Franchising: Meaning, Types, Advantages and Limitations, Franchising in India
Franchising is based on a marketing notion that a company may use to expand its business. Where applicable, a franchisor licenses part or all of its know-how, methods, intellectual property, business strategy, brand, and rights to sell its branded goods and services to a franchisee. In exchange, the franchisee pays certain fees and agrees to comply with certain requirements, which are often outlined in a franchise agreement.
The term “franchise” is derived from the Anglo-French word “franc,” which means “free,” and is used as both a noun and a (transitive) verb. For the franchisor, using a franchise system offers an alternate company development approach to expanding via corporate-owned outlets or “chain stores”. Using a franchise system business development approach to sell and distribute products and services reduces the franchisor’s capital investment and liability risk.
Franchising is not an equal relationship, particularly given the franchisor’s legal advantages over the franchisees. However, given certain conditions, such as transparency, favorable legal laws, financial resources, and appropriate market research, franchising may be a profitable venture for both the franchisor and the franchisee.
Thirty-six nations have laws that directly control franchising, while the majority of the other countries have laws that have a direct or indirect impact on franchising. Franchising is frequently employed as a foreign market entrance strategy.
Fees and Contract Arrangement
Three major payments are paid to a franchisor:
Franchisees may get a royalty for the trademark, reimbursement for training and advising services, or a portion of individual business unit sales. These three costs may be merged into a single’management’ charge.
A cost for “disclosure” is distinct and always a “front-end fee”.
A franchise typically has a definite term (divided into shorter periods that must be renewed) and serves a defined region or geographical area around its site. A franchisee may handle many such establishments. Agreements normally run between five and thirty years, with early cancellation or termination of most contracts having substantial ramifications for franchisees. A franchise is essentially a short-term business venture in which you rent or lease an opportunity, rather than purchasing a firm for the purpose of ownership. It is regarded as a wasting asset owing to the license’s limited duration.
Types:
Manufacturing Franchising:
Under this structure, the franchisor (manufacturer) grants the dealer (bottler) exclusive rights to make and sell the product in a specific territory. This sort of franchising is widely employed in the soft drink business.
Product Franchising is the oldest sort of franchising. Dealers were granted the ability to distribute products on behalf of a manufacturer. The dealer pays a charge to sell the producer’s branded products. The Singer Corporation distributed their sewing machines via product franchising, maybe for the first time, in the 1800s. This method gained popularity in the petroleum and car sectors as well.
Business-format franchising is now the most prevalent variety and is relatively new. This is what most people mean when they use the phrase franchising. In the United States, this kind accounts for roughly three-quarters of all franchised locations.
Business-format franchising is an agreement in which the franchisor provides a variety of services to the franchisee, such as marketing, advertising, strategic planning, training, the creation of operational manuals and standards, and quality control guidelines.
Franchise in India
Trade-name Trade-name franchising occurs when a franchisee buys the right to use the franchisor’s trade name but does not distribute the items solely under that brand.
Product Distribution Franchise:
Such franchising is a method in which a franchisor grants the franchisee a license to sell specified items using the franchisor’s trademark and brand name. This sort of franchising is often used to promote vehicles (such as Chevrolet), soft beverages (such as Coca-Cola), and appliances. It is worth noting that these two forms of franchising provide franchisees with some form of franchisor identity.
Pure franchising occurs when a franchisor offers the whole business model and system of their product to the franchisee. In other words, this sort of franchising offers the franchisee with a full company structure that includes a trade name license, the product or service to be sold, the physical plant, operating procedures, a marketing strategy plan, a quality control process, and so on. This sort of franchising is widespread in fast-food restaurants (such as McDonald’s), hotels, educational institutions (such as Delhi Public School (DPS), and many more.
Franchising is an established business idea that has been used for many years. Some date the genesis of franchising back to the mid-nineteenth century, when Isaac Singer intended to enhance the distribution of his sewing machines, known as ‘Singer.’ Nowadays, franchising has become a popular business concept, particularly for organizations with a proven track record of success and those that are readily replicated.
Advantages:
The franchising agreement benefits both the franchisor and the franchisee; nonetheless, franchising is most advantageous to the franchisee.
The following are some of the different benefits that franchising brings to franchisees:
(i) Franchising simplifies the start-up process by providing a market-tested and proven business model. As a result, purchasing a franchise is significantly less risky than starting your own firm.
(ii) It decreases risks of failure. It is worth noting that less than 10% of franchises fail. In stark contrast, two out of every five independent entrepreneurs fail after three years, and eight out of every 10 fail within ten years.
(iii) A well-established franchise offers significant benefits, including recognition. Many fledgling firms struggle for months or even years after they launch. Obviously, the longer the firm must go through it, the higher the likelihood of failing. With a well-tested franchise, this misery may be reduced to weeks or even days.
(iv) Franchising may boost franchisees’ buying power. Because being a member of a big, owner-operated firm means paying less for a range of items such as supplies, equipment, inventory, services, insurance, and so on. It might also imply receiving superior service from suppliers due to the prominence of the organization (franchisor) of which you (franchisee) are a member.
(v) Benefit from the franchisor’s research and development to improve the product.
(vi) The franchisee has exclusive rights to franchise within a certain territory.
(vii) Franchising offers better lending opportunities from banks and financial institutions than other emerging company models.
Disadvantages: While franchising has many benefits, it is not without drawbacks. There are certain downsides to a franchise system.
(i) Franchisees are unable to express their ideas, unlike entrepreneurs who create their own businesses, particularly in ‘pure franchising.’ They must follow the business format specified by the franchisor. McDonald’s restaurant business model is a typical example of franchise regimentation.
A McDonald’s franchise is allowed relatively little operational liberty; in fact, the operations handbook covers such tiny things as when to boil the potato slicer bearings. The goal of these limits is not to annoy franchisees, but to guarantee that each location is rimmed in a consistent and accurate way.
(ii) Franchisees face various constraints. Restrictions may be limited to a certain product line or geographic region.
(iii) Franchisees often cannot sell or transfer their companies without the franchisor’s consent.
(iv) The franchisor retains ownership of the goodwill created by the franchisee’s efforts in the company.
(v) If the franchisor fails, the franchisee may face failure as well.
(vi) Franchisees have the disadvantage of franchisors having the ability to acquire back outlets upon contract termination. Many franchisees are prone to this possibility. As a result, they are always concerned that the franchise agreement will not be renewed. Then the issue arises: do these drawbacks imply that franchising is no longer an attractive strategy to start a small business? Certainly not. Franchising is a tried-and-true business strategy that has worked all around the globe.
In reality, they imply that the security that some individuals associate with franchising is a mirage. To be a successful and rewarding franchisee, you must put in the effort, have reasonable expectations, and do extensive research. This emphasizes the need of doing a thorough review of a franchising agreement. This is explained later.