What Is a Franchise?
A franchise is a type of license that grants a franchisee access to a franchisor's proprietary business knowledge, processes and trademarks, thus allowing the franchisee to sell a product or service under the franchisor's business name. In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual licensing fees.
What is Franchising?
Franchising is a form of marketing and distribution in which the owner of a business system (the franchisor) grants to an individual or group of individuals (the franchisee) the right to run a business selling a product or providing a service using the franchisor's business system.
Franchisees are also given permission to use the franchisor's branding, trademarks, and identifying marks under specified guidelines. It is important for anyone deciding to start a business by becoming a franchisee to remember that in franchising the franchisee is bound to a partnership agreement with the franchisor for a defined period of time (some exceptions do exist).
Franchising as we know it today is widely believed to have originated with Isaac Singer in the 1850s. After Singer invented his sewing machine he encountered two main problems when introducing it to the marketplace. The first was that customers needed to be taught how to use the new invention before they would buy it. The second was that Singer did not have enough capital to manufacture his machine in large numbers.
In response, Singer, along with business partners, came up with the idea of selling the rights to sell the sewing machines as well as train those who bought one to local business people across the country (and eventually internationally).
Once he employed this system, Singer’s enterprise expanded rapidly. The royalties earned from the license rights helped offset manufacturing costs and, because each franchise was self-financed, Singer Manufacturing Company was able to tap into the entrepreneurial attributes and local market knowledge of the franchisees to help Singer become more successful than he could have by himself.
The tipping point for franchising came in the 1950s. In 1954, Ray Kroc, a successful business man from Illinois, saw the potential in franchising a successful southern California hamburger stand owned by a couple of brothers. This restaurant chain, McDonald’s, is perhaps the most well-known example of franchising in the world. Kroc has drawn comparisons to auto maker Henry Ford for bringing an assembly line-like concept to the fast food industry through his belief that customers of McDonald’s should have an idea of what to expect wherever in the world they may be.
When asked, the majority of people when asked for a commonly known franchise would name a fast food franchise most often. However, franchising is extremely diverse. Name a product or service from ATMs to yogurt and there’s likely a franchise industry for it.
While franchising is a staple of the American business landscape, the merits of franchising have not been ignored abroad. It is steadily increasing its footprint in numerous other countries. This is especially true in emerging markets such as China, India, Russia, Brazil and the Middle East among others.
Elements of the franchise model has also been woven into the fabric several other industries. For example, Coca-Cola was able to expand throughout the United States by shifting the burden of manufacturing, storing and distributing its product to local business people who acquired bottling rights. Car manufacturers who had been spending enormous amounts of capital tooling their assembly lines found they could develop retail distribution networks using capital provided by independent dealers. Oil companies such as Standard Oil and Texaco also started granting franchises to convenience stores and repair mechanics across the U.S. to efficiently expand their reach.
The Myth of Guaranteed Success
No business method or industry sector can guarantee success, and franchising is no exception. If a franchise system has a proven product or service with a well-recognized brand combined with hard-working, well-financed franchisees, the chances of success are very high — but never a 100 percent given. If, on the other hand, the franchise system is under-funded with an ill-conceived business plan that has not been tested properly, and franchisees have been poorly recruited or trained, failure is likely.
Due diligence is key in making the right decision for you. Seek the advice of seasoned franchise professionals and ask questions until you are confident in your decision. Remember, it is your investment that is at stake. More information about finding the most profitable franchise for you can be found here.
Franchising Defined
Many people feel as though they have an understanding of the concept of franchising. However, do you really know what franchising is? Can you define it? (And no, saying fast food chains doesn’t count.)
As it relates to business, Merriam-Webster defines a franchise as: “the right or license granted to an individual or group to market a company's goods or services in a particular territory.” While a good definition, it doesn’t exactly touch on many of the nuances involved in franchising.
The definition for franchising given by the International Franchise Association (IFA) gives more detail, stating that a franchise is:
“A contractual relationship between the franchisor and the franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format or procedure owned by or controlled by the franchisor, and in which the franchisee has made or will make a substantial capital investment in his business from his own resources.”
Individual franchises are part of a brand’s ecosystem, a network that is a pooling of resources and capabilities.
In a franchise business setup, the franchisees of a brand gain access to the franchisor’s know-how and experience of its business system in exchange for their money and personal labor. This way, franchisees who want to own a business can shorten the learning curve that comes with starting a business. It’s also a way for franchisees to avoid spending a significant portion of the time and money that typically comes along with developing a business idea.
On the other end of the deal, by licensing out its business methods and pledging support to franchisees, the franchisor allows itself the opportunity to expand into areas it may have had difficulty expanding to without the extra money and manpower.
There are three main types of franchises.
• Most franchises fall under the business format type where the franchisor licenses a business format, operating system, and trademark rights to its franchisees.
• The second type of franchise is product distribution, which is more of a supplier-dealer setup. The franchisor grants the franchisee permission to sell or distribute a product using their logo, trademarks and trade name, but typically does not provide an operating system to run the business with.
• The third is manufacturing, where the franchisor permits the franchisee to manufacture their products (e.g. clothing) and sell them under its trademarks.
When the purchase of a franchise is made, the franchisee is required to comply with strict guidelines and rules regarding the operation of the business. These guidelines are in place to maintain brand consistency.
In addition, fees are collected regularly for as long as the franchisee owns the franchise. In exchange for these payments, the franchisee will receive continued support such as marketing assistance and ongoing training opportunities.
Despite its strong association with fast food, franchising is not confined to a narrow range of business segments. Name an industry from drug testing to dog walking, and there’s likely a franchise in it.
Not only is it used in many different industries and sectors, but elements of franchising are becoming a feature in many areas of business. For example, car manufacturers who had been spending enormous amounts of money building up centralized assembly lines found they could more efficiently build and sell their cars by developing networks for manufacturing and retail distribution in different areas using capital provided by independent dealers.
Link: https://www.franchisedirect.com/what-is-franchising-definition/
Franchising is an arrangement where franchisor (one party) grants or licenses some rights and authorities to franchisee (another party). Franchising is a well-known marketing strategy for business expansion.
A contractual agreement takes place between Franchisor and Franchisee. Franchisor authorizes franchisee to sell their products, goods, services and give rights to use their trademark and brand name. And these franchisee acts like a dealer.
In return, the franchisee pays a one-time fee or commission to franchisor and some share of revenue. Some advantages to franchisees are they do not have to spend money on training employees, they get to learn about business techniques.
Let us see the opportunities of franchising in India with some examples.
Ten advantages of franchising
- The risk of business failure is reduced by franchising. Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
- Products and services will have already established a market share. Therefore there will be no need for market testing.
- You can use a recognised brand name and trade mark. You benefit from any advertising or promotion by the owner of the franchise - the 'franchisor'.
- The franchisor gives you support - usually as a complete package including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
- No prior experience is needed as the training received from the franchisor should ensure the franchisee establishes the skills required to operate the franchise.
- A franchise enables a small business to compete with big businesses, more so than an independent small business, due to the pool of support from the franchisor and network of other franchisees.
- You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same territory.
- Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
- You can benefit from communicating and sharing ideas with, and receiving support from, other franchisees in the network.
- Relationships with suppliers have already been established.
Eight disadvantages of franchising
- Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor.
- The franchise agreement usually includes restrictions on how you can run the business. You might not be able to make changes to suit your local market.
- You may find that after some time, ongoing franchisor monitoring becomes intrusive.
- The franchisor might go out of business.
- Other franchisees could give the brand a bad reputation, so the recruitment process needs to be thorough.
- You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.
- All profits (a percentage of sales) are usually shared with the franchisor.
- The inflexible nature of a franchise may restrict your ability to introduce changes to the business to respond to the market or make the business grow.
Link: https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-franchising