisee. Every business format franchise should be systemised to a point where the operations can be defined within an operating manual, which can be passed to anyone to allow them to run the business. The phrase that is often used for this is a ‘turn key business’. An incoming franchisee should expect to receive an operations manual as part of the package.
Payments from the franchisee to the franchisor
In exchange for the brand and systems, there would usually be a payment from the franchisee to the franchisor. This will usually be both an initial franchise fee, together with an ongoing MSF (management service fee). The MSF is often calculated as a percentage of sales; however in some businesses it is a flat monthly fee. There are often other fees payable, such as a contribution to a central marketing levy, or purchases of centrally supplied goods.
Legal agreement between the franchisee and franchisor
Underpinning the above is a legal agreement between the franchisee and franchisor. These usually take a standard form, and are often non-negotiable. They will set out the obligations of the franchisee and franchisor; the payments due to the franchisor from the franchisee; and will set the scene for the ongoing relationship.
The above is an extract from The Franchising Handbook, which is due for release later this year. Follow this link to pre-order and be one of the first to read it!