Tread With Caution

Franchising is not the perfect expansion model for all.

- Michael A Peterson, Franchise Beacon

When a business considers its next phase of development, franchising often comes into the discussion. That should not come as a surprise; when you look at the 12 most recognised food restaurant logos in the world,1 11 of them are franchised brands, 9 out of 10 of the most valuable fast-food brands are franchised,2 and roughly half of the world’s top retailers offer a franchise or license model.3

Franchising as a growth model is not just a consideration for emerging brands. Recently, I was asked to consult with a specialty clothing manufacturer with presence in 30 countries; they are considering franchising as a possible avenue for their next growth phase.

What is franchising?

If you are going to evaluate franchising as a potential growth vehicle, then first you have to understand what franchising is. There is no one universally accepted legal definition of a franchise relationship. The UK Common Law System does not have an official definition of franchising at all, the Consumer Protection Act (2008) of South Africa essentially defines franchisees as consumers, with many of the same protections, whereas Italy defines a franchise as an agreement between two legally and economically independent entities for mutual consideration.4 Though there is not a single legal definition, a good starting point for discussion is that a franchise relationship, at its core, is one built around a licence agreement and services agreement. One party (the franchisor) licenses to the other party (the franchisee) certain rights in respect to its trademarks, trade name, business systems, etc., and also agrees to provide certain services. The other party (the franchisee) typically agrees to abide by certain rules regarding the conduct of its business, and also to pay the licensing party some fee or set of fees.

Considerations of franchising