Franchising can be an efficient way of growing your business. It can help you create a wider market base, increase revenue and expand your business in a cost-effective way.
As an established business strategy, franchising can help you exploit a particular gap in the market before any potential competitors.
Business growth through franchising
In a typical franchising agreement, you allow other businesses to sell your services or products under your brand. You allow them to use your intellectual property (IP), including trade marks, copyright and know-how, as well as your business model.
Once the franchisee has set up their business, you provide them with ongoing support. In return, the franchisee pays you an initial fee, followed by royalties - typically a percentage of the sales or profits. You may also generate an income from the mark-up on any products and services that you sell to your franchisees.
Find best practices to help you franchise your business.
Advantages and disadvantages of franchising
One of the main benefits of franchising is reduced risk. The franchisees bear the costs and the risks of the business and you get a guaranteed fee. Also, because the franchisees are running their own businesses, you benefit from limiting your own management costs or you may choose to charge the franchisees for your expertise.
However, since franchisees are separate businesses in their own right, you risk losing control over your products, services or brand, which could result in reputational or financial loss.
How to negotiate franchise agreement
It's important to choose a franchisee carefully and get them to sign a written franchise agreement. The agreement should cover:
- what territory the franchise agreement relates to
- whether the franchise is an 'exclusive franchise' or whether there will be other franchisees
- what rights the franchisee has to use your intellectual property
- any restrictions on what the franchisee can do
- what help and support you will provide to the franchisee
- what fees and royalties the franchisee will pay
- how long the franchise lasts and what happens at the end, or what happens if either party wants to terminate the agreement sooner
Read more about the key issues in the franchise agreement for a franchisor .
To see how franchising works in real life, see below how the ZIP Yard turned their business into a franchise.