Franchise
3. What is a Franchise?
Authors: Staff Legal Eagle
Firm / Chambers:
Last updated: 27 Jul 2015
- A franchise works very differently from other business structures such as establishing your own business or purchasing an existing business that operates through a company, trust or other business structure.
- A franchise is a business arrangement that allows an individual, partnership or company to operate under the name of an established business.
- The franchisor is an established business or organisation that grants or leases the right to sell, produce or use their product, service or brand to the franchisee.
- Usually the established business will have a successful business model that is adaptable to additional locations or sectors and can be operated independently from the original business.
- Many supermarkets, fast food stores and clothing chain stores operate as franchises.
- In addition to the fee paid by the franchisee to enter into the franchise arrangement there will often be additional ongoing fees and obligations such as:
- the payment of ongoing royalties; or
- payment of a percentage of the franchisee’s monthly income to the franchisor.
- There are three common franchising models available depending on the kind of business that forms the franchise arrangement. These three models are:
- business format franchises;
- product franchises; or
- manufacturing and processing franchises.
- A product franchise is a model through which the franchisee sells the franchisor's product from an independent location. This is usually a retail or wholesale outlet such as automotive parts.
- A business format franchise is where the franchisee is given the right to use the franchisor's intellectual property in their own business. For example some of the most recognisable brands such as McDonalds, KFC or Subway restaurants use this format.
- A processing or manufacturing franchise provides the franchisee with an essential ingredient or process that enables a specific product to be produced from an independent location. A common example of this is food production such as soft drinks or chocolate bars.
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