What is Franchising?

What is Franchising?

Franchising is a business growth strategy where one person called "the franchisor" gives another person called "the franchisee" the right to market and sell the franchisor's products or services using the franchisor's:

• brand or trademark;
• method of doing business; and
• marketing and distribution system.

While there are other forms of franchising, when people refer to franchises, they are generally referring to a business format franchise, where the franchisor specifies the business format under which the franchisee must operate. 

Franchising in Australia is governed by the Franchising Code of Conduct [What is the Franchising Code of Conduct?]. 

According to the IBISWorld, Franchising in Australia, Industry Report, 3 May 2023, franchised businesses in Australia turn over approximately $170 billion each year and employ an estimated 574,000 people.

 

 

Contents

What is A Business Format Franchise?

What is a Product Franchise?

What is a Processing or Manufacturing Franchise?

What is a Franchise Agreement?

Licence vs Franchise

Takeaways

 

What is a Business Format Franchise?

Under a business format franchise, the franchisee is given the right to use the franchisor's intellectual property, the franchisor's trademark and the franchisor's business and marketing systems.

• A trademark can be a letter, number, word, phrase, logo or picture which is registered so that goods and services can be distinguished from each other [Trademarking a Business Name].
• Intellectual property includes trademarks, but also includes other things such as business know-how and trade secrets [What is Intellectual Property?].

The franchisor may supply products and services directly to the franchisee or arrange for the franchisee to purchase products and services from third party suppliers.

The franchisor will provide the franchisee with procedures on how to operate the business and will often centrally manage operational activities such as marketing and supply chain responsibilities. The franchisor will also provide the franchisee with ongoing training and support.

 

What is a Product Franchise?

A product franchise is where a retailer, as a franchisee, purchases products for resale from a manufacturer or a wholesaler and sells the product under the franchisor's name or brand. 

Car dealerships are examples of product franchises.

Under a product franchise, the franchisor will not usually provide the franchisee with training and support.

What is a Processing or Manufacturing Franchise?

A processing or manufacturing franchise is where the franchisee, under a licence, manufactures and distributes the franchisor's product under the franchisor's name or brand.

An example of a processing or manufacturing franchise is a soft drink bottler.

Under a processing or manufacturing franchise, the franchisor will not usually provide the franchisee with training and support.

What is a Franchise Agreement?

A franchise agreement outlines the terms and conditions under which the franchisee can operate the business [What is a franchise agreement?].

The terms and conditions generally set out in the franchise agreement include the fees payable by the franchisee, territory rights, term and renewal, operational procedures, supplier obligations, intellectual property rights (including the use of trademarks) and dispute resolution mechanisms.

Licence vs Franchise

A licence agreement is an agreement between a person who owns property (including Intellectual Property) called "the licensor" and another person called "the licensee", under which the licensor gives the licensee the right to use the property in a certain way. The right to use the property is called "a licence".

An example of a licence agreement is a software licence agreement, where the user is given permission to use the software on certain terms and conditions.

All franchise agreements contain licences, but not all licence agreements are franchise agreements.

The Franchising Code of Conduct defines a franchise agreement using 4 criteria:

• there is a written, oral or implied agreement,
• under the agreement
  • the franchisor gives the franchisee the right to carry on a business using a system or marketing plan which the franchisor creates or controls,
  • the operation of the business will be substantially associated with a brand, image or trademark owned or specified by the franchisor,
  • before starting or continuing the business, there is a requirement that the franchisee pays or agrees to pay an amount to the franchisor.

If a business system or structure has the four criteria it is likely to be a franchise.

A licence agreement, while similar to a franchise agreement, will not contain all four criteria. 

Takeaways

Franchising is a business model where franchisors can grow their business by giving franchisees the right to use the franchisor's trademark and the franchisor's business and marketing systems.

With its potential for scalability, flexibility and shared risk, franchising continues to be an attractive option for individuals seeking business ownership opportunities [Guide to Buying A Franchise] and for entrepreneurs looking to grow their business [Guide to Franchising Your Business].

 

Disclaimer

The information in this page is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.