Definition: A continuing relationship between the producer/owner of the product and its business clone (also called as Franchise) is termed as Franchising.
Need of Franchising:
1. Owner/Producer of product does not have sufficient funds to promote his brand
2. The reach of Owner/Producer of product is limited and he wants to expand it.
3. There is a need to generate a feel-good factor that the company is doing good. [It means that the company is successful and is looking to expand]
Types of Franchising:
1. Product Distribution Franchising (International Soft-drinks, chewing gums, etc.)
a. involves distribution of goods/products.
b. refers mainly to a retail market.
c. Franchisee is independent of the Franchisor(owner).
2. Trade Name Franchising (Hotel Chains)
a. involves promotion of a brand name.
b. Franchisee uses trade name to generate profits & is bound by rules of organization.
3. Business Format Franchising
a. Combination of the first two.
b. Franchisee uses trade name to generate profits.
c. Franchisee is NOT bound by rules of organization (i.e. free to bring innovation, marketing) and can sell additional assets as well.
Going ahead with a Franchising Model (franchisor)?
It appears to be a short-cut to success by buying a Franchisee; but it’s not always the case. When you buy a franchisee, there are some issues involved with it:
1. Buying Power:
As a parent company/owner of the product, you ought to have the buying power. It is important to pass on the profits to the franchisee.
2. Brand Name:
Establishing a brand name before franchising is a better option. It builds faith in the mind of franchisee. Alternatively, franchising in order to establish a brand is also a viable option. You get lot of help to start-up your business, but it also involves capital risk.
3. Low Failure Rate:
I believe 80% of companies that opt for franchising do not suffer failure. So, there are probable chances of getting on at a correct pace with franchising model.
4. Escalating Capital & Costs:
Besides the Capital Investment, the cost on support, royalties, revenue-sharing is high. The parent company needs to be prepared for this.
Choosing your Franchisee:
Choosing a correct franchisee is an important decision as he/she not only needs to maintain the brand/trade name; but also has to make it better.
Factors behind choosing your franchisee:
1. Educational Background
2. Experience of the franchisee
4. Commitment to start, and run the franchisee
5. Readiness to adhere to uniform processes across the franchisee (as dictated by franchisor)
The contract involves following questions
1. Franchising type & terms.
2. Revenue sharing between the Franchisee & Franchisor (on monthly basis)
3. Support required from Franchisor
4. Duration of Franchising contract
5. Limitations of expansion for franchisee.
6. Terms when Franchisor goes bankrupt.
If your business model fails, i.e. you are not able to generate revenue and are on the verge of bankruptcy, then :
1. Allow your Franchisee to continue: Your failure/bankruptcy does not force your franchisee to stop their business till the business is in operation.
2. You stop getting royalties: You stop receiving royalties from the franchisee.
3. Brand Maintenance: Bankruptcy when gets reported to media, faces a big blow to the brand. To maintain the brand value, proper communication needs to be done with customers, franchisee and media.
What as a Franchisee, you should look at:
1. Initial Training
2. Being your own boss
3. Continuous support
4. A high-quality product, that you need to sell
5. Promotion fund of the product by Franchisor (for M&R, sponsorships, brand identity maintenance, etc.)
6. Scalability of business.
7. Resources required to keep business in operation