What is franchising & how does it work?

This is the first in a series of articles that will build your knowledge about all aspects of franchising.

For franchisors, we’ll look at

  • how franchising brings the capital and people necessary to grow your business
  • how to determine if your business is ready to franchise
  • the strategies and processes to grow a thriving franchise network
  • trademark registration and IP protection
  • legal agreements and compliance issues with the Franchising Code of Conduct
  • how to select the right franchisees to grow your network
  • the strategies that capture market share and build brand authority,
  • your online platform and the technologies to manage your network
  • social media
  • strategies to develop your franchise concept internationally
  • crystallising your enterprise value with the optimal exit strategy

For potential franchisees:

  • the commercial and legal criteria when buying a franchise
  • multiple-unit franchising
  • area-development licences
  • bringing a great franchise concept from overseas as a master franchisee

 What is franchising?

A good franchise proposition is a successful business concept that is a combination of the franchisor’s product or service, their experience, systems and processes, marketing know-how and brand. Together this constitutes their intellectual property, which is a business opportunity that the franchisor can safely duplicate and sell rights to other entrepreneurs (franchisees) to invest in.

The franchisees in turn operate one or more individual units under the guidance of the franchisor, who gets an ongoing royalty or fee, growing a multi-unit network in the process. Franchisees know that if they comply faithfully, the franchise model provides greater certainty than an unproven concept, reduces the risk and offers a higher potential for growth and realising their enterprise value when they sell.

Franchises are everywhere – why?

Historically, forms of franchising have been around for centuries, although it really took off in the late 19th century in the US with Coca Cola granting its first franchise in 1899, General Motors about the same time, followed by Henry Ford a year so later and franchised service stations following in quick succession.

The first franchise in Australia, however, predates that with a grant by Governor Macquarie to a group of local businessmen in 1809 for the exclusive import of 60,000 gallons of rum over three years in exchange for building the Sydney Hospital – the ‘rum hospital’ in Macquarie St Sydney.

Franchised businesses employ almost half a million people in more than 83,000 franchised outlets across Australia and contribute more than 11% of GDP to the economy.

Today there are almost 1200 franchise systems in Australia, meeting thousands of our goods and service needs every day. From a macchiato, a mortgage and a massage to a filling your molar, your petrol tank or your swimming pool, franchised businesses employ almost half a million people working in more than 83,000 franchised outlets across Australia and contributing about $155 billion per year to the economy or more than 11% of GDP.*

Franchising is a huge part of the global economy. Pepsi, Shell, BP, Ford, General Motors and KFC have used franchising as a capital-raising, HR, management and marketing tool to span the planet. In fact, a few years ago Entrepreneur magazine quoted the then president of the International Franchise Association as saying that franchising accounts for almost half of all US retail sales.

Aussies & franchising

That said, over 90% of Australian franchises are home grown: Hairhouse Warehouse, Pie Face, OPSM, Total Tools, Boost Juice, Grill’d, Baker’s Delight, Forty Winks, Terry White Chemists, Laser Clinics, Pack and Send, RACV, Autobarn, Jenny Craig, Australia Post, AGL and ANZ Mortgage Choice are just a few companies that have used franchising to grow substantial domestic and, in some cases, international franchise networks. And many Australian entrepreneurs have benefited from becoming master franchisees for international concepts such as Unilever’s Ben & Jerry’s, L’Oreal, BUPA, 7-Eleven, Ella Bache, Jani King and Yoghurtland.

In fact Australia is one of the most heavily franchised countries per capita in the world. And maybe that’s because we are also one of the most risk-averse nations globally. The franchisor’s proven profitable concept supported by their training, systems, marketing, brand and often product takes a lot of the risk out of running your own business.

This, combined with the fact that Aussies really like to be their own boss, makes franchising such a winner. Additionally a high level of home ownership with substantial equity provides the capital so franchisees can invest in their businesses. It also solves the operational needs of companies with outlets spread over a large land area with a small population.

How does franchising work?

In simple terms franchising addresses the two fundamental requirements for business growth: raising the funds to expand and finding the right people to manage that growth.

Join us for the next chapter as we explore franchising as a capital-raising strategy and franchising as an HR strategy.

*Ibis World 2013

 Suzanne Jarzabkowska, CEO, DC Strategy