How does a franchise work?

Quite simply, a franchise is a method of distributing a business’s products or services.

Think of a national retail chain which has grown through corporate investment in new sites, extra staff, and advertising campaigns promoting its merchandise.

Franchising is an alternative to the owner building a chain of stores or business units that they fund, manage and staff themselves.

It allows individuals to trade on the goodwill of a brand name and gain from the company experience.

This is how a franchise works

Typically the owner of a business (known as the franchisor) licenses to a third party (known as the franchisee) the right to operate a business or distribute goods and/or services using the franchisor’s business name and systems for a set period of time.

Of course the franchisee will pay a fee for this, which may be an upfront payment by the franchisee to the franchisor, an ongoing fee (an agreed percentage of revenue or profit) or a combination of the two.

Why is franchising so popular?

The simple answer is that franchising provides benefits to both franchisors and franchisees, as they share in the success of the business operated by the franchisee.

Six franchisor benefits

  • Expansion isn’t dependent on the franchisor’s capital but the resources of the franchisee

  • Improved performance: a franchisee’s investment in the business is likely to make them more committed to success than a corporate manager

  • Speedy growth of the network

  • The franchisor can service national customers

  • The franchisor is not handling the day-to-day operations of each business unit

  • There is less capital risk

Six benefits of being a franchisee

  • Access to a well-known brand and the buying power attached to a bigger operation

  • Assistance in choosing a location and setting up the business

  • Ongoing support and training from experienced professionals

  • Mentoring and business advice from fellow franchisees

  • A common marketing program

  • Some legal protections are provided to franchisees by the Franchising Code of Conduct, which is administered by the ACCC

Franchising in Australia

Today in Australia franchises are well represented across the small business sector, from mobile services to food chains to educational programs.

Annual revenue from franchising is in excess of $100 billion with franchises employing more than 500,000 people.