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Understanding the franchise business format

Updated: Jan 5, 2023


In a strictly legal sense, every franchise agreement is entered into between a franchisor and one specific franchisee. What is frequently overlooked however is the fact that three other parties will be affected, to a greater or lesser extent, by every such agreement. Unless the franchise agreement enables the franchisor to exercise adequate control over the way each franchisee exercises his rights and carries out his obligations, the entire network of company-owned and franchised stores, its suppliers and its customers could suffer from the actions of one errant franchisee.


  • The franchisor, having invested much time and money into the creation of the franchise package, is entitled to protect the value of the brand and ensure its continued growth.

  • The franchisees within the network, in their efforts to maximize market penetration and business results, will rely on the reputation of the brand.

  • The network’s suppliers, having entered into network-wide supply agreements, will expect each member of the network to meet its respective obligations arising from the supply of goods and services. Should, for example, one franchisee habitually default on payments, the credit rating of all other members of the network could be affected.

  • Guided by word of mouth and their own past experiences and influenced by the brand’s advertising message, customers tend to develop certain expectations when dealing with a brand. They may not know which store within a network is company-owned and which one is franchised, nor will they really care. They expect that the service experience offered under the banner of the brand remains consistent throughout the network, no matter where the outlet they frequent is located or who owns it. If this simple expectation is not met, the brand will suffer.

Understand the difference between Franchisor and Franchisee:

THE FRANCHISOR….

  • Is the originator of the concept

  • Provides an established and tested business system

  • Has an established name, brand and trade mark

  • Sells ‘clones’ of his concept for a prescribed contract period in order to grow the business and build the brand

  • Supplies the know-how, training and support services

  • Expands his network rapidly and cost-effectively

  • Benefits from pooled operational efficiencies

THE FRANCHISEE…

  • Buys into a ready-made business package

  • Buys the rights to operate under a well-established brand

  • Invests capital, time and effort to replicate a proven concept

  • Must follow the franchisor’s standards, methods, procedures, techniques and marketing plans

  • Must pay a fee to the franchisor for the rights to use the trade mark and business system for an agreed period of time

  • Benefits from skills transfer, training and business support

  • Invests in a viable business that will prove to be a good investment

Choosing the ideal Business Format and Support Structure

It is imperative that franchisors have a look at themselves to honestly assess whether they have the business format and support structure in place to give each franchisee the best chance of making a success of their business. This would include reviewing whether a franchisor has:

  1. A proven, replicable business format for the franchisees to replicate.

  2. A fair and balance fee structure which makes the business viable for both franchisor and franchisee.

  3. A realistic cash flow projection to ensure franchisee is adequately capitalised from the outset.

  4. Strong systems and procedures in place.

  5. A viable and sustainable country development plan in place.

  6. Site and territory selection criteria.

  7. An up to date, accessible and relevant franchise package in place (operations and procedures manual, disclosure document and franchise agreement).

  8. Comprehensive initial and ongoing franchisee training programmes in place.

  9. Defined franchisee profile with a strong recruitment and selection process.

  10. Strong franchisee support culture and infrastructure.



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