Tell the difference

Many of this magazine's readers are new to franchising. With that in mind, I thought it might be instructive to consider the definition of business format franchising and consider how it differs from an agency or a distributorship.

Agency
An agent is someone who introduces a buyer to a supplier. He represents his supplier in a commercial transaction. It is the supplier who sells the goods, although you, as the agent, may deliver them to the customer on his behalf. So the customer belongs to the supplier, not to you.
An agent who sells goods on behalf of his supplier will not own them.  The supplier retains ownership until the goods are sold.

Distributorship
Whilst an agency has a number of advantages, it also has its disadvantages, especially for the supplier. A serious disadvantage is that the agent may commit the supplier to things of which it may disapprove. Unlike an agent, a distributor acts for himself. He contracts directly with the customer, so they are his customers. There is a moment in the buying and selling chain when the distributor becomes the owner of the goods in question. Furthermore, a distributor does not bind his supplier in the way that an agent does. So, if a distributor makes any promises he will have to honour them himself, as he is not a middleman acting for someone else.

Franchising
Franchising developed from distributorships. In business format franchising, Company A permits Franchisee B to use its entire business package, which has been proven to be successful.
A franchise therefore includes:
l    The use of a common name or shop sign and a uniform marketing image;
l     The transfer by the supplier (the franchisor) to the franchisee of know-how;
l    The continuing provision by the franchisor to the franchisee of commercial or technical assistance during the life of the agreement.

To qualify as a franchise:
l    The franchisor must train the new franchisee in all aspects of the franchised business prior to them starting their business, and assists the franchisee with launching it;
l     Once the franchisee's business has opened and is trading, the franchisor must continue to support them in all aspects of operating that business;
l     The franchisor must permit the franchisee to operate the business under its brand, format and business system and let the franchisee benefit from the goodwill of its brand;
l     The franchisee must own the business he or she operates and makes some capital investment in that business;
l     The franchisee must pay the franchisor an ongoing fee for the right to use its business system, brand etc and for the ongoing support and services which the franchisor is required to provide.