What is franchise business

what is franchise

WHAT IS A FRANCHISE?

When you look for the word ‘franchise’ on the internet, you’ll get complex definitions. A lot of people find it difficult to understand the commercial terms such as ‘franchise’, ‘franchiser’, ‘franchisee’, etc.

Hence, this article revolves around the word ‘franchise’ and other terms associated with it and will try to make you understand the same in the simplest way possible.

BRIEF HISTORY OF A FRANCHISE BUSINESS MODEL:

In 1886, a Biochemist named John S. Pemberton is known to have owned one of the first successful franchising operations in the United States.

He started with preparing a beverage made of sugar, molasses, spices and caffeine, it was an older version of Coca-Cola. He authorized a few people to pack and sell the drink, after which it became very popular.  

After this, various individuals and corporations like Howard Johnson Restaurants, General Motors Corporation, Rexall, etc came up and adopted the franchise business model (mostly Americans).

And today, in almost every other street, you can find a franchised business, be it fast food restaurants like McDonald’s and KFC or hotel chains like Taj and ITC.

Franchising plan has grown extensively over the years and is now adopted by big as well as small companies all over the world.

FIRSTLY, KNOW THE TERMS ‘FRANCHISER’ AND ‘FRANCHISEE’

FRANCHISER: A franchiser is an existing company or business that invests in a franchisee and gives them the authority to use the company’s idea and name in order to sell the company’s goods and services.

They later receive money through the franchisee in form of revenue, profit or royalty.

A Franchiser facilitates a franchisee with:

  • Proprietary tools
  • Trademark
  • Technology
  • Signages
  • Training
  • Business process
  • Manuals

Some of the major responsibilities of a franchiser includes business advisory and supportive role, focus on ongoing business expansion and innovation.

Keeping a check on its outlets, implementing an easily adoptable system, and working on enhancing the brand reputation.

FRANCHISEE: As a franchisee, you are an individual or corporation that is granted a license to do a business under the business model, trademarks and associated brands of the franchisor.

The franchisee purchases a franchise from a franchiser and must abide by the rules and regulations set by the firm.

A Franchisee provides the franchisor with:

  • Ingredients
  • Equipment
  • Marketing
  • Workers
  • A part of the profit

Some of the major responsibilities of a franchisee includes distributing goods and services to meet higher consumer demand.

Following the franchise’s system and operations, and marketing and upholding the brands image. The franchisee has to pay some amount to the company as a royalty for using their name and trademark.

HOW IT WORKS-

Make a choice: The initial step before purchasing a franchise is to do your underlying exploration and making a choice between setting up your own independent business or purchasing a franchise.

The choice must be made based on primary factors like budget, resources, location and type of consumers.

Research: To realize which franchise is a solid match for you, it’s essential to initially explore regular franchise prerequisites to guarantee you qualify and have the best possible sources and features for buying a franchise.

There are numerous franchises accessible in India and you can easily find about them on the internet. You can utilize an online franchise site like FranchiseIndia.com to discover openings that fit your needs.

Find a franchisor suitable for you:  As a franchisee, choosing your field of industry should be your prior concern. It is important to make a deep research and find out the most suitable franchise according to your investment capabilities, customers’ choice, geographical conditions and location, reputation of the franchisor and other important factors.

In recent times, fast-food franchise is occupying a large place in the market. McDonald’s is the world’s largest franchise network with an incredible global sale.

Some other popular franchise networks are Subway, Baskin-Robbins, Burger King etc.

Franchise Qualification Requirements: Franchisors usually set some prerequisites or qualifications to guarantee that all their franchisees are qualified regarding the finances and business experience.

Because more or less these are the main factors responsible for the success or failure of a franchise. Here is a list of a few requirements that are frequently thought about:

Industry experience

Financial assessment

Total assets

Money in hand

Extra source of income

Submit Request for Consideration/Application: When you are finished with all the self-assessment and research, make a few industry choices.

Inside every category of industry, pick one to three organizations in which you wish to fill up application forms. The organizations will coordinate you with a delegate, and you ought to get informed by them in seven days by email as well as phone.

Study Franchise Disclosure Document: Once you have submitted the qualification questionnaire, the franchisor will furnish you with the franchise Disclosure Document (FDD), which contains significant information like rules/regulations, responsibilities to be taken care of.

The amount of share you will have to pay and other important financial and legal information associated with the franchise. Read this document cautiously and get all the queries answered before you proceed for further steps.

Disclosure period: Along with FDD, you also get a 14-day disclosure period. A franchisee contract can’t be signed during this time.

These compulsory periods are allotted to the franchisee as a chance to explore, audit and make a well-researched choice on whether they are ready to join the franchise or not.

Visit Existing Franchisees: The most effective approach to get to know about any franchise is to visit any nearby existing franchise stores. Get in touch with them and clear all the inquiries you have regarding the business.

This is the best way to become acquainted with their lives as franchisees and assessing how well a franchiser works with them.

Visit Franchiser: In case you’re going to enter a business, it is important to meet the individuals who will be helping you to run your business effectively.

You can get any of your final doubts cleared, also the franchiser will be assessing you as a potential franchisee. Take necessary training and workshops before setting up your business.

Settle: When you have completed all of the above steps, it’s an ideal opportunity for you to settle on your final conclusion.

The last thing you are left to do is to consent to the franchise agreement and meet the heads and key administrators who will work with you as a franchisee.

If you have followed all the proceedings sincerely, then congrats! You’re presently into the world of franchise business.

ADVANTAGES-

Minimum financial risk- The business idea has already been experimented by others, hence there is less chance of failure in case of a franchise. You don’t have to worry about questions like whether people will like your idea or not, will the business make sufficient sale, will you earn a decent amount, etc.

Maximum business expansion – Franchisors often have an existing reputation, better management and supervision; hence you get to work like an established firm. Most franchisors have existing relationships with providers, distributors, marketing and advertising firms, from all of which the new franchisee can benefit, even while learning.

Less investment – You may find it easy to invest in a franchise than starting your own business of the same type. Also, the brand being well-known, requires less expenditure on promotion and branding.

Rapid profit in limited time – Being a part of an existing organisation, your business won’t take much time to establish and gain people’s trust. Hence, you can make significant profit in a short period of time.

Business assistance- Franchisors usually provide you the basic training and assistance needed to operate their business model before setting up a new franchise. In case of any major trouble, you get orders from the franchisor which helps you in dealing with it.

Higher rate of success than start-ups: Statistics show that the success rate of a franchise is higher as compared to the new independent start-ups. This is because gaining a bulk of customers and their trust is not that easy.

DISADVANTAGES-

Limited creativity – A new franchise needs to follow up on the order of its parent organization. There is no chance for any creativity and this lack of freedom and flexibility is a significant disadvantage of franchising.

Lack of privacy- The parent organization begins this procedure by sharing relevant data to other franchisees and orders all other outlets to do the same. There is a danger of leakage and that your rivals can some way or another can extract your information and strategies. Sharing information includes a risk of third-parties gaining information and this is a serious disadvantage of franchising.

Lesser control – Franchisors dictate franchisees over most of the matters and most of the decisions are taken by the franchisor. Hence, the franchisee does not have much control over the business. Apart from this, bad reputation of other Franchises can affect your reputation as well.

Shared profits – Franchisors expect their franchisees to handover a percentage of their total benefits in return for using their brand name and trademark. Therefore, a franchisee can not take up the whole profit made by his franchised store.

Difficult to exit business – Franchises come with various terms and conditions which means you have to abide by the rules of the contract and cannot exit the business before the end of the franchise agreement term.

That’s all about a franchise. Hope, you would have now understood a great deal of things about franchise and its associated terms.