We all look around us and find many Franchises and we are bombarded with many questions such as: What is a franchise? And How the franchise works? How to get a franchise? Etc. In this article, we are going to cover all these questions and many more facts about it. I am sure that after reading this article you will get some knowledge of Franchise Business.
Meaning of Franchising
Franchising is a business wherein a Company lends its Trademark, Goodwill and Business Techniques to another company or individual in exchange for money.
The franchise consists of two parties. One is the Franchisor who gives the franchise and other is the franchisee who runs and operates the franchise. In the franchise business, unlike the traditional businesses, there are no sales of Physical goods and any services instead, the Goodwill and the reputation of the Franchisor Company are sold (Licenced) to the franchisee for a particular period.
The Company lending the Franchise and the Individual/Company taking the Franchise sign a contract or agreement called the Franchising Agreement or Franchising Contract. After which they are now called as the Franchisor and Franchisee of the particular agreed franchise.
Franchising Business can be seen in many businesses such as Restaurant, Fast Food Chains, Hotels, Hospitals, Schools, Salons, Shopping Malls, Clothing Lines etc. Franchise business has seen significant growth in the global market and will continue to grow as the Franchise Business model is a “Win-Win” model.
Meaning of Franchisor
The franchisor can be any company or an individual who has a successful brand name and has influential goodwill in the market. The franchisor should have at least one of these exceptional qualities that make it stand unique from its competitors
- Unique Business Idea
- Advanced Technology
- Best Quality
- Large Customer base
- Unique identity (Goodwill)
The franchisor may or may not be a huge brand but must have a considerable amount of the goodwill in the market. A franchisor is the one which may have its branches also have many other franchisees. a franchisor can have multiple franchisees for its franchise.
Franchisors rent out the brand name, logo and trademark to the franchisee in exchange of fixed annual or monthly amount or a percentage of the gross sales called as the Royalty.
Top 3 Largest Franchisors in the world –
- 7-Eleven – 55,000+ outlets worldwide
- Subway – 42,000+ outlets worldwide
- McDonald’s – 33,000+ outlets worldwide
Role and Duties of Franchisor
Training – Franchisor has the responsibility to train the franchisee and give him the required information about its business and product or services.
Support – Franchisor has to listen to the queries or complains of the franchisee and provide support to the franchisee. The franchisor must solve any of the problems and confusions of the franchisee.
Advertising – Franchisor has to constantly advertise its product or the brand. The franchisor has to make it’s brand stronger and reach as many customers as possible. The franchisor must advertise from time to time. So that it’s beneficial to both the franchisor and the franchisee.
Provide Technology – Franchisor has to make its franchisee familiar to the latest technology and provide them with the latest technology as this would help them to work efficiently.
Meaning of Franchisee
A franchisee is that person or the company that takes the franchise and runs it with his/their own Mind, Money and Energy. The franchisee is benefitted with the already established brand name of the franchisor and does not have to struggle to get customers, improve the product, management issues etc. The Franchisee basically earns a good profit in a shorter time.
Franchisee also has the opportunity to learn the business of the franchisor. He gets the complete knowledge and training from the franchisor regarding the franchise and business. This can be useful for the franchisee to start its own business in the same field. However, in most cases the franchisee is not willing to start their own business due to numerous reasons.
Franchisee acts as the brand to the customers and this is what makes the franchisee a very crucial aspect in a franchise. The franchisor in a franchise is dependent on the franchisee for building and managing its brand name and goodwill. Because the franchisee is the one who comes in direct contact with the customers.
Role and duties of Franchisee
Customer Service – The franchisee is the one that works on the ground zero and is in direct contact with the customer so the franchisee must provide with the best of its service to customers as it would directly affect the goodwill of the company.
Fair Accounting Practices – Franchisee has to submit its financial reports to the franchisor monthly or quarterly on the basis of which royalty is charged by the franchisor. Some franchisees for short term gains manipulate the accounts, this may be beneficial for a short term but in the long run in it can bring legal complications and can affect the relations with the franchisor.
Follow the Instructions – Franchisor provides the franchisee with the set of guidelines or the instructions that the franchisee has to follow. The franchisee should never violate these instructions or guidelines because some strict franchisors don’t care to spare the violators and charge heavy fines, take legal actions or even terminate the contract.
Brand Image – Franchise is the game of Brand and goodwill once the brand image is deteriorated the brand is incapable to lend its franchise, So the franchisors are very intolerant to Brand Image damages. The franchisee should take care of the brand image and the goodwill of the franchisor as it would care for its own.
Franchisee’s duty and responsibility towards itself
Select the best possible franchise, this is a very known yet ignored fact. Franchisees often commit a mistake of getting a franchise of an unknown brand or the brand which lacks above-discussed qualities.
The mistake can prove to be a disaster for the franchisee. Because the franchisee will work hard on a brand/product that does not have a potential In the market and could eventually fail. This could lead not just the monetary loss for the franchisee but can also lead to loss of time, energy and motivation to do business.
Franchising Agreement is a legal agreement between the franchisor and the franchisee. The agreement specifies all the details of both the franchisor and the franchisee. The amount that the franchisee has to pay as the franchising fee. Payment terms of royalty. The period of contract/agreement. The norms and conditions that both the parties have to follow. Conditions that would lead to termination of the contract etc.
Franchising fee is the one-time fee that the franchisee has to pay to the franchisor while signing the franchising agreement. Franchising fees is the sum that is considered as the large cost of aquiring a franchise. Typically a franchisor charges any where between 50k to 50 Lakh+ as franchising fee.
The recurring amount collected by the franchisor is called as the royalty. Generally, the royalty is a certain percentage charged on the gross sales made by the franchisee in a particular period usually in a month. The franchisors generally charge anywhere between 3% to 10% royalty per month on the gross sales made by the franchisee.
Every franchise agreement has its termination policy. This policy states on what conditions the agreement stands terminated. Agreement termination is when the agreement is termed as invalid(null and void) from the date when either of the two parties notifies to opposite regarding the same, which means if the franchisee violates any of the rules and norms of the franchising agreement then the franchisor at extreme conditions can notify the franchisee regarding the termination and state the agreement as null and void. And the franchisee has to stop its business activities which it carries out using the name and trademark of the franchisor. There are rare chances but if the agreement allows even the franchisee can notify the termination of the agreement to the franchisor.
Example of Franchise Business
Master Burgers is the fast-food restaurant in Mumbai which has gained popularity amongst the customers for its unique burgers. Mr Vishwas is interested in getting the franchise of Master Burgers. So it approaches Master Burgers and both agree on the following terms.
- Master Burger will allow Vishwas to use its brand name and trademark.
- Master Burger will share its unique recipes with Vishwas.
- Master Burger will also provide training and assistance to Vishwas.
- In return, Vishwas has to pay ₹1,00,000 as one-time franchising fees.
- Vishwas will also pay 10% of the gross sales every month to Master Burgers as Royalty.
They both agree to this and sign a Franchise agreement for 7 years. After 3 years of doing business together and earning a good profit, they got into a dispute. Master Burgers claimed that the Vishwas was not following their guidelines and was violating the norms of a franchising agreement. Master Burger decided to terminate the contract with Vishwas and ordered him to stop using their trademark. As soon as the branding of Master Burger was taken down it affected Vishwas’s Business severely and lead to heavy losses within 6 months of termination.
This Example shows us the normal process and working of the franchising business with an uncommon but real end. Its argued that most of the franchises in India fail. There are numerous reasons for it too. Which we will try to cover in our next article.