1.2.3 - Franchises, social enterprises and multinationals

How a franchise works

A franchise allows one business to trade using another business's established name and system under an agreement.

The franchisor owns the brand and grants the right. The franchisee is the operator who buys that right and runs the outlet. An initial fee commonly secures the agreement; continuing royalties are payments for the continuing right to use the brand and support. The agreement may require approved ingredients, suppliers, service methods, prices or store design. The exact restrictions and support depend on the agreement.

Illustrative example: an entrepreneur in Oman buys the right to operate a café under an established café brand. The franchisor provides staff training, recipes and signage. The franchisee recruits local staff, organises the outlet and pays the agreed fees. The franchisee has a business interest and responsibilities, rather than simply being an employee of the franchisor. Some outlets using the same brand may instead be owned directly by the brand's company; a familiar logo alone does not prove a franchise.

Franchising describes a trading arrangement. A franchisee could be a sole trader or a limited company, so franchise is not a substitute answer to every question about legal ownership. The outlet's limited liability depends on its legal form, not its use of a recognised brand.

Benefits and limits of franchising

Franchising exchanges some independence and income for access to a brand, a tested system and support.

For the franchisee, a recognised name may attract customers sooner than an unknown independent outlet. Training, an established product range and advice can reduce mistakes at launch. These can reduce the uncertainty of starting a business, but do not guarantee success: local demand, rent, staff and the operator's decisions still matter.

The franchisee pays fees and continuing royalties, which reduce the amount left from sales after costs. Restrictions may prevent changes that would suit local customers. Illustrative example: a franchised convenience shop near a school wants to stock a local snack, but its agreement requires approved products. Consistency protects the brand, yet the restriction could prevent the outlet from meeting that local demand. An independent shop has more freedom, but must develop its own reputation and systems.

For the franchisor, franchisees provide investment and operate outlets, allowing the brand to expand without the franchisor funding and managing every location directly. Fees and royalties can provide income. However, an outlet offering poor service can damage customers' trust in the whole brand. The franchisor therefore needs standards, training and monitoring, which use resources. Legal independence of an operator does not isolate the brand from reputational harm.

Social enterprises trade for a mission

A social enterprise uses business activity to pursue a main social or environmental objective.

The mission can include creating employment for disadvantaged people, improving access to services or reducing waste. The enterprise trades by selling goods or services. It still needs revenue and control of costs to continue operating. Profit can support the mission, often through reinvestment; being a social enterprise does not mean never making a profit or providing everything free.

Illustrative example: a repair-and-resale business in Sri Lanka sells restored bicycles and trains people who have struggled to find work. Sales pay for parts and wages; a surplus funds more training places. The training objective may lead it to spend longer supporting a new worker than a business focused only on immediate profit would. It has to balance that purpose with enough trading income to survive.

A social enterprise is not necessarily a public corporation. Its social aim does not establish government ownership. Nor does any business become a social enterprise simply by making a donation: the mission must shape its main purpose and decisions. Its legal form could be a company or another appropriate structure. Charities and social enterprises can overlap, but a donation-funded activity alone does not demonstrate the trading business described here.

The mission can attract customers who value its impact, but those customers may still compare price and quality. A social enterprise's success can therefore be judged through mission outcomes as well as its financial ability to continue trading.

Multinationals operate across countries

A multinational has business operations in more than one country, rather than only selling exports from its home country.

Operations may include factories, shops, service offices or other business facilities controlled by the business. Headquarters may be in one country while operations are in others. A multinational need not manufacture goods: a bank or hotel business can also operate internationally. A foreign customer buying an exported product does not, by itself, establish that the seller operates abroad.

Illustrative comparison: a Moroccan pottery business makes every product at home and ships orders to independent shops abroad. Exporting alone does not make it multinational. If the business opens and controls its own production facility or retail operation in another country, it now operates in more than one country. A large hotel company that owns and runs hotels in several countries is another illustrative multinational, even though it mainly provides services.

International operations can bring access to more customers or useful production resources. Managing them also involves coordinating distant teams and adapting to different customer preferences and operating conditions. Benefits, host-country effects and international location decisions are developed in sections 1.4 and 1.5; do not assume that merely adding another country guarantees growth or lower costs.

These descriptions can overlap. A multinational company might use franchises for some outlets. A social enterprise might operate in more than one country. A private limited company can be multinational without offering shares publicly. Ask separately about legal ownership, trading arrangement, main objective and international operations.