Back to basics

Get to grips with franchising with these commonly asked questions

What is franchising?

Business format franchising - the most common type of franchising - refers to the granting of a licence by one person (the franchisor) to another (the franchisee). This means the franchisor - the brainchild of the business - offers you the opportunity to buy the business model, brand, franchisor's expertise and experience, training and support, and run it as your own successful business. In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of the sales revenue.

Q. What are the pros and cons of franchising?
Franchising can be particularly attractive in uncertain times like these. It allows a franchisee to be an entrepreneur but with reduced risk and with support from an established business. Here's a list of the pros and cons of buying a franchise:

Advantages
• Established and proven business model rather than risk of testing a new business
• Faster time to start trading and reach profitability
• Established brand name and shared marketing
• Training and support from the franchisor
• Volume buying power and purchase costs
• Network of other franchisees to share ideas and best practice
• Reduced risk of business failure and, linked to this, easier access to bank funding

Disadvantages
• Payment of franchise fees
• Reduced opportunity to introduce your own ideas
• Possible restrictions on territory and potential growth

These are just examples and importantly, they vary widely depending on the franchisor. Therefore it is important to examine each franchise individually to assess the advantages and disadvantages of joining that particular network.

Q. What is the bfa?
The bfa stands for the British Franchise Association and is the voluntary self-regulating governing body for franchising. The bfa's Tom Endean says: "Only those that put themselves forward and can satisfy the criteria and tests can become a member. By looking for franchisors and professional advisors with bfa membership, you can be confident that they are ethical and experienced businesses."

Q. What is a master franchise?
Compared with a franchise, which concerns the granting of rights to operate a business at local level, a master franchise is essentially to do with a much bigger picture and international implications. It entails additional responsibilities and obligations, territorial provisions that extend to a country or part of a country, higher levels of investment and greater potential rewards. However the key difference is that a master franchise confers the right to appoint franchisees.

To bring this into context, consider a successful UK franchisor that wants to develop overseas (although the same applies to foreign franchisors who want to come here). The objective being to set up franchise networks in other countries, a logical step would be to prepare a master franchise programme aimed to attract a party of some substance who would be appointed as the master licensee (the expression usually adopted). As such, they become the franchisor for the territory concerned and will need to be trained not only in all operational aspects of the business but also in franchise management, because they will be responsible for the recruitment, training and support of franchisees.

Financial procedures will typically relate to the master licensee paying a master licence fee at the outset, plus a continuing fee based on the franchise revenues he receives henceforward. With franchise developments progressing swiftly worldwide, agreements of this kind are forecast to grow.

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