What is Franchising?

Articles: Franchising Articles

"What is Franchising?" - by Miles Agmen-Smith

© Copyright ASCO Legal 2014

Franchising is a way of doing business where responsibilities and risks are shared between the business system owner – the Franchisor – and the individual business outlet operators – the Franchisees. The Franchisees are separate business owners operating under a form of licensing whereby one party grants another party the right to use its business system and related intellectual property to sell and/or supply certain goods and services using common brand names and presentation.

The Franchisor and the Franchisee enter into an agreement which sets out their obligations towards each other.  Under the Franchise Agreement the obligations on the Franchisee are usually substantially more comprehensive than on the Franchisor.  This is due to the Franchisor’s need to protect the goodwill and the integrity of the franchise system and the business of its other Franchisees.

The most common form of franchising is known as “business format” franchising.  “Business Format” franchising is the term used to describe the way of doing business where one party (“the Franchisor”) has developed a successful and proven system for doing business (“the System”) and enters into an agreement with another person (“the Franchisee”) under which the Franchisor grants the Franchisee the right/ licence to do business following the methods and guidelines developed by the Franchisor and using its intellectual property i.e. its brand name, trademarks and system for doing business (“the System”).

Under the Franchise Agreement the Franchisee typically only has a right to use the Franchisor’s intellectual property for a fixed period of time.  In this way the purchase of a franchise is very similar to entering into a lease for a set period of time. Lengths of franchise terms vary, and very often there are one or more rights of renewal. Sometimes there are also options to take on additional business. With a franchise, the right to use the intellectual property ends upon the final expiry of the term.

The Franchisee is usually required to pay a fee for the use of the Franchisor’s intellectual property.  Other fees may also be payable under the Franchise Agreement, for instance: ongoing royalties based on a percentage of total sales, a renewal fee (on renewal of the term), a transfer fee (payable on transfer of the franchise to another party) and a marketing fee (payable to the Franchisor for the purpose of marketing the whole System).

In return for payment of these fees, the Franchisor receives (in addition to the grant of rights to use the Franchisor’s Intellectual property) various services from the Franchisor.  These may include site selection assistance, initial and ongoing training, assistance in relation to store fit out, design, access to centralised purchasing, ongoing operational advice and assistance with marketing and many other kinds of assistance.

The Franchisee will also receive a manual which is highly confidential and is lent to the Franchisee for the term of the Franchise Agreement.  The Manual sets out, in detail, the methods, processes, techniques and systems which have been developed or compiled by the Franchisor for operating a franchise and which must be complied by its Franchisees.  The Manual may be in paper or electronic form and is generally a combination of both.  It may also be in one or many parts.

The Franchisee is typically, but not always, granted the right to operate the business using the System in a defined area known as the ‘territory’. The territory may be big or small, relate to the whole business or only part of it; it may or may not be exclusive (and may be subject to various exceptions).  The Franchise Agreement will set out the rights of the Franchisee to operate its business within its territory and will explain what rights the Franchisor has to develop other franchised businesses in or near to a franchisee’s territory.

We have prepared this guide to and for our clients. It is not a substitute for detailed advice as every individual situation differs, and also government policies, laws and general conditions constantly change. We are happy to assist anyone who wishes to obtain more detailed advice or information on these or other matters. 

This publication may not, in whole or in part, be lent, copied, photocopied, reproduced, translated or reduced to any electronic medium or such other form without the express permission of ASCO Legal except complete copies may be made if fully attributed.