The advantage to the franchisee

The franchisee is the proprietor of its own business and owns the tangible assets of the franchise outlet. What it does not own is the goodwill in the business concept. Like any other business proprietor the franchisee buys materials, pays rent and staff salaries and takes the profit of operation, less royalty and service fees. Subject to various restrictions, it can sell its business when it wishes (usually subject to the franchisor's pre-emption right and on condition that the purchaser is approved by the franchisor). What makes the franchise different from any other business is that it gains from the franchisor the entire business concept with full training, assistance in every aspect of setting up and running the business, and access to necessary materials and supplies.

In essence, it can be said that the franchisee does not have to worry about what to do or how to do it, but merely follow the developed concept. This makes failure less likely. According to the UK's Department of Employment over 25% of ordinary businesses fail whilst the BFA (British Franchising Association) quotes failure for only 5% of franchised outlets.

Obviously the franchisees' start-up costs entail more than paying the franchisor an up front fee; it must invest in premises, fittings, equipment, materials and working capital until the inward cash flow commences. In addition, it must make regular payments to the franchisor in the form of royalties or management services fees or, in some cases, an agreed mark-up on supplies obtained from the franchisor.

The disadvantage to the franchisee

The franchisee is not an independent entrepreneur. In the final analysis the franchisee must follow the franchisor's instructions. The lower risk is off-set by the lower reward for success.

The advantage to the franchisor

The main advantage of franchising to the franchisor is that it allows the latter to increase its number of outlets with minimum capital outlay and so accelerate the network's growth and probably its profitability. Self-employed franchisees are generally more highly motivated than salaried managers, and are more likely to produce better results for less expenditure of capital on behalf of the franchisor. Less staff will mean fewer personnel problems. As the franchise network grows it will become easier to handle national or regional customer accounts.

The disadvantage to the franchisor

The disadvantage of franchising to the franchisor is that it has to control and co-ordinate a network of semi-independent businessmen and ensure that they build and maintain a favourable image for the whole franchised operation. This means that the franchisor's own role changes drastically.

The policing and monitoring of standards by the franchisor is vital but can at times be difficult. The franchisor will sometimes have to resort to the use of both carrot and stick to get franchises to try new techniques or improve their current performance.

Ensuring that franchisees do not under report their turn over is also a major task.

The dynamics of the franchisor-franchisee relationship are such that a lack of trust will on occasions creep in making life more difficult than it should be. This may be due to "personality" clashes between the franchisee and members of the franchisor's team or because the franchisee realises that he/she does not find it easy to live within the restraints imposed by a franchise.

Conflicts between the franchisor's corporately owned outlets and those owned by franchisees may occur. It is the franchisor's duty to remove/minimise these conflicts and ensure that they are satisfactorily dealt with.

An individual corporately owned outlet will be more profitable for the franchisor than an individual franchised outlet (although the increased number of franchised outlets will probably mean that the franchised business as a whole will be more profitable than one which is entirely corporately owned).

It will be quite apparent from the above that the franchisee is in no way an agent or representative of the franchisor. The complexities of the relationship may however lead the courts to speculate that the franchisor could in certain circumstances be a show director of a corporate franchisee.

How big is franchising?

In the United States, franchising accounted for sales of an estimated US$591 billion in 1987. It is also extremely well established in other countries such as Canada and Japan. A recent survey commissioned by the British Franchise Association and the National Westminster Bank indicates that annual sales through franchising amount to up to £3.8 billion in the UK, and that turnover may reach £9,895 billion by 1994. Annual growth is 33% year on year over the last four years. In the last 25 years over 20,000 separate businesses have been created using the franchise concept, directly employing nearly 150,000 people. Today there are over 200 different types of business being franchised by about 440 franchisors with nearly 20,000 franchised outlets. According to former EEC Commissioner, Peter Sutherland, franchising accounts for some 10% of all retail sales in Europe. Even so, few franchised operations in the UK claim to be fully mature, or to have reached market saturation point.

The UK is one of the fastest expanding franchise areas in Europe, and is second only to France. After 1992, Europe, with its 320 million consumers, could surpass the United States in overall turnover through franchising. This is primarily the result of the fact that EC law is sympathetic to franchising.