A franchise is an agreement or license between two parties which gives a person or group of people (the franchisee) the rights to market a product or service using the trademark of another business (the franchisor).
The franchisee has the rights to market the product or service using the operating methods of the franchisor. The franchisee has the obligation to pay the franchisor certain fees and royalties in exchange for these rights. The franchisor has the obligation to provide these rights and generally support the franchisee. In this sense, franchising is not a business or an industry, but a method used by businesses for the marketing and distribution of their products or services. Both franchisor and franchisee have a strong vested interest in the success of the brand and keeping their customers happy.
Methods of Franchise Methods
1)Business Format Franchising
Business format franchising offers a variety of services to the franchisees. They provide the franchisee use of trademarks and logos, as well as a complete system of doing business. They will assist the franchisee with site selection, interior layout and design, hiring and training, advertising and marketing, product supply and more. The franchisee pays an up front franchise fee and agrees to pay continuing royalties to the franchiser that help the franchiser provide research, development and support for the entire system.
There are many examples of business format franchising, including - fast food restaurants, automotive services, estate agents, convenience stores, recruitment agencies, hairdressers etc.
Characteristics of Business Format Franchising
The franchisee sells goods or services which meet the franchisor's quality standards (in cases where the franchisee operates under the franchisor's trade mark, service mark, trade name, advertising or other commercial symbol designating the franchisor ("mark") or which are identified by the franchisor's mark;
The franchisor exercises significant assistance in, the franchisee's method of operation; and
The franchisee is required to make a payment to the franchisor or a person affiliated with the franchisor at any time before to within six months after the business opens.
Product & Trade Name Franchising
Product and trade name franchising generally is associated with industries such as automotive, petroleum and soft drink. This type of franchising does not include royalty fees. The franchiser provides trademarks and logos, national advertising campaigns, but most importantly, product.
Characteristics of Product & Trade Name Franchising
The franchisee sells goods or services which are supplied by the franchisor or a person affiliated with the franchisor;
The franchisor assists the franchisee in any way with respect to securing accounts for the franchisee, or securing locations or sites for vending machines or rack displays, or providing the services of a person able to do either; and
The franchisee is required to make a payment to the franchisor or a person affiliated with the franchisor at any time before or within six months after the business opens.
Franchising may seem like an easy way to start ones own business and many times it is just that. However, investing in a franchise is no guarantee that you will be successful.
Your success in franchising will depend on three key factors; your ability to make the investment to secure the franchise and open it for business, the care with which you select the franchise, and most importantly your drive and ambition to make it successful.
Advantages of Franchise
As practiced in retailing, franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators). A well run franchise would offer a turn key business: from site selection to lease negotiation, training, mentoring and ongoing support as well as statutory requirements and troubleshooting.
After their brand and formula are carefully designed and properly executed, franchisors are able to expand rapidly across countries and continents, and can earn profits commensurate with their contribution to those societies. Additionally, the franchisor may choose to leverage the franchisee to build a distribution network.
Franchisors often offer franchisees significant training, which is not available for free to individuals starting up their own business.
Disadvantages of Franchise
For franchisees, the main disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, and marketing, the franchisee is required to follow the system and get approval for changes from the franchisor. For these reasons, franchisees and entrepreneurs are very different.
It can be expensive. Because of standards set by the franchisor, the franchisee often has no choice as to signage, shop fitting, uniforms etc. and may not be allowed to source less expensive alternatives. Added to that is the franchise fee and ongoing royalties and advertising contributions. The franchisee may also be contractually bound to spend money on upgrading or alterations as demanded by the franchisor from time to time.In response to the soaring popularity of franchising, an increasing number of communities are taking steps to limit these chain businesses and reduce displacement of independent businesses through limits on "formula businesses."
Another problem is that the franchisor / franchisee relationship can easily cause conflict if either side is incompetent (or not acting in good faith). For example, an incompetent franchisee can easily damage the public's goodwill towards the franchisor's brand by providing inferior goods and services, and an incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits.