FRANCHISING
The franchise sector is now well established and is an important contributor to the Irish economy both in terms of the employment it creates and the wealth it generates. The growth in the franchise sector in Ireland looks set to increase through new franchisees setting up their own businesses, through existing indigenous businesses using the franchise model for expansion and through new non-Irish franchises entering the market due to our strong domestic economy.
See www.irishfranchiseassociation.com for the latest statistics.
This outline guide is from the Irish Franchise Association. For more information see www.irishfranchiseassociation.com
Business Format Franchising is a business method in which the franchisor (developer) grants to the franchisee (investor) the right to run a business selling a product or providing a service under the franchisor’s business format and identified by the franchisor’s trademark or brand. This includes a format for the conduct of the business, a management system for operating the business and a shared trade identity.
Franchising is a comprehensive business relationship whose four essential elements ensure a better success rate than starting a non-franchised business. These are:
A legal agreement between the franchisor and franchisee
In return for these the franchisee pays the franchisor an initial franchise fee and a continuing management services fee based on a small percentage of turnover.
A franchisor is a person or business who has developed a business method (product or service) and seeks to expand through offering franchisees/investors the right to trade under their business name using their operational methods, organisational systems and trademarks. The franchisor will assist in setting up and maintaining links with the franchisee through continued support including advice, training and ongoing research of the concept.
A franchisee is the investor who purchases the right to trade using the franchisor’s tried and tested business concept and all that it entails. The franchisee maintains links with the franchisor in a number of ways including the exclusive purchase of products or services, the payment of a management services fee and/or an advertising levy.
A franchise system refers to the different franchise systems in operation. The term includes the owned and franchised units and the administrative centre of the franchise.
A franchise unit refers to each individual franchise outlet, whether company-owned or
franchised. It is possible for a franchisee to operate more than one unit of the franchise.
A franchise agreement is a legally binding contract that defines the obligations of the franchisor and franchisee throughout the period of the operation of the franchise. It defines the duration of the contract, the territory in which the franchisee will conduct business and the level, frequency and method of payment of all continuing fees. It may also include equipment specifications, extension and termination clauses and the conditions under which either party may terminate or
extend their business arrangement. The operating manual may be an integral part of the
agreement, obliging the franchisee to follow the strictly defined business method laid out in it.
The operations manual is a “blueprint” for the operation of the franchise. It provides
specifications and instruction on how to conduct the franchise activity on a day-to-day basis. It includes such diverse areas as equipment specifications (where applicable), financial and accounting procedures, product preparation and presentation, staff selection, local advertising and promotion and customer liaison. It should provide the franchisee with a source of reference for all conceivable business situations that may arise. It should be subject to revision on a regular basis and remains the property of the franchisor.
The franchise package presents the business being franchised in a tangible form. It brings together the elements of the business, reflecting the accumulation of the franchisor’s total operational experience. It specifies the range of items that must be purchased to ensure that a uniform image is presented to the consumer. In a retail outlet the package may include the shop front, layout and design, product display, fixtures and fittings and equipment necessary to operate the business. In a service franchise the package includes business stationery and promotional literature; it may also include equipment and materials.
The initial franchise fee covers the franchisor’s expenses in recruiting, training and setting up the franchisee in business. It also covers areas such as site selection and design. There is usually a small profit element for the franchisor.
The continuing fees, also known as the management services fee (MSF) or royalty, is a
payment usually made on a monthly basis by the franchisee to the franchisor or master franchisor. It is calculated as a percentage of the franchisee’s gross turnover, excluding VAT.
The advertising levy covers the franchise system’s advertising and promotional activities. It is
usually calculated as a percentage of the franchisee’s gross turnover, excluding VAT.
Territory is the area within which the franchisee has the right to conduct the franchise business. The territory may be defined in terms of population size or street/town/county. A map may form part of the agreement, defining the specific territory for the franchisee. Exclusive territory may or may not be offered. If it is, the franchisee is assured that no competing units of the same system will be introduced within the area.
Starting a Business through Franchising - Information for potential Franchisees
Business Format Franchising can be the perfect way to launch your own business. It minimizes the risk of going into business by providing a tried and tested concept as well as access to training and ongoing advice and support. Franchising means being in business for yourself but not on your own. The franchise sector in Ireland has shown significant growth and now contains a wide range of franchises in the service and retail areas
Selecting a Franchise
There is a wide range of franchises available so it may help to narrow your choice through the following key questions –
Does the franchise have a proven track record?
Does it have the four elements mentioned above?
Can you identify with the concept?
Will it work in your chosen area?
Do you have the necessary finance?
For a more comprehensive list, see “checklist for prospective franchisees” on the franchise information & resources section of our website - www.irishfranchiseassociation.com.
Useful Websites
For franchise listings –
The Irish Franchise Association - www.irishfranchiseassociation.com
Franchise Direct - www.franchisedirect.com
Franinfo UK – www.franinfo.co.uk
Franchise World – www.franchiseworld.co.uk
For Checklists and Finance
AIB Bank – www.aib.ie
Bank of Ireland - www.boi.ie
Ulster Bank – www.ulsterbank.com
For legal information
Beauchamps, Solicitors – www.beauchamps.ie
Expanding a Business through Franchising- Information for potential Franchisors
The benefits of franchising as a means of expanding a business are:
It involves low capital investment by the franchisor, as the capital used to expand the network comes from franchisees
The business owner places the expansion of his/her business in the hands of people who are motivated to make the business successful. Having invested what in many cases are their life savings in a franchise, franchisees will strive to make the business
The franchisor is able to establish more rapid expansion without incurring the overheads associated with opening company-owned outlets. Rapid expansion brings benefit to both the franchisor and the franchisee as it helps build consumer recognition quickly, helping the franchise to become established.
- The return on investment is much higher for businesses who expand through franchising. Because of the low capital employed, the franchisor’s profits are generated on a much lower capital investment. Although the revenue from franchised outlets is lower than that received from company-owned outlets, a higher percentage of the revenue is profit.
- Franchising also allows the business to expand without spreading managerial resources across too many business units. A business owner may wish to keep his/her own operation small and tightly run. Operating more than a few units can drain business resources.
- Franchising can allow expansion into foreign markets. Successful franchising is based on careful planning and preparation. A successful franchise can only be achieved through the development of a well-structured franchise package. Before a company considers taking the franchise route, it must measure up the existing business to assess its suitability for the business format franchise concept
But there are also disadvantages and professional advice is recommended.
For more information, see “How to Franchise Your Business” on the franchise information and resources section of our website www.irishfranchiseassociation.com
Some Useful Websites
The Irish Franchise Association - www.irishfranchiseassociation.com
AIB Bank – www.aib.ie
Bank of Ireland - www.boi.ie
Ulster Bank – www.ulsterbank.com
Franchise Development Services – www.fdssouthern.com
Beauchamps, Solicitors – www.beauchamps.ie
