How does franchising work?
The definition of a franchise is simply an endorsement by a business to another party to carry out specific commercial activities.
More specifically, in a franchise agreement, the owner of a brand (the franchisor) licenses the right to use its brand and business model to a third party (franchisee). A franchise agreement is usually set for a defined period of 5 to 7 years.
The franchisee pays the franchisor a fee which may consist of an upfront payment and/or an ongoing fee, usually calculated as a percentage of sales. The franchisor may also sell some elements necessary to operate the franchise, such as products or services, to the franchisee.
In addition to the brand and business model, the franchisor will often assist with marketing, training, site selection and mentoring. Some larger franchisors are also able to assist with financing the franchise.
The most famous example of a franchise business in the world is McDonald’s. Over 90% of McDonald’s outlets worldwide are franchises. Other well-known Australian franchises include Anytime Fitness and Baker’s Delight.
