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FRANCHISING FOR BEGINNERS

by Simon Lord,
last updated 23/06/2017

If you’ve ever dreamed of being your own boss, you might have wondered about buying a franchise. But just what is franchising and how does it work? Here’s our guide

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Franchises have become very much a part of the daily life of most New Zealanders, whether we know it or not. We buy Lotto tickets, groceries and even houses from franchised companies. We have our lawns mown, our carpets cleaned and our cars serviced by franchises. At work, the computers may be supported by a franchised team or the office cleaned by one. We eat out at franchises - not just fast food but Burger Wisconsin, Cobb & Co or Columbus Coffee. And at the end of the day, after we have brushed our teeth with toothpaste bought from a franchised pharmacy, we climb into a franchise-bought bed.

But what is franchising? How does it work? Is buying a franchise a safe way to go into business for yourself, or is it just pyramid selling under a different name? Can you really make money as a franchisee?

In this beginners guide, we’ll answer some of those questions to help those who are considering buying a franchised business for the first time to understand how franchising works.

what is franchising?

The basic principle behind franchising is that someone develops a business format and an operating system which has some advantages over other existing businesses in the market. By franchising, this person (called the franchisor) then replicates or clones his or her business in other geographic areas by granting the right to another (the franchisee) to operate the same business system under the same name. This right is usually granted for a fixed term, not forever.

The franchisor gains income from an initial fee paid by the franchisee to gain access to the franchise brand, training and systems, and from ongoing fees paid by the franchisee which can be calculated in any one of a number of ways: some of the most common are a flat monthly fee, a percentage on sales or a mark-up on product supplied. In return, the franchisor must provide a variety of services to encourage the continuing profitability and growth of the franchisee’s business. The franchisee receives their income from marketing a desirable product or service under a desirable brand name.

This basic approach – which is called business format franchising – has proved to be the most dynamic form of marketing and distribution in the world over the past sixty years or so.

So successful has it been that the term franchise has been loosely applied to other forms of business arrangements – the term is now common in the world of Super Rugby, for example, and movie-goers are familiar with talk of the Lord of the Rings and Harry Potter ‘franchises’. However, it is business format franchising which concerns us here.

how does it work?

Mention the word ‘franchise’ to most people, and one name will spring to their mind – McDonald’s. That’s not too surprising – with about 37,000 restaurants in 120 countries world-wide, McDonald’s is one of the world’s best-known brands (although another franchise, Subway, has even more outlets – almost 45,000).

McDonald’s didn’t invent franchising, but in the 1950’s and 60’s they led the development of franchising as we know it today. Let’s use them, then, as an example of how franchising works.

When you go into a McDonald’s, you’re not going into part of a huge company-owned chain – you’re actually going into a small, local business, even if it looks similar to every other McDonald’s in the country (or the world). That may sound odd but it is absolutely...

 

This article appears in full in the latest issue of Franchise New Zealand magazine (Year 26 Issue 2). Read the entire article in the digital magazine or, if you live in New Zealand please send for your free print copy.

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