Franchising

The franchise sector is an important contributor to the Irish economy both in terms of the employment it creates and the wealth it generates. The growth in the franchise sector in Ireland looks set to increase through new franchisees setting up their own businesses, through existing indigenous businesses using the franchise model for expansion and through new non-Irish franchises entering the market due to our strong domestic economy.

Business Format Franchising is a business method in which the franchisor (developer) grants to the franchisee (investor) the right to run a business selling a product or providing a service under the franchisor’s business format and identified by the franchisor’s trademark or brand. This includes a format for the conduct of the business, a management system for operating the business and a shared trade identity.

Franchising is a comprehensive business relationship whose four essential elements ensure a better success rate than starting a non-franchised business. These are:

• ​A legal agreement between the franchisor and franchisee
  
• An operations manual, on the workings of the business written by the franchisor
  
• A training programme, provided to the franchisee
  
• On-going support, from the franchisor to the franchisee during the term of the contract

In return for these the franchisee pays the franchisor an initial franchise fee and a continuing management services fee based on a small percentage of turnover. The franchisor will assist in setting up and maintaining links with the franchisee through continued support including advice, training and ongoing research of the concept.

A franchise agreement is a legally binding contract that defines the obligations of the franchisor and franchisee throughout the period of the operation of the franchise. It defines the duration of the contract, the territory in which the franchisee will conduct business and the level, frequency and method of payment of all continuing fees. It may also include equipment specifications, extension and termination clauses and the conditions under which either party may terminate or extend their business arrangement.

The operating manual may be an integral part of the agreement, obliging the franchisee to follow the strictly defined business method laid out in it. The operations manual is a “blueprint” for the operation of the franchise. It provides specifications and instruction on how to conduct the franchise activity on a day-to-day basis. It includes such diverse areas as equipment specifications (where applicable), financial and accounting procedures, product preparation and presentation, staff selection, local advertising and promotion and customer liaison.

It should provide the franchisee with a source of reference for all conceivable business situations that may arise. It should be subject to revision on a regular basis and remains the property of the franchisor. The franchise package presents the business being franchised in a tangible form. It brings together the elements of the business, reflecting the accumulation of the franchisor’s total operational experience. It specifies the range of items that must be purchased to ensure that a uniform image is presented to the consumer. In a retail outlet the package may include the shop front, layout and design, product display, fixtures and fittings and equipment necessary to operate the business.

In a service franchise the package includes business stationery and promotional literature; it may also include equipment and materials. The initial franchise fee covers the franchisor’s expenses in recruiting, training and setting up the franchisee in business. It also covers areas such as site selection and design. There is usually a small profit element for the franchisor. The continuing fees, also known as the management services fee (MSF) or royalty, is a payment usually made on a monthly basis by the franchisee to the franchisor or master franchisor. It is calculated as a percentage of the franchisee’s gross turnover, excluding VAT.

The advertising levy covers the franchise system’s advertising and promotional activities. It is usually calculated as a percentage of the franchisee’s gross turnover, excluding VAT. Territory is the area within which the franchisee has the right to conduct the franchise business. The territory may be defined in terms of population size or street/town/county. A map may form part of the agreement, defining the specific territory for the franchisee. Exclusive territory may or may not  be offered. If it is, the franchisee is assured that no competing units of the same system will be introduced within the area. 

There is a wide range of franchises available so it may help to narrow your choice through the following key questions –

• Does the franchise have a proven track record?
  
• Does it have the four elements mentioned above?
  
• Can you identify with the concept?
  
• Will it work in your chosen area?
  
• Do you have the necessary finance?

www.irishfranchiseassociation.com