In franchising, a business owner (called a franchisor) lets an individual or business (the franchisee) replicate its business idea or model by granting a licence.
The terms of the licence are set out in a document called the Franchise Agreement, and usually carries a geographical restriction.
How franchising works
The franchisee pays the franchisor an initial fee. This covers the costs the franchisor will incur in setting the franchisee up in business.
The franchisee then makes on-going payments to the franchisor throughout the duration of the agreement, usually at least five years. Renewing the franchise agreement at the end of the initial term is usually straightforward, provided all parties have fulfilled their obligations to each other.
The payments the franchisee makes to the franchisor are usually calculated in one of three ways:
1. A fixed monthly fee
2. Percentage of the franchisee’s turnover
3. A mark-up on the cost of goods or services that the franchisor sells to the franchisee
While Franchise Agreements can vary, in most cases the franchisee owns its outlet while the franchisor controls how its products or services are produced and marketed.