How franchising works

What is the role of a franchisor and franchisee, and what are the financial implications of owning a franchise? 

How does franchising work?

Who are the players?  

The franchisor – Owner of a brand, intellectual property and business knowledge; this is the franchise “head office” and includes a team of directors and employees.  

The franchisee – The person who purchases the rights to operate a franchise in a specific area, including access to the brand, intellectual property and business knowledge.  

The bank – Provider of finance and banking solutions for the franchised outlet.  


What the franchisor does  

The franchisor is responsible for the following functions:  

  1. Recruitment and training of new franchises
  2. Providing ongoing support to existing franchisees in the form of continuing training, store visits and meetings to assist the franchisee in meeting their objectives and boosting operational efficiencies 
  3. Ongoing product development to ensure that the franchise remains competitive 
  4. National/regional marketing of the franchise brand and assisting franchisees with templates and toolkits to perform local marketing in their area
  5. Design of promotions and providing franchisees with the tools to participate in these promotions
  6. Monitoring of quality to ensure that the reputation of the brand and the franchise remains intact 
  7. Sharing best practices with franchisees 
  8. Facilitation of all communications within the franchise network
  9. Providing franchisees with a detailed operations manual to assist them with every operational aspect of the business 
  10. Management of company-owned outlets  

What the franchisee does  

The franchisee is responsible for the following:  

  1. Daily operations of the franchised outlet, including staff management, financial management and customer relations 
  2. Local marketing of the franchise according to guidelines provided by the franchisor 
  3. Compliance with franchise operational standards to maintain quality in the operation
  4. Resolving customer service issues at the outlet level 
  5. Monitoring local competition and letting the franchisor know what is happening in the trading environment 
  6. Reporting of financial results to the franchisor in the required format 
  7. Attending training organized by the franchisor and 
  8. Staff recruitment and administrating of all HR matters for the outlet 
  9. Hands-on management of the outlet 
  10. Reinvesting in the franchise to maintain quality standards and meet revamp requirements stipulated by the franchisor and ensuring that staff are trained  


Financial implications of owning a franchise  

Initial fees and investment  

The franchisee is responsible for the initial capital investment required to set up the franchise. This includes the following:  

  • Initial fee/Franchise fee/Joining fee – This is the fee that the franchisee pays for the license and usually includes the initial assistance the franchisor provides.
  • Establishment cost – This is the investment required to fit out the new outlet and could include equipment, signage, computer hardware and software, uniforms and other brand collateral, furniture and fixtures. The investment will depend on the size and layout of the outlet.
  • Working capital – This is the cash the business will need to meet its current requirements, including all expenses, debtors and payment of salaries. The franchise may take a few months to reach profitability; working capital helps fund the shortfall. The franchisor should provide a guideline for the amount of working capital needed.
  • Guarantees –The landlord and franchisor may need rental and stock guarantees. Your bank can assist you with issuing guarantees but be aware that it adds to the initial investment.  

Ongoing fees  

A franchisee can expect to pay the following monthly ongoing fees:  

  • Royalty/Management Service fees – This is usually calculated as a percentage of sales and compensates the franchisor for continuing assistance provided  
  • Marketing contribution – This may be a fixed fee, or a percentage of sales and the franchisor uses these contributions to fund marketing campaigns and initiatives  
  • Other fees – The franchisor may charge additional direct costs to the franchisee, such as software license fees, accounting fees if the franchisor performs this service or other direct costs incurred. All ongoing fees should be disclosed by the franchisor in both the Disclosure Document and Franchise Agreement before signing the franchise agreement (Learn more about the legal implications of franchising here)