What franchising is not!

What franchising is not!

Franchising is just one of many methods of “distribution” and many prospective business owners often don’t understand or are misled into buying a business which is clearly not a franchise business or don’t quite understand the implications of investing in a franchise.

Franchising, therefore, is

  • NOT an Idea
    An idea is not a franchise and cannot be franchised. The inherent elements of a franchise revolve around a tried and tested concept and it is the franchisor’s responsibility to pilot the concept, set out the business format and make it work as a viable business venture.
  • NOT an Investment Instrument
    When one refers to someone “investing” in a franchise one does not refer to investors in the common sense who rely on corporate efforts for dividends or income. Those sorts of investors are not what a franchise requires. A franchisee is very much an owner/operator, playing an active role in the business and through his hands-on efforts reaps the rewards of his investment.
  • NOT a Partnership or Joint Venture
    In a franchise agreement between franchisor and franchisee there is no common ownership of the business and neither party is responsible for the other’s debts or liabilities. The Franchisor provides the business format system, the trademark and name and the franchisee owns and operates his own business for the number of years specified in the contract.
  • NOT a Distributorship or Dealership
    Both a distributorship and a dealer run independent businesses and are in essence middlemen, for the companies on whose behalf they are operating. Unless contractually bound, they have the right to buy and sell products and/or services from anyone to anyone and are not prescribed by any business format system (as in a franchise). They remain independent entities in law, in spirit and in conduct.
  • NOT an Agency
    This concept is the one most confused with franchising. In an agency arrangement there are two parties – the principal and the agent. The principal grants the agent the right to distribute the product or products, usually in a defined geographical area and under his own name and not that of the principal. The agent is not required to follow a specific business format and does not have the stringent controls that a franchisor has over his franchisees.
  • NOT Multilevel Marketing
    Multilevel marketing is just that – the establishment of an unlimited number of levels where members sell products or services and promote the registration of other members as part of the system. Members at the upper levels receive payment according to sales generated and payments made by those lower down on the payment scale.
  • NOT Licensing
    This concept, seen in movie franchises, character/celebrity licensing, technology transfer and trade mark licensing, involves the licensor giving the licensee the right to use the licensor’s name. The licensor is usually more interested in collecting royalties and to supervising the correct use of the license without concerning himself with the day-to-day business of the licensee. Although there is a similarity to franchising, the relationship in franchising is more active, with the franchisor having more authority and control over the franchise operation, to ensure the business is carried out in accordance with the business format system.

Defining true franchising

The two most universally accepted forms of franchising are:

Business Format Franchising
This is defined as a distribution network operating under a shared trademark or trade name, with franchisees paying the franchisor for the right to do business under that name for a specified period of time. In exchange, the franchisee is able to use the franchisor’s entire business system or format, including the name, goodwill, product and services, operating manuals and standards, marketing procedures, systems and support facilities. The franchisor, in turn, is obliged to give initial and ongoing services and support.

Product and Trade Name Franchising
Characterized as a sales relationship between a supplier and a dealer, product and trade name franchises can be found most commonly in car dealerships, petrol service stations and cooldrink bottlers. The dealer is granted the right to sell its products in exchange for fees and royalties and has an obligation to sell only the franchisor’s products.

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