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What is Franchising?

Definition: Franchising involves two parties - one is the franchisor, who as the owner of a business gives a licence to the other party, the franchisee, that allows the use of a business idea.

Franchising is a beneficial model to both the franchisor and the franchisee.

For the franchisors, they are paid an initial fee for their license and subsequently they receive ongoing royalties based on revenue.

For franchisees, they get to use the franchisor's brand, trademarks, strategies and business model, and the franchisor additionally provides them with support, including training and advertising, as part of the agreement.

Franchisor benefits

Franchises can be seen as an alternative model to chain stores with a number of distinct advantages. Franchises lets a company distribute their goods in many locations while at the same time avoiding large investments and liability.

Franchising allows companies to expand faster and quicker compared to the chain store model, since the costs for the franchisor are much smaller when new branches are owned and operated by a third party.

The franchisor receives two initial payments:

  • A royalty fee that covers use of the trademark
  • Payment for training and other services that the franchisee receives

A drawback to the franchising model is that the potential for revenue growth is more limited because the franchisor only gets a percentage of the earnings from each branch.

Franchisee benefits

With the franchising model, franchisees can set up a company quickly based on a proven trademark, and has immediate access to the tools and infrastructure needed to succeed.

The franchisees normally have a greater incentive to be successful than direct employees of the franchisor since they hold a direct stake in the business.

Franchisee types

The most common types of franchises are centered around offering a service - for instance, stores, shops and restaurants - but a number of product franchises also exists, e.g. Chanel and other cosmetics firms. The best-known franchises include McDonalds, 7-Eleven, Subway and others.

Franchising tends to work best for businesses that are easily duplicated and which have been proven to be profitable.

Franchisee with Reviso

The Reviso online accounting solution allows users to access data and collaborate through one central location and is thus ideally suited for companies that use the franchise model.