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Introduction:

The relationship between the franchisor and the franchisee is the foundation of the franchise business model. An established company, referred to as the “franchisor,” contracts with an independent business owner, known as the “franchisee,” to use its branding, business model, and other intellectual property. The individual or business that holds the rights to a brand’s trademark is known as the franchisor. To use the franchisor’s trade name and operational procedures, a fee must be paid by the franchisee. In exchange, the franchisee consents to pay the franchisor an initial franchise fee as well as monthly royalties. There is a formal business partnership between the franchisee and franchisor.

An overview of the franchise business model’s history:

Franchise business models have existed for a while. Contrarily, it has roots in the Middle Ages and Ancient China, when landlords permitted peasants and serfs to engage in commercial activity on their property, such as hunting or selling goods at fairs, in exchange for a fee or commission. Benjamin Franklin is credited with creating the modern business concept franchise when, in the year 1731, he entered into a contract with Thomas Whitmarsh to offer printing services in Charlestown, South Carolina. Isaac M. Singer would once more market his Singer sewing machines using the franchise business model more than a century later. There are thousands of franchisees today.

The Franchise Business Model’s Relationship Between the Franchisor and the Franchisee:

According to the conditions of an FDD, a franchisee has the right to launch a franchised site using the franchisor’s operations and authorised logos (Franchise Disclosure Document). The authority to establish and manage a franchised site is granted to a franchisee by a franchise agreement. In the franchise sector, a franchisee’s and franchisor’s intimate relationship is essential to the success of the brand. In the beginning, the franchisor offers the franchisee support with regard to product development, marketing, training, and occasionally financing. The franchisee runs the business as though it were their own in the franchise model. The relationship between the franchisee and the franchisor is governed by the franchise agreement.

Franchising Rules:

The franchise disclosure document, or FDD, serves as the franchise’s legal basis for sale. Both the federal and state franchising legislation have it as a core necessity. A franchisor is required by the FDD to share all franchise disclosure documentation with the appropriate state regulators. In accordance with Section 8 of the Small Business Franchise Act, franchisors are also permitted to extend their agreements with their franchisees under the FDD.

What a franchise business model has going for it:

1. Partner With a Recognized Brand

A strong brand will boost customer loyalty, expand sales opportunities, and give your business a competitive edge.

2. Less Risky Than Launching Your Own Business

Working with a reputed franchisor reduces your risk of failure. It is simpler and less dangerous to invest in a franchise model than to launch a brand-new company.

3. Simpler Procurement Techniques

Another advantage of franchising is that you’ll have access to reliable suppliers and more affordable costs.

4. Advertising and marketing

The franchisor will launch marketing initiatives and promotions that are advantageous to your business. The franchisor will also research the most likely market areas and discuss the findings with you.

More effective leadership and lower operating costs

The franchisor will give you guidance and support. The entire expenditure in brand expansion is their responsibility. You can assume leadership thanks to this model’s decreased operational costs.

The disadvantages of Franchising:

Although it may appear at first glance that franchising solely provides advantages, there are also some disadvantages to take into account.

1. Both in terms of managerial effort and initial financial outlay, developing a franchise network can be costly.

2. You cannot recoup your investment until franchisees are chosen and you begin to earn payments from them.

3. Due to the fact that your franchisees are independent contractors, there is a chance that they will occasionally ignore their franchise system-related commitments.

Several franchise business models:

1. Company Owned Company Operated (COCO) – Under the COCO model, the franchisor owns and operates the franchise store unit. It has absolutely nothing to do with franchising. As a result, the corporation provides all of the funding for the franchise. The franchise is managed by brand employees. Reliance Jio Mart and Bigbazar, as examples.

2. Corporate Owned Franchise Operated (COFO) – In this scenario, the franchisor makes an investment in the franchise business, which is then controlled by the franchisee in accordance with company policies. Due to the fact that few companies spend in growing their operations, this is exceptional and uncommon in the market. For instance, call centres that answer calls on behalf of businesses.

3. Franchise Owned Company Operated (FOCO) – The franchisee is in charge of all further capital expenditures and is the one who owns the real estate. The franchising business oversees the operations of the stores and outlets. Franchise Invested Company Operated is another name for it. Consider Bistro57.

4. Franchise Owned Franchise Operated (FOFO) – In this FOFO arrangement, the franchisor grants the franchise investor access to its brand name. They agree to this in return for a non-refundable franchise fee and a set time frame. The prices and products at the store are determined by the brands. As a result, the franchise investor owns the business and is responsible for paying all operating expenses. The Franchise must also provide the Brand a portion of its earnings (royalty). This is the most prevalent model in market place.

How Does the Process of Franchising Work?

The method of franchising differs according to the type of franchise agreement, the state, and franchisor policies. Having said that, a typical franchising procedure will resemble this:

Step 1: Compile background data

First things first, do some study to figure out what kind of franchise you want to start. Make sure you are certain of the benefits you anticipate obtaining from opening a franchise. Prioritize choosing companies that fit your objectives, financial constraints, and business savvy.

Step 2: To contact the franchisor.

Make plans to meet with the franchisee’s representative. The duration of the company’s existence, its growth strategy, and risk concerns are important inquiries to take into account.

Step 3: Negotiations

It’s time to bargain over the details of the partnership, assuming early discussions go well and the franchisor satisfies your primary requirements. Since this step is frequently fairly difficult, you should arm yourself with the greatest bargaining techniques and tactics.

Step 4: Signing the Agreement

The next action is to sign a formal agreement when the terms on the table have been agreed upon. Consider retaining a legal professional to advise you at this point. Spend some time reviewing the agreement to make sure it is as precise and clear as possible to prevent confusion and future problems.

The future of franchise business model:

Franchise company models will change in the future as artificial intelligence becomes more prevalent. Numerous commonplace tasks that don’t require professional human resources will likely be replaced by technology. Franchises will expand globally. Worldwide, franchises have been growing quickly. A few years ago, some businesses did not operate in the countries that are now popular and lucrative marketplaces for international franchising investments. Remote franchises are more common. Last but not least, because to the trend of working from home, certain remote franchises have increased their market share with the development of technologies linked to the coronavirus pandemic.

Regulatory Challenges in Franchising:

It can seem that franchising is simple and fundamental. However, a few concerns need to be resolved before starting a reliable franchising work procedure. Although there isn’t a specific legislation governing franchising in India, it’s important to look at how these several laws affect it:

Franchising Agreements’ Validity

Every franchise agreement resembles a partnership created by a contract, making the Indian Contract Act of 1872 applicable. An arrangement that is legally enforceable under this Act is referred to as a “Contract” and must meet specific criteria in order to be considered valid.

Agency connection

Franchisers and franchisees typically have a relationship of independent contractors, however this can occasionally change and could be concluded as an Agency. If the franchise agreement changes to an agency, the franchisor would also be responsible for all actions taken by the franchisee while conducting business.

Rights to intellectual property

All franchise-related concerns typically involve the exchange of intellectual property, which could be anything from a business technique format, formation method, trade secrets, or an invention or a patent for the construction of any design. Since franchise agreements grant rights for intellectual property, the laws governing IPR licencing are also referred to as franchise laws.

Tort

A tort is a civil wrong that has unliquidated damages as its remedy. In a franchise agreement, tort liability could appear in the following circumstances:

Vicarious Liability

In a principal-agent relationship established between the franchisor and the franchisee, any civil wrong committed by the franchisee in the course of business may be held against the franchisor to hold him or her accountable, but not when the franchisee intentionally acts outside the scope of authority granted to him by the franchisor and would hold the franchisor responsible for making the recovery of damages from the franchisee.[1]

Conclusion:

The franchising business model has a number of advantages for both the franchisor and the franchisee. Individual franchisees frequently give the franchisor a low capital franchising charge as well as royalties. Businesses in developing nations like India need to expand swiftly in order to quickly capture market share. The franchising business strategy allows for quick growth and market share acquisition.

The franchisor works with business owners or entrepreneurs who are motivated by ownership, profitability, and the capital invested in the enterprise in a franchise model. Both the franchisee and the franchising company will benefit from it.

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