ENTU4 - 03 Franchising

 

FRANCHISING

Meaning of Franchising

Franchising is an agreement between the franchisee and the franchisor, where the franchisor allows the franchisee to sell or distribute the branded products in a specific geographical area of the franchisor in consideration of payment made by the franchisee called Royalty.

Example of franchises are McDonalds, Subway, Raymond Ltd, Dominos, KFC, Apollo Clinic, Lenskart, Mahindra and Mahindra Ltd.

Terminologies

1. Franchisor

A franchisor is a company that has developed a successful business model and brand and allows other companies (franchisees) to use its trademark, products, and services in exchange for a fee called a royalty.

The franchisor may also offer ongoing support and assistance to the franchisees, including training, operations support, marketing, and advertising support.

2. Franchisee

A person or entity who purchases the franchise and is given the opportunity to enter a new business with a better chance of success is known as Franchisee.

3. Franchise Agreement

A Franchise Agreement is a legal contract between the franchisor and franchisee that outlines the terms and conditions of the franchise relationship.

It can contain the following ingredients:-

1. Contract explanation

2. Operations Manual

3. Proprietary statements

4. Ongoing site maintenance

4. Royalty

Royalty is the payment made by the franchisee to the franchisor for getting permission to distribute branded goods or services of the franchisor.

Types of Franchising

1. Product Distribution franchise:

Under this model, the manufacturer grants a store owner (franchisee) the authority to distribute the goods manufactured under their brand name. The store owner is either required to pay a fee or a minimum inventory of stock. E.g. Tyre store.

2. Business Format franchise:

Under this model, the franchisor provides the franchisee a proven method of operating a business using its name and trademark. The franchisor assists in starting and managing the business. This is the most popular form of franchising.

3. Manufacturing franchise:

Under this model, the franchisee is given exclusive rights to manage and sell a product, using the franchisor’s name and trademark. This type is common in the food industry.

4. Joint Venture Franchise: 

In a joint venture franchise, the franchisor and the franchisee share ownership of the franchise business and work together to operate and manage it.

How does Franchising help startups?

            Franchising can be a beneficial option for startups in several ways:

(i) Proven Business Model: Franchising allows startups to use a proven business model that has been successful for other franchisees. This can reduce the risks associated with starting a new business, as the franchisor has already developed a successful business model that has been tested in the marketplace.

(ii) Established Brand: By franchising, startups can leverage an established brand with a recognized reputation. This can help attract customers and build credibility for the new business.

(iii) Support and Training: Franchisors typically provide ongoing support and training to franchisees, which can be especially helpful for startups that may not have a lot of experience in running a business. This support can include everything from initial training to ongoing marketing and operational assistance.

(iv) Access to Financing: Franchising can also provide startups with access to financing, as some franchisors may offer financing options to help new franchisees get started.

(v) Growth Opportunities: Franchising can also help startups to grow their business more quickly than they might be able to on their own. By leveraging the resources and support of the franchisor, startups can expand their business more rapidly and potentially achieve greater success.

Overall, franchising can provide startups with a range of benefits that can help them to succeed and grow their business more quickly and effectively.

Advantages of Franchising

1. Advantages to Franchisor

Franchising can be beneficial to franchisors in several ways, including:

1. Rapid Expansion: Franchising allows a franchisor to expand their business quickly and efficiently, as franchisees provide the capital and effort needed to open and operate new locations. This can allow the franchisor to expand its brand and market presence more rapidly than it would be able to do on their own.

2. Increased Revenue: Franchisors can generate revenue from franchise fees, ongoing royalties, and other sources associated with franchising. This can provide a steady stream of income and help to grow the overall value of the franchisor's business.

3. Shared Risk: Franchising allows the franchisor to share some of the risks associated with opening and operating new locations with the franchisees. This can help to reduce the financial risks and liabilities associated with expanding a business.

4. Brand Consistency: Franchising allows the franchisor to maintain consistency in their brand image, products, and services across all franchise locations. This can help to protect the franchisor's brand reputation and ensure a consistent customer experience.

5. Entrepreneurial Talent: Franchising allows the franchisor to tap into the entrepreneurial talent of franchisees, who are often highly motivated and willing to invest their own time and resources to make their franchise successful.

2. Advantages/Merits to the Franchisee

The main advantages for the Franchisee are:

1. Established Brand. Under the franchise system, the franchisee gets the right to use a popular brand name or trademark. They get an easy start in business with a branded product.

2. Quality Product. The franchisor takes steps to ensure that products and services in all franchised outlets are uniform and standardised.

3. Advertisement. The franchisor places advertisements at national and international level. The advertisements increase the sales of the franchisee.

4. Financing. The franchisor provides financial assistance to the franchisee by offering short-term credit, flexible repayment, payment of royalty on easy terms, etc.

5. Training. Management assistance and training are provided to the franchisee. They keep updating the knowledge of people working at the franchisee outlet.

6. Technological Upgradation. The franchisee gets the benefits of technological upgradation in its own operation without investing huge amounts. The franchisor makes a huge investment in research, new product design, and innovation.

7. Uniform Control System. All franchising outlets are subject to a uniform control system. An inventory control system enables the franchisor to have accurate information.

Overall, franchising can be a powerful tool for franchisors to expand their business, increase revenue, share risk, maintain brand consistency, and tap into the entrepreneurial talent of franchisees. 

LIMITATIONS OF FRANCHISING

1. High Initial Investment: Acquiring a franchise often requires a significant initial investment, which can include franchise fees, equipment costs, and initial inventory. This financial barrier may make it difficult for some individuals to enter the franchise business.

2. Ongoing Fees and Royalties: In addition to the initial investment, franchisees typically have to pay ongoing fees and royalties to the franchisor. These fees can include monthly royalty payments based on sales revenue and contributions to national marketing and advertising funds. This ongoing financial commitment can reduce the franchisee's profitability.

3. Lack of Independence: While franchising offers the advantage of operating under a proven business model, franchisees have less autonomy compared to independent business owners. They must adhere to the franchisor's rules, guidelines, and standards, limiting their ability to make independent decisions and innovate.

       4. Limited Creativity and Flexibility: Franchisees may have limited flexibility to adapt their products, services, or marketing strategies to suit local preferences or market conditions. Franchisors often enforce strict brand standards and operating procedures, which can restrict the franchisee's ability to experiment or customize their offerings.

        5. Dependency on the Franchisor: The success of a franchisee's business is closely tied to the performance and reputation of the franchisor. If the franchisor faces financial difficulties, legal issues, or a tarnished brand image, it can negatively impact the franchisee's business operations and profitability.

    6. Geographical Restrictions: Franchise agreements typically include territorial restrictions that prevent franchisees from operating in certain geographic areas or competing with other franchisees within the same brand. This limitation can constrain the franchisee's growth opportunities and market reach.

     7. Renewal and Termination Risks: Franchise agreements are typically finite in duration, and renewal is subject to the franchisor's discretion. If the franchisor decides not to renew the agreement or terminates it for any reason, the franchisee may lose their investment and business operation.

    8. Legal and Contractual Obligations: Franchise agreements are legally binding contracts that outline the rights, responsibilities, and obligations of both parties. Franchisees must carefully review and comply with the terms of the agreement, which may include restrictive covenants, non-compete clauses, and dispute resolution mechanisms.