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Franchising is much more than a method of business expansion; it is a powerful business model that can provide a framework for growth, operational efficiency, and brand expansion. For prospective franchisors, understanding franchising as a business model is critical to scaling your brand while mitigating risks. However, deciding to franchise your business has several legal and strategic implications. This article explores how franchising functions as a business model and highlights several legal insights for those looking to take this route.
Understanding Franchising as a Business Model
At its core, franchising is a business model that enables a company (the franchisor) to permit independent entrepreneurs (franchisees) to operate under its brand and model. A franchise system is a collection of franchise locations operating under one brand.
Unlike alternative business models, where the company directly manages multiple locations or distributes its products through third-party retailers, franchising leverages franchisees’ drive and capital to expand a brand. Franchisees own their businesses and follow the franchisor’s model and brand standards.
Key Characteristics of Franchising as a Business Model
1. Replicable Business Model
While franchising is a business expansion model, you must start with a proven business model to build a successful franchise system. This proven business model should be replicable, meaning other franchisees can copy it into their own businesses. If your business model is overly complex or niche, it is unlikely to succeed as a growing franchise system.
Your business model includes aspects such as the following:
- daily operating procedures;
- marketing strategies;
- product and service offerings; and
- customer service standards.
You will encapsulate your business model in the franchise operations manual. This comprehensive document outlines your business model and how a franchisee will run a business under your brand.
This handbook covers all the essential topics you need to know about franchising your business.
2. Brand Consistency
Maintaining consistent brand standards across all franchise locations is crucial. This consistency ensures that customers have the same experience regardless of the location they visit. To ensure cross-location brand consistency, you must set explicit brand and performance standards for your franchisees. You can set these standards in the franchise agreement, the legally binding agreement you share with your franchisees, elaborating on them in the operations manual.
It is critical that your franchise agreement carefully defines the relationship you will share with each of your franchisees. Within it, you will outline your rights and obligations and those of the franchisee. The following are key components to include in the franchise agreement:
- guidelines on how franchisees can use your intellectual property;
- whether franchisees will have exclusive territory rights and, if so, the scope of this area;
- training and support you will provide;
- a comprehensive breakdown of the franchise fee structure;
- dispute resolution mechanisms; and
- termination and renewal terms.
Intellectual property protection is another critical part of ensuring brand consistency as a franchisor. Registering your trade marks with the Intellectual Property Office (IPO) is a vital aspect of this. You should also set explicit guidelines on intellectual property use within the franchise agreement. Then, you can monitor franchisee compliance and enforce your intellectual property rights by taking legal action, if necessary.
3. Shared Risk and Reward
In franchising, franchisors share the risk and reward of expansion with their franchisees. Your franchisees will invest in and operate their businesses, and you will benefit from your brand’s growing reputation with minimal direct financial risk.
The franchise model can enable your business to scale rapidly without requiring substantial capital. The franchisee bears the cost of setting up and operating the new location, making franchising a capital-efficient approach to growth.
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Key Takeaways
Franchising as a business model offers a unique framework to expand your brand, scale your business and share risk between you and your franchisees. While franchising can provide significant growth potential, it also comes with its own set of legal complexities. Understanding these complexities is critical for any prospective franchisor looking to minimise risk and establish a profitable and sustainable franchise network.
The legal considerations associated with franchising include:
- drafting a comprehensive franchise agreement and operations manual;
- seeking expert legal advice; and
- registering and protecting your intellectual property rights.
If you are considering franchising your business, our experienced franchise lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The franchise business model enables a company (the franchisor) to permit independent entrepreneurs (franchisees) to operate under its existing brand and business system.
When franchising, you can protect your brand by registering your trade marks and setting clear guidelines for intellectual property use in the franchise agreement. You should also monitor franchisee compliance and enforce your intellectual property rights through legal action if necessary.
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