D1 Franchise Opportunities
An entrepreneur may decide to finance growth through a franchise strategy. A franchise is a business setup where a company (franchisor) allows another person (franchisee) to use its brand and business model to sell products or services. In return, the franchisee pays an initial fee and ongoing royalties to the franchisor.
An example of a famous franchise is McDonalds where approximately 95% of its restaurants are set up and run by franchisees. The franchisees sell McDonalds products and use their branding but must comply with McDonalds rules of operation and pay monthly royalties.
The Franchise Agreement
A franchise agreement is a legal contract between a franchisor and a franchisee. It sets the rules for their relationship, allowing the franchisee to run a business using the franchisor's brand and systems, in return for fees and responsibilities.
The main features of a franchise agreement include;
Territory Rights: This outlines the geographical area where the franchise is allowed to set up and run the business. The franchisor may grant a franchisee a protected territory which means they will not let another franchisee set up in the same area.
Site Development: The franchisee is usually responsible to purchase the business premises but the franchisor will set standards for them to adhere to in its location, fixtures and fittings. The franchisor will need to approve of the premises prior to opening.
Performance standards: This outlines the expectations of the franchisee in terms of sales targets and other performance figures.
Trademark permissions: This formally grants permission for the franchise to operate under the branding and sell the products of the franchisor.
Financial obligations: The agreement outlines the franchise fee, ongoing royalty payments and any other financial contributions that need to be made by the franchisee.
Franchisor Services: The agreed services to be provided by the franchisor such as marketing, supply chain management and staff training.
Insurance requirements: The agreement will outline the insurance requirements against unexpected events such as fire or customer injury. This is to ensure the business can return to business as quickly as possible.
Duration: The franchisor and franchisee will agree a duration of their relationship, the conditions under which it can be renewed and the conditions under which it can be terminated by either party.
