Franchising is a business model where an organization grants permission to aspirants to accept its strategy & concept as per defined norms or to take part in an activity which the organization controls. It is nothing but a strategic relationship between franchisor and franchise.
In other word franchisor allows franchise to access its proprietary knowledge, processes and trade mark to obtain a business in return franchise has to pay declared strategic relationship fee as per mutual understanding.
The Franchisor and Franchise knowingly and voluntarily enter into a long term interdependent relationship, each relying on the other for its success. The relationship between Franchisor and Franchisee is exactly the same as relation between a Parent and child, between Landlords and the tenants, between conductor and the orchestra and between a coach and the team. The award of the franchise can be compared to the state that grants a Driver’s License; you may use and renew the privilege of driving but only subject to the rules of the road and the payment of ongoing fees.
Education and training related franchising comes in Business Format Franchise category where a franchise can use franchisor’s product, service and trademark, complete method to conduct the business, such as the marketing plan and operations manuals. Business format franchises are the most common type of franchise now a day.
Advantages and Disadvantages of Franchising:
The advantages and disadvantages of owning a franchise should be carefully evaluated before deciding to purchase one.
- A franchise provides an established product or service which already enjoys widespread brand name recognition. This gives the franchisee the benefits of customer awareness which would ordinarily take years to establish.
- A franchise increases your chances of business success because you are associating with proven products and methods.
- Franchises may offer consumers the attraction of a certain level of quality and consistency because it is mandated by the franchise agreement.
Franchisor’s pre-opening support:
- Site selection
- Design and construction
- Inauguration program
Franchisor’s ongoing support:
- Operating procedures and operational assistance
- Ongoing supervision and management support
- Increased spending power and access to bulk purchasing (in some cases)
- The franchisee is not completely independent. Franchisees are required to operate their businesses according to the procedures and restrictions set forth by the franchisor in the franchise agreement. These restrictions usually include the products or services which can be offered, pricing and geographic territory.
- In addition to the initial franchise fee, franchisees must pay ongoing royalties and advertising fees.
- Franchisees must be careful to balance restrictions and support provided by the franchisor with their own ability to manage their business.
- The term (duration) of a franchise agreement is usually limited and the franchisee may have little or no say about the terms of a termination.
Each party in a franchise system has several interests to protect. The franchisor is involved in securing protection for the trademark, controlling the business concept and securing know-how. The franchisee is obligated to carry out the services for which the trademark has been made prominent or famous. There is a great deal of standardization required. The place of service has to bear the franchisor's signs, logos and trademark in a prominent place. The uniforms worn by the staff of the franchisee have to be of a particular design and color. The service has to be in accordance with the pattern followed by the franchisor in the successful franchise operations. Thus, franchisees are not in full control of the business, as they would be in retailing.
A service can be successful if equipment and supplies are purchased at a fair price from the franchisor or sources recommended by the franchisor. So the purchase things like uniforms and signs, as well as the franchise sites, are owned or controlled by the franchisor.
The fees must be fully disclosed and there should not be any hidden fees. The start-up costs and working capital must be known before the license is granted. There must be assurance that additional licensees will not crowd the "territory" if the franchise is worked according to plan. The franchisee must be seen as an independent merchant. It must be protected by the franchisor from any trademark infringement by third parties. A franchise attorney is required to assist the franchisee during negotiations.
Often the training period – the costs of which are in great part covered by the initial fee – is too short in cases where it is necessary to operate complicated equipment, and the franchisee has to learn on their own from instruction manuals. Also, franchise agreements carry no guarantees or warranties and the franchisee has little or no recourse to legal intervention in the event of a dispute. Franchise contracts tend to be unilateral and favor of the franchisor, who is generally protected from lawsuits from their franchisees because of the non-negotiable contracts that franchisees are required to acknowledge, in effect, that they are buying the franchise knowing that there is risk, and that they have not been promised success or profits by the franchisor. Contracts are renewable at the sole option of the franchisor. Most franchisors require franchisees to sign agreements that mandate where and under what law any dispute would be litigated.
Legal Issues or Regulation:
While the concept of franchising seems fascinating and simple, there are several issues that must be dealt with before commencing a sound franchising arrangement. Though there is no specific law pertaining to franchising in India, franchising as a business touches upon various business laws and industry specific laws within the country.
It would be important to understand how these different laws can affect a franchising business in India and what the issues that could arise there under are:
- Intellectual Property
- Validity of the Franchise
- Exchange Controls
- Weights and measures
- Competition Laws and MRTP issues
Brand Selection Criteria:
Purchasing a franchise is like any other investment: it comes with risk. When you consider a particular franchise, think about demand for the products or services it offers, whether competitors offer similar products or services, the level of support you will receive and the franchisor’s reputation.
What’s the level of competition — nationally, regionally and locally? How many franchised and company owned outlets are in your area? Does the franchise sell products or services that are easily available online or through a catalog? How many competing companies, including competing franchises, sell similar products or services at a similar price? Are those companies well established or widely recognized in your community?.
Buying a franchise gives you the right to associate with the franchisor’s name or brand. An established franchise with a well-known name — and good reputation — is more likely to draw customers than a relatively new or unknown franchise. If you invest in a franchise, you’ll be responsible for creating customer demand for its goods or services in your area.
Training and Support Services:
What training and continuing support does the franchisor provide? Does the training measure up to the training provided by other franchisors in the same type of business and for workers in that field? Can you compete with others who have more formal training?.
Many franchisors that operate well-established companies have years of experience selling goods or services and managing a franchise system. A successful entrepreneur can successfully manage a franchise system. Find out how long the franchisor has managed a franchise system.