What do we understand by franchise?
A franchise is referred to as a business started out of a set business with an established brand, as an expansion of the franchisor's proprietary business. This type of business strategy is generally adopted by the company to capture and increase its market share.
This practise is widely popular and often referred as franchising. The contract is between the two parties, the original business owner i.e. franchisor, and the person/entity obtaining the franchise i.e. franchisee. There could be multiple franchises set up, depending upon the business of the franchisor.
Franchise allows the franchisee to sell products or services under the original brand’s trademark or trade name and a business system. In order to set up the franchisee, the license holder generally has to pay an initial set up fee and annual fees.
Few of the countries have very strict rules to follow in order to obtain the franchise and run them with specific requirements and franchise-specific prohibitions. Under these guidelines, the franchisee has to meet the legal and regulatory risk with set standards to operate the business.
Franchise model is used to reach out to more and more consumers to sell goods and services. It is known to be an effective marketing strategy to create brand awareness by giving the business unit to be run by an authorized vendor. Through a regulated manner, the business is expanded, and products and services are distributed to cater the growing demand in the market.
What is the significance of franchise model?
Franchising is like a contractual relationship. The proprietary business owner and a budding entrepreneur come to a mutually beneficial agreement and run the business making a win-win situation for both the parties.
The franchisee gets access to established business to earn profits and the franchisor gets to expand its business and earn profits without directly running it. For a business, its brand is a most valuable asset. Hence the franchisee has to maintain the brand value, standards and meet obligations in order to deliver goods and services.
For the consumers, a franchise is a chain of an original business, they are not aware of who is running the business, all they see is the quality of the products and services. And if they do not receive the same standard of the original business, then there are high chances of franchise models failing, eventually impacting the brand’s image and brand loyalty.
A smooth transitioning of system and support from the franchisor is also essential for a franchisee to understand the core business objective and vision and mission of the company. Unless the franchisee feels like a part of the system, they will not be able to deliver the best results.
While there are several advantages associated with franchise model, specific risks in terms of brand equity, litigation, compliances, and capital investment needs cautious eye.
How does the franchise model work?
- The franchise business model can be seen as a joint venture between the business proprietary owner - franchisor and the person running the franchise - the franchisee.
- The original business owner sells the right to franchisee to use its brand name and idea and further sell its products and services under its established name. They both sign a mutually beneficial agreement.
- Generally, the agreement is standard for all the franchisee obtaining the franchise from the franchisor. The rules and all the guidelines to follow for the franchisee are standard and they are expected to run the franchise in the same manner, to keep the brand image undamaged.
- While giving away the rights to run the franchise to various entities, the businesses make sure that the franchisee is maintaining its integral aspects such as branding, vision and mission, objectives, product quality etc
- Usually the businesses, while giving the franchise, train the franchisee on how to effectively run them. They also monitor the units and review if the franchisee is keeping up with the standards.
- The highly competitive industries such as fast food or fashion and other retail businesses have benefited from the franchise model.
What are various kinds of franchise formats?
- Business Format Franchising model is all about the needs of the proprietary business owner. Usually the standard process followed in the market while giving a franchise is a Business Format Franchising.
This type is commonly known as most businesses find this model best in terms of giving returns. In this format, the proprietary business owner provides an entire set up to the franchisee. The franchisee only has to find a location to run the business and get it approved from the franchisor.
The franchisee signs a contract with the franchisor and gets an entire system including the brand name, products and services to operate. Franchisee also receives other support such as business development, operating manuals, brand guidelines, quality control, marketing, advertising and public relations support.
A business advisory team from the franchisor side provides support to the franchisee to smoothly function the site.
- Traditional/ Product Distribution Franchising format is based on supplier-dealer relationships. The franchisee here only distributes franchisor’s products. The franchisor does not provide the entire system to operate to franchisee like the Business Format Franchising format.
Businesses in bottling, gasoline, automotive and other manufacturing industries work on this franchise model often. This model provides the highest percentage of total retail sales. Sometimes franchisors provide licenses for manufacturing processes as well. Soft drink manufacturers like Coca-Cola and Pepsi work on this franchise model.
- Job Franchise is another format widely popular among entrepreneurs. It gives an opportunity to operate small time and home-based franchises. Usually the franchisee has to invest minimally to obtain such a franchise.
A wide and diverse range of businesses fall in this format such as real estate broker, travel agency, automobile repair services, plumbing services etc.