Franchising explained simply

Franchising is a form of expansion based on partnership. A franchisor provides a tried-and-tested business model, a brand, standards, expertise and support. Independent franchisees implement this concept at their own premises or in their own markets.

A good franchising model combines entrepreneurial independence with a shared system. The aim is to create a model from which customers, franchisees and the franchisor all benefit equally.

A franchisor is the company that develops, operates and refines a franchise system. It provides franchisees with the brand, business model, expertise, standards, processes and support.

A professional franchisor does more than just sell a brand. They ensure that partners get off to a good start, can operate profitably, and that the brand continues to be reliably represented across different locations.

A franchisee is a legally independent business owner who implements an existing business concept under a shared brand. The franchisee invests in their own premises or territory and bears the business risk at the local level.

At the same time, he does not work alone, but draws on the franchisor’s expertise, standards, brand and support. Successful franchising requires both: entrepreneurship and the ability to operate within a system.

A franchise system is an organised collaboration between a franchisor and several franchisees. It comprises a brand, a business model, a contract, standards, processes, training, communication, management and ongoing development.

A strong franchise system is not a loose network of individual outlets. It is a scalable organisational model in which knowledge is shared, quality is assured and partners are given professional support.

The franchise head office is the organisational unit within the franchisor that manages the day-to-day operations of the system. It develops standards, supports franchisees, organises training, carries out marketing activities, analyses key performance indicators and drives the system’s further development.

As the number of partners grows, the head office is becoming increasingly important. What began as a start-up organisation must evolve into a professional head office that empowers partners and ensures growth can be managed effectively.

A franchise agreement governs the working relationship between the franchisor and the franchisee. Among other things, it sets out trademark rights, obligations, fees, the territory, the term of the agreement, standards, training, support, reporting requirements and the termination of the partnership.

The contract is important, but it alone does not make for a good franchise system. It should reflect what is actually practised within the system.

A franchise handbook sets out the standards, processes, roles and quality requirements of a franchise system. It explains how the business model should be implemented in day-to-day operations and what knowledge is essential for successful operation.

In the modern sense, the franchise handbook is not a static document. It is a management and knowledge tool that supports partners, staff and head office in their day-to-day operations.

Franchising know-how is the practical, experience-based knowledge that makes a business model replicable. This includes processes, standards, methods, cost calculations, marketing expertise, training content, supplier relationships, IT systems and operational details.

It is crucial that this knowledge is transferable. A franchisor must structure, document and impart its know-how in such a way that franchisees can apply it successfully.

A franchise fee is the payment that franchisees make for the use of the system. There is often a one-off entry fee and ongoing franchise fees.

A good fee structure must be viable for both parties. The franchisor needs funds for the brand, support and system development. The franchisee needs a business model that remains attractive even after fees have been paid.

The entry fee is a one-off payment that franchisees usually make at the start of the partnership. It may cover services such as access to the business concept, initial training, site support, onboarding and system implementation.

It is important that the admission fee is justified in a transparent manner. It should not be seen as a short-term profit, but rather as a contribution towards a professional start.

The ongoing franchise fee is a regular payment made by the franchisee to the franchisor. It funds ongoing services such as partner management, system development, marketing, training, quality assurance, digital systems and central support.

It should be proportionate to the benefits of the system. Partners are more likely to accept fees if these result in tangible support and further development.

A marketing fee is an additional or separately itemised fee used to finance central marketing initiatives. These may include brand building, national campaigns, digital advertising, promotional materials or joint promotions.

Transparency is key. Franchisees should be able to understand how marketing funds are being used and how they contribute to strengthening the brand and developing the market.

A licence usually focuses on the use of a specific right, such as a trade mark, technology or method. Franchising goes further: it encompasses a complete business concept, including the brand, know-how, standards, training, support and ongoing system management.

The main difference lies in the depth of the collaboration. Franchising is particularly suitable when quality, processes and a unified market presence need to be closely managed.

In a chain system, the company runs its own branches. In a franchise system, branches or territories are run by independent business owners who operate according to a common system.

Many systems start out with their own branches and later move into franchising. Even after that, their own branches often remain important for maintaining a close connection to the market, testing innovations and realistically refining standards.

Territorial protection means that a franchisee is granted exclusive or restricted rights for a specific territory. The franchisor then usually undertakes not to appoint any further franchisees with the same rights in that territory.

Territorial protection can provide planning certainty. However, it must be consistent with the expansion strategy, market potential and economic viability. Territories that are too large or poorly defined can hinder growth.

The business model for a future franchise system is usually first trialled in one or more of the company’s own outlets. If this model is to be rolled out via franchising, a pilot franchise outlet also tests the franchise concept.

The question at issue is whether the model can be applied to self-employed partners. Among other things, the following aspects are being tested: partner selection, onboarding, training, the handbook, support, communication and quality assurance.

Standardisation means that key processes, quality requirements, brand guidelines and customer experiences are set out in a binding manner and made reproducible. It ensures that customers have a consistent brand experience across different locations.

Good standardisation does not mean imposing rigid rules on everything. Professional franchising distinguishes between binding minimum standards and sensible entrepreneurial freedom at local level.

The right time has come when the business model has been thoroughly tested. At least one of your own businesses should have established itself in the market and be operating profitably.

Franchise expansion should not be used as a lifeline for an unsound business model. It works best when it is clear why customers buy, how revenue is generated, and what support partners need.

No, not every business model is suitable for franchising. A business model must be scalable. Its success must not depend too heavily on the individual talents, connections or personality of the founder.

You cannot simply replicate an artist. An artistic method, a clearly structured studio concept or the sale of art, on the other hand, can certainly be replicated.

The costs depend heavily on the business model, the maturity of the brand and your own expectations. The key factor is how much is already in place: processes, documented knowledge, IT infrastructure, brand identity, cost calculations, training programmes and partner processes.

As a rough guide, the start-up costs can range from the equivalent of a small car to the cost of buying a house. A reliable estimate can only be made on the basis of a well-thought-out franchise concept.

The duration depends heavily on the maturity of the business model, the existing documentation, the available resources and the level of professionalism required.

It can take just a few weeks to go from the initial idea to a documented franchise concept that has not yet been fully implemented. You should allow at least a few months for the essential elements, the franchise agreement, the handbook, training and partner processes. Getting started with the first pilot partners usually takes extra time.

Above all, a business needs a tried-and-tested, economically viable and transferable business model. The brand should be clearly positioned, and at least one of its own operations or a comparable operational unit should have demonstrated that the model works in the market.

In addition, it requires a willingness to organise knowledge and share it with partners. Becoming a franchisor means establishing a system that empowers other entrepreneurs to operate successfully in accordance with shared standards.

Franchise potential is determined by whether a business model is replicable, economically attractive and transferable to other entrepreneurs. Successful owner-operated businesses are an important foundation, but they are not sufficient on their own.

Among other things, it should be assessed whether processes can be standardised, whether know-how can be transferred, whether partners can get off to a sound financial start, and whether head office can provide long-term support and leadership.

A franchise concept describes how a successful business model is transferred to independent partners. It translates operational experience into a clear system comprising roles, services, standards, processes, fees, training, support and management.

The development process begins with the question of what really underpins the success of the existing business model. The key system components for partners and head office are then derived from this.

A franchise concept outlines the key components for setting up and managing the system. These include the business model, brand, target groups, partner profile, allocation of responsibilities, fee structure, profitability, standards, training, manual, quality assurance and partner support.

Partner acquisition, onboarding, communication, IT systems, data and reporting should also be taken into account at an early stage. The concept lays the foundations for future scaling.

During the set-up phase, the system headquarters lays the foundations for future collaboration with partners. It defines standards, documents expertise, develops training programmes, outlines partner processes and establishes the framework for support, quality assurance and management.

In the early stages, not everything has to be perfect. However, the core services provided to partners must function reliably and become more professional as the business grows.

A franchise partner needs an entrepreneurial mindset, the right personal qualities, sufficient capital and a willingness to work within a shared system. He or she should be keen to take on responsibility whilst accepting that the brand, standards and central processes are binding.

Good franchise partners are not merely executors, nor are they lone wolves. They combine independence with the ability to work within a system.

It is rare to find your first franchise partners based on reach alone. The key factors are a clear partner profile, compelling benefits for partners, realistic profitability and a structured selection process.

It is the very first partners who have a major influence on the system. That is why quality is more important than speed. They should be prepared to learn alongside head office and to help develop the system further.

The first franchisee is the first real test of whether a business model that has so far operated internally can be transferred to independent entrepreneurs.

The first partner will reveal whether the training, manual, communication, support, quality assurance and allocation of roles are viable. They should therefore be carefully selected and closely monitored.

Setting up a franchise requires, amongst other things, a franchise concept, a partner profile, a feasibility study, recruitment materials, a franchise agreement, a franchise handbook, training materials and a roadmap.

It is important that these documents are consistent with one another. The sales process, contract, manual, cost-effectiveness and system performance must all follow the same logic.

Digitalisation should be taken into account at an early stage of development. It affects not only marketing and IT, but also knowledge, training, processes, key performance indicators, communication and partner management.

New systems can be launched in a pragmatic manner. Nevertheless, the digital architecture should be designed in such a way that it does not hinder future growth, benchmarking, digital academies, PRM systems and AI applications.

Franchise fees should be based on the allocation of responsibilities, the benefits to franchisees, the profitability of the business model and system costs. The relevant fees are usually the initial fee, the ongoing franchise fee and, in many cases, a marketing fee.

Fees that undermine the profitability of the franchisee’s business or offer no discernible value in return are a cause for concern. A good fee structure is reasonable, financially viable and forms part of a well-thought-out franchise concept.

A business plan for franchisees serves as a financing document, a decision-making tool and a system standard all in one. It describes the franchise system, the benefits of setting up a franchise, investments, revenue planning, cost structure, fees, financing, liquidity and scenarios.

The franchisor can provide a template incorporating system logic and empirical data. The franchisee then adds their own specific assumptions; ideally, in the case of start-up entrepreneurs, this should be done with the support of a business start-up consultancy.

Equity capital is important for both franchisees and franchisors. It provides financial security, entrepreneurial freedom and resilience during the start-up phase. For franchisors, sufficient equity capital is a key criterion in the selection of franchisees.

Equity capital is not just about the initial investment. It also covers working capital, start-up losses, liquidity reserves, personal living expenses and unforeseen costs.

A franchise partner profile outlines the kind of people who are a good fit for a franchise system in terms of their professional, personal, financial and entrepreneurial qualities. Typical criteria include personality, alignment with the franchise’s values, financial resources, leadership experience, industry knowledge, sales ability, location suitability, willingness to learn and ability to work within the system.

A good partner profile distinguishes between essential criteria and desirable criteria. It forms the basis for partner acquisition, marketing, the selection process, the business plan and onboarding.

A franchise selection process is a two-way assessment process. The franchisor assesses whether candidates are a good fit for the system in professional, personal, financial and cultural terms. At the same time, candidates assess whether the brand, business model, values, profitability and working relationship are a good fit for them.

Typical steps include initial contact, an information meeting, a self-assessment, a presentation of the business concept, a discussion of profitability, a visit to head office, an assessment of the location or area, a review of the contract and a joint decision.