Business Glossary

What is a Franchise?

A franchise is a business model in which a franchisor licenses business assets to franchisees. A franchise agreement generally allows the franchise business the right to use the franchisor’s brand. It may also cover access to products/suppliers, operational processes and general business support.

Examples of franchises

Many of the world’s most famous businesses are run on the franchise business model. In fact, the franchise model is very well suited to geographical expansion, including international expansion.

For example, in the Australian franchise sector, many of the biggest names are brands that have moved in from overseas. They include the likes of McDonald’s, Domino’s, Pizza Hut, KFC and Starbucks, all of which started in the US.

The convenience sector is dominated by franchises. In addition to fast-food outlets, many local supermarkets are franchises. There are also franchise opportunities at the more premium end of retail such as jeweller Swarovski.
In fact, it’s fair to say that there are franchise opportunities available in every business sector. What’s more, if there is a business sector without any current franchise opportunities, there’s probably scope to create them.

The benefits of franchises for franchisors

For franchisors, creating a franchise agreement is a way for them to scale up their company with minimal investment risk. Instead of having to absorb scale-up costs, the franchisor essentially creates a blueprint for franchisees to replicate their business in new locations.

The franchisor still retains overall control of the business, in particular the brand assets. They may also take some level of responsibility for business operations. This will, however, typically be at a high level. For example, a franchisor might control the overall supplier network but leave the franchisees to choose and order their own supplies.

The drawbacks of franchises for franchisors

Creating a franchise does still require an upfront investment. In particular, most prospective franchisors are likely to need professional help to navigate franchise law. Franchisors must have a robust franchise agreement to protect them from intellectual-property theft. From a franchisor’s perspective, this is the only real potential risk of operating a franchise.

The benefit of franchises for franchisees

For franchisees, the franchise model can provide an opportunity to run your own business (and be your own boss) with minimal risk. Signing up for a franchise allows entrepreneurs to bypass the tricky start-up stage. It can therefore provide a shorter and smoother path to profitability.

Going down the franchise route may be particularly helpful for people with limited experience in running a business themselves. For example, people in employment may well have skills they can transfer. They will, however, still need to adapt to the realities of entrepreneurship. Becoming a franchisee can help to flatten this learning curve somewhat.

From a franchisee’s perspective, a lot of the benefits of franchise businesses often stem from the ability to use the brand. This is particularly relevant in the convenience sector, hence the predominance of franchise businesses in this area.

Convenience businesses tend to serve customers who prioritise speed. These customers tend to value familiarity as it makes choices easier (and more quickly).

The drawbacks of franchises for franchisees

For franchisees, there are two main potential drawbacks of entering into a franchise agreement. Firstly, the upfront investment required can be much higher than for equivalent start-ups. Ongoing costs may also be higher as franchisors may require franchisees to buy goods and services directly from them or their approved suppliers.

Secondly, franchisees have limited scope for making their own decisions. This can actually be a benefit for new entrepreneurs. As entrepreneurs gain experience, however, it can become a drawback. It may also prevent franchisees from optimising their business for local conditions.

Learn more about franchsing.

This article is for informational purposes only and does not constitute legal, employment, tax or professional advice. For specific advice applicable to your business, please contact a professional.

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