The franchise package
A standard franchise package must cover the following sections:
- A trademark (brand) that the franchisor lends to the franchisee
- Know-how (proven knowledge) on how to run a franchise business that the franchisor lends to the franchisee
- An operations manual that sets out the procedures for running a franchise business
- Services provided by franchisor to its franchisees
- Franchise fees to be paid by the franchisee to the franchisor
A trademark is defined under EU intellectual property law as a sign, particular words (including personal names), or designs, letters, numerals, colours, the shape of good, or of the packaging of goods or sounds.
A trademark is protected under law and applies to trademarks of goods officially registered by the Patent Office. The enterprise which the trademark has been registered to then acquires the exclusive right to use trademark throughout their course of trade and throughout the territory/territories covered by the registration.
The trademark is usually placed on registered goods, packaging or on branding. A very distinguishable ® sign around the trademark means the trademark has been registered and acts as gentle reminder of the legal protection.
The concept of know-how arose in during the Anglo-American industrial revolution of the latter 19th century. It’s exact definition is wildly disputed in the business world. Some European cultures believe know-how relates to technical knowledge of a confidential nature, directly useful in production and particular industrial property contracts. However, we base our definition from the International Chamber of Commerce based in Paris – whereby - know-how means the entirety of knowledge, i.e professional knowledge and experience regarding the technology and conducting the production process of a specific product.
The operations manual has two primary responsibilities to achieve. Firstly, it sets out all of the operating rules by the primary franchisor of which the franchisee must operate under. Therefore, the operations manual should be comprehensively detailed and cover all aspects of the franchisees new business. Moreover, by giving a detailed operations guide the franchisor has way to not only protect their concept, but to also protect their know-how and even trade secrets.
We will demonstrate the essential topics covered in a standard operation manual. Please note that this is just a basic broad example. Each industry and sector have their own very specific features that should be included when compiling their own detailed operation manual. For example, a fast-food restaurant’s manual will differ significantly to a motor mechanic workshop.
Gives a description of the overall franchise system. It encases the business philosophy and ethos. It generally covers expectations and what to expect as a franchisee.
A specific description of the operation principles of the franchise. It should outline how the different elements function and reference the interrelationships between the franchisor and franchisee.
A list of necessary equipment required to run the franchise, combined with operating instructions provided by your equipment suppliers. Also include advice based on your experience of troubleshooting or fixing the equipment of any known common faults. It’s important to add a contact list of relevant equipment suppliers and service points. Often a franchisor will provide the franchisee with the design architecture and lay-out functionality of the franchise premises.
This part is divided into business specific procedural sections generally covering:
- Opening days/ trading hours
- Detailed job descriptions for each member of staff
- Staff training
- Employee standards (i.e. clothing and appearance)
- Employee hiring procedures
- Rules and disciplinary procedures
- Occupational health and safety regulations and standards
- Pricing policy requirements and recommendations
- Supply policies
- Product/Service quality standards - including complaint procedures
- Accounting – a detailed description of the accounting standards to be used by the franchisee and the financial information that should be provided to the franchisor. You should specify the methods of collecting and keeping relevant financial documentation by the franchisee
- Franchisee fees – a detailed procedure for calculating the fees the franchisee is contracted to pay to the franchisor, including templates of any specific related forms
- Cash-flow control and banking procedures. This includes procedures for handling checks, digital payments and credit cards
- Insurance policies – details of any insurance program offered through or by the franchisor; specific requirements the franchisee must include in a policy
- Inventory control procedures
- Advertising and marketing – basic marketing tips and sales techniques used within the franchise system; point of sale advertising; description of public relations activities used by the franchise system; instructions on how to organize a promotional campaign for the grand opening of the franchise
- Requirements for the use of trademarks by the franchisee or any other branded signage distinguishing the franchise system; full description of the ‘corporate identity’ of the franchise system
- A list of basic legal requirements the franchisee should know
This section should contain templates for all forms required by the franchisee, including forms already inserted into other sections of the manual. In addition, it should include model employment contracts, contracts to do with employee confidentiality, templates of other contracts used by franchisees in their daily activities (e.g. commission contracts or contracts for specific work) as well as contracts used with clients.
List of franchisor employees
A list of the franchisor’s staff members – highlighting the key people to be contacted in regards to specific parts of the business operation.
A detailed list of addresses, emails, and telephone numbers that may be useful to the daily operations of the franchise.
Every franchisor should be aware their operating manual be kept up-to-date so the franchise system keeps pace with the market. Any changes or modifications to the operating manual should be made immediately available to all franchisees.
One of the most basic practical differences between a traditional distribution network and a fully developed franchise system is the level of support offered to franchisees by franchisors in the form of initial services and ongoing services.
The general rule is that franchisors take on responsibilities related to the development of products and services. This includes advertising and public relations activities for the entire system. Also supporting with matters regarding supply, administration and the overall financial support of the operation. Overall, implementing a strong system which ensures the businesses quality mark of goods and services.
The range of services offered by franchisors will vary from business to business. For example, an owner-operator franchisee cleaning service will be offered more support pertaining to administrative and accounting services. On the other hand, a fast-food restaurant with several employees might be offered regular intensive training at the franchise (on top of other functional services that assist and support the franchisee).
From the franchisors stand point, it’s important their franchise system is organised in such a way it creates a functional dependency on the franchisors know-how and services, whereby the franchisee sees value in paying their regular franchise fees. The involvement of the franchisor brings confidence that company standards are maintained. Subsequently sales revenue should project more on target, benefitting both parties.
Preliminary services for the franchisee (before opening the business)
- Intensive training program covering:
- Products/services offered by the franchise
- Market competition information
- Marketing techniques
- Recruitment and training methods
- Accounting and reporting
- Supply management
- Computer hardware and software
- Service and maintenance of specialised equipment
- Help in choosing a site location
- The franchisor is usually more aware of the geographical demographics that should be met for the franchise to successfully operate
- Aiding in the construction or renovation of the premises. (A uniformed concept generally works best for a franchise network. It minimises any disputes and normally works out to be both faster and cheaper to set-up)
- Ordering and installation of equipment
- Ordering the first delivery of products
- Provisioning of the relevant software
- Staff recruitment. (Many franchisees can lack experience in conducting job interviews)
- Assistance organising the promotional campaign for the grand opening of the franchise
Ongoing services (after the franchise launch)
- Regular visits and advice from a franchisor representative
- Training for new employees of the franchise
- New product research and development. Also, new marketing strategies (many franchise systems have increased their market share after adopting new concepts suggested by their franchisees)
- Joint purchasing programs for products and services from third-party vendors
- Advertising and public relations campaigns organised for the entire franchise system
- Providing uniformed promotional materials for use at the franchise outlets
- Organisation of the participation in fairs
- Implementation of uniformed procedures in customer service (customer relationship management)
- Regular joint franchisee system meetings. Creation of an intranet network. And, or the publishing of a regular corporate newsletter or magazine.
- Development of a website that provides central access for the franchise network. A great way to back up important information contained in operation manuals - or to provide the updates of the operation manuals themselves
The franchisor will need to define the structure and the exact amount of fees the franchisee will be required to pay to the franchisor. The franchisee must also be aware of the up-front and on-going capital required to become a fully-fledged franchise owner. Finally, the franchisor should be able to carefully demonstrate the financial results both the franchisor and franchisee are projected to achieve.
The franchisor’s revenues gained from the licences granted to use the franchise package usually bare the following three forms:
- Initial franchise fee (otherwise referred by the initial franchise fee)
- Current franchise fee (ongoing franchise fees or royalties)
- Contribution to a joint marketing fund (advertising contribution/fee)
Figures from the USA show initial franchise fees range in price on average between USD$10-$30 thousand. However, depending on the reputation, stability or exclusivity of the operation, some franchises initial fees go for USD$100 thousand and above. Current franchise fees, however, usually trade from 3-6% of sales value. While the joint marketing fund ranges from 1-3% of the sales revenue. It’s worth noting in some regions of Europe, that all such franchise fees can be absorbed into the business sales in what is called a distribution franchise. In a distribution franchise the fees are incorporated into the price of goods provided by the franchisor. This allows people who might not have all the capital required up-front to still join and run a franchise. This usually leads to a reduction in disputes around the amount of remuneration owed to the franchisor.
Initial franchise fee
Trying to calculate the initial franchise fee isn’t always a strict financial equation. The right fee to charge is generally influenced by the following factors:
- The nature and scope of support being implemented to franchisees in the form of both initial services and ongoing services
- The cost of these support brackets for the franchisor
- Funds at the disposal of the franchisee
- Comparative initial franchise fees charged by competitors
- Value of the trademark and know-how of the franchisor
- Attractiveness of the concept and business
- The size of the area the franchisee operates
- Terms of the franchise agreement
In theory, the initial franchise fee should cover the franchisor’s costs associated with the creation of the franchise package. However, in practice, the fee is not always sufficient to cover these costs in the early stages of franchise system development. This is usually because franchisors are keen to develop and expand their brand. By internalising some of the initial fee’s, franchisors can make their offer more appealing to would-be investors until the time comes where the brand has a strong market share. As interest and confidence in the brand grows, franchise developers are then far less willing to lower the initial fee.
On average, franchisers who are trying to attract fast new franchisees try to calculate their entry fee at a low 10%. This figure may go lower than 10% in cases where the franchisees financial position is limited. Of course, the percentage is higher in other instances. For example, when the overall franchise cost is more affordable.
Current franchise fee
The current franchise fee essentially covers the rights to use the trademark, know-how and the ongoing support services covered in the franchise agreement. This fee is usually calculated as a percentage of sales made by the franchisee. As this is the main source of revenue for the franchisor, the fee should cover the continual costs of the support and development of the franchise system – which ensures success for both the franchisee and franchisor in the market. Furthermore, it goes without saying the long-term goal is for the franchisor to achieve an additional and sustainable revenue stream. Therefore, it’s vital to keep the full scope in mind when a franchisor is calculating the right fee to benefit all parties involved.
Contribution to the joint marketing fund
One of the most important aspects of franchise is brand recognition. Outside of the product or service itself, a brand is developed and built on the back of marketing and advertising efforts. When applied to a franchise system it benefits all parties. Therefore, franchisees are expected to contribute to a communal business marketing fund. When determining the marketing fund fee, the franchisor should take into account the necessary expenses required to conduct effective and reaching promotional activities relevant to their market scale, combining it with the costs associated with advertising materials. Public relations activities of the franchise system are also financed from the joint marketing fund, if necessary.
Note that, it’s not uncommon for a start-up franchise to hold the charge fee for a joint marketing fund for a certain amount of time until their market growth reaches maturity.
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