“UNDERSTANDING HOW THE FRANCHISE MODEL WORKS?”

INTRODUCTION

Being an entrepreneur is always a dream. And every entrepreneur wants to be his own boss, albeit every person desires for the same but the ones who dreams for it and wants to live their dream, do become one. And franchising is one of the options for them. Let us first understand the meaning of the term, franchising.

“Franchising involves two parties, namely, franchisor and franchisee. The franchisor is the one who has created a brand and a business model to market the goods and services associated with that brand. And the franchisee is the one who often pays an upfront fee plus recurring royalties in exchange for the right to utilize the franchisor’s brand name and business model for a predetermined length of time.”[1]

Franchising is a way for individuals to invest in an existing business model and gain a competitive advantage operating their own business. The business owner or franchisor licenses to franchisees the right to operate a business or to distribute goods or services for a specific period of time and in return the franchisees pay the franchisor a fee. This usually comprises an initial payment and then regular ongoing fees.

WHY TO PAY FEES?

The franchisee is investing in a proven system with all the experience and knowledge of the franchisor on-hand, that could be an easier way to get a return on investment than starting up a business from scratch.

WHAT ARE THE RULES?

Of course, there are limitations, the franchisee will have to operate their business according to the rules and the process set out by the franchisor after all the tried and tested formula is what has made the business a success.

WHAT DOES THE FRANCHISOR PROVIDE?

1. An existing business model
2. An established brand
3. Operating systems and processes
4. Marketing strategy
5. Training
6. Ongoing support

HOW LONG IS A FRANCHISE TERM?

A franchise who follows the rules can run their business for the length of the franchise term. It could be three years, five years or even longer. At the end of the term, the franchisee may be able to renew the term the franchise agreement but this doesn’t always the case.

WHAT IS THE PROCESS OF FRANCHISING?

The process of franchising differs according to the type of franchise system, the state, and franchisor policies. “Having said that, usually the franchising process will resemble something like this:

Step 1- Assembling the Background Information

First things first, conduct research to identify the type of franchise you would like to venture into. Make sure you have a clear idea of what you expect to gain from starting a franchise. Next, come up with a list of franchisors you’d be interested in investing in. Prioritize selecting businesses that match your goals, budget, and business acumen. Also, make sure you research the legal considerations involved with a particular industry or jurisdiction for starting a franchise in your state.

Step 2- Connecting with the Franchisor

Contact the franchisor’s representative and schedule a meeting. A face-to-face meeting is an opportunity for you to know more about the business and help you make an informed decision. Key questions to consider include inquiring about how long the business has been in operation, its growth plan, and risk factors. After the interview, the franchisor should offer you their franchising brochures, guidelines, and other relevant initial documentation for potential franchisees.

Step 3- Making Arrangements & Negotiations

Assuming initial conversations go well and the franchisor meets your key criteria, it’s time to negotiate the terms of the partnership. This stage is often quite complicated, so you need to equip yourself with the best negotiation skills and strategies.

Step 4- Signing the Agreement

Once the terms on the table are accepted, the next step forward is signing a formal agreement. At this stage, consider hiring a legal expert to guide you. Also, take some time to review the agreement to ensure that it’s as clear and detailed as possible to avoid confusion and potential disputes down the road.”[2] The significant aspects covered in a franchise agreement are Details of the franchisor and franchisee, Franchisee appointment and license grant, Franchisee location, Development and maintenance of the franchisee location, Proprietary marks or trademarks which the franchisee can use, Permissions or licenses the franchisee should obtain or can use from the franchisor, Operation and quality standards, Assistance and training from the franchisor, Consideration (specific amount) to grant the franchisee, Franchise license fee, Marketing assistance from the franchisor, if any, Services or products that the franchisee can offer, Franchisee obligations, Franchisor responsibilities, Terms and tenure of the franchise agreement, Renewal of the franchise agreement and Termination of the franchise agreement.[3]

PHASES OF FRANCHISOR PLAN

Phase 1: “It consists of market research, entry strategy, legal & disclosure documents, growth strategy and business plan.

Phase 2: It consists of roll out plan, locating the right partner, government clearances and approvals, valuations and negotiations.

Phase 3: It consists of support activities, audits & controls, roadmap for franchise expansion.”[4]

FRANCHISE REGULATIONS

The franchise disclosure document forms the legal foundation to sell a franchise. “It is a fundamental requirement for both the federal and state franchising laws. The FDD requires a franchisor to provide all franchise disclosure documents with their respective state regulators. Also, under the FDD, franchisors can renew their agreement with their franchisees at the end of an agreement,”[5] in accordance with the existing laws of the land.

FRANCHISE SUCCESS

Good communication with the franchisor and a great attitude to the business who really make a difference to the franchise success is dependent on many factors like,

1. The brand
2. Business support
3. Location
4. Costs

And ultimately the franchisees’ ability to manage and control the business.

CONCLUSION 

Franchise owners frequently give the franchisor a relatively low franchising fee as well as royalties. “In order to grow the business and its reputation, the franchisor may invest funds from franchisees. Businesses in developing nations like India need to expand swiftly in order to quickly capture market share. The franchising business model allows for quick growth and market share gain.”[6] However, the understanding of how the franchise model works is crucial for aspiring entrepreneurs.