What is Franchising?

Franchising is a way of doing business where responsibilities and risks are shared between the business system owner - the Franchisor - and the individual business outlet operators - the Franchisees. The Franchisees are separate business owners operating under a form of licensing whereby one party grants another party the right to use its business system and related intellectual property to sell and/or supply certain goods and services using common brand names and presentation.

The most common form of franchising is known as "business format" franchising. "Business Format" franchising is the term used to describe a method of doing business whereby one party ("the Franchisor") has developed a successful and proven system for doing business ("the System") and enters into an agreement with another person ("the Franchisee") under which the Franchisor grants the Franchisee the right/ licence to do business following the methods and guidelines developed by the Franchisor and using its intellectual property i.e. its brand name, trademarks and system for doing business ("the System").

The Franchisor and the Franchisee enter into an agreement which sets out their obligations towards each other. Under the Franchise Agreement the obligations on the Franchisee are usually substantially more comprehensive than on the Franchisor. This is due to the Franchisor's need to protect the goodwill and the integrity of the franchise system and the business of its other Franchisees.

Under the Franchise Agreement the Franchisee typically only has a right to use the Franchisors intellectual property for a set fixed period of time. In this way the purchase of a franchise is very similar to entering into a lease for a set period of time. Lengths of term vary, and very often there are one or more rights of renewal. Sometimes there are also options to take on additional business. On the final expiry of the term the right to use the intellectual property ends.

The Franchisee is usually required to pay a fee for the use of the Franchisor's intellectual property. Other fees may also be payable under the Franchise Agreement, for instance; ongoing royalties based on a percentage of total sales, renewal fee (on renewal of the term), transfer fee (payable on transfer of the franchise to another party) and a marketing fee (payable to the Franchisor for the purpose of marketing the whole System).

In return for payment of these fees, the Franchisor receives (in addition to the grant of rights to use the Franchisor's Intellectual property) various services from the Franchisor, including, site selection assistance, initial and ongoing training, assistance in relation to store fit out, design, access to centralised purchasing, ongoing operational advice and assistance with marketing.

The Franchisee will also receive a manual which is highly confidential and is lent to the Franchisee for the term of the Franchise Agreement. The Manual sets out, in detail, the methods, processes, techniques and systems which have been developed or compiled by the Franchisor for operating a franchise and which must be complied with by its Franchisees.

The Franchisee is typically but not always granted the right to operate the business using the System in a defined area known as territory. This may be big or small, relate to the whole business or only part of it; it may or may not be exclusive (subject to various exceptions). The Franchise Agreement will set out the rights of the Franchisee able to exclusively operate its business in a certain area and will explain what rights the Franchisor has to develop other franchised businesses in that area.