Franchising is a great way to start a business, but before you decide to spend the thousands of dollars needed to buy one, you must do your due diligence. It is critical to understand what a franchise is and how it differs from a chain. Owning a franchise does not work the same way as a business that comes from an original idea you have.
A franchise is a way of structuring a business. Generally, it involves the owner of a business (known as the franchisor) licensing to a third party (known as the franchisee) the right to operate a business or distribute goods and/or services using the franchisor’s business name and systems for an agreed period of time, in return for a fee. The franchise fee may be an upfront payment by the franchisee to the franchisor, an ongoing fee (e.g. an agreed percentage of revenue or profit) or a combination of the two. Franchising is an alternative to the franchisor building a chain of stores. Its success can be attributed to the fact that franchising provides incentives to both franchisors and franchisees, as they both share in the success of the business operated by the franchisee.
The relationship between the franchisor and franchisee is governed by the franchise agreement, which is a written legal document between the franchisor and franchisee. The franchise agreement is the fundamental document upon which the franchisor-franchisee relationship is based on. The franchisor and franchisee must both sign the agreement.
The following are some of the major aspects covered in a franchise agreement:
Details about the franchisor and franchisee
Appointment of franchisee and grant of a license
Location of the franchisee
Development of the franchisee location
Maintenance of the franchisee location
Proprietary marks or trademarks the franchisee can use
Licenses or permissions the franchisee must obtain or can use from the franchisor
Operation standards
Quality standards
Training and assistance from the franchisor
Marketing assistance from Franchisor
Franchisee obligations
Franchisor obligations
Terms of the franchise agreement
Tenure of the franchise agreement
Renewal of the franchise agreement
Termination of the franchise agreement
The franchising business model creates a win-win situation for both parties. It offers both the franchisor and the franchisee various advantages listed below:
Benefits for Franchisor
Low Capital: Franchisors typically collect a franchising fee from individual franchise owners at no interest. This money collected from franchisees can be used by the Franchisor to grow the business and brand.
Rapid expansion: Franchising business model can help a business quickly expand and garner market share.
Partnering with Entrepreneurs: In a franchising business model, the franchisor partners with Entrepreneurs or Business Owners who are motivated by their ownership, profits and capital invested by them in the business.
Greater buying power: Since franchisors represent a number of franchisee’s they can often negotiate volume discounts from suppliers when buying in bulk. Sharing the savings with the franchisees provides a competitive advantage for the franchises over the independently operated business.
Brand Building: Compared to independently operating businesses, franchisee business has a better recognition as many locations are opened. In a franchising business since brand building costs are spread over a number of businesses, there can be tremendous savings on advertising and branding costs.
Benefits for Franchisee
Expertise: To start and manage a franchise business, the promoter does not need any experience or expertise. The franchisor will provide the training and expertise to successfully operate the business.
Higher chance of success: Franchise business usually has a higher rate of success than independent business due to a number of reasons. Franchise businesses have well experienced professionals backing the business, lower branding cost, higher brand reputation, etc., – increasing the chances of success.
Independence: Franchise business offers the business owner a chance to operate an independent business while enjoying many of the benefits of big business.
After clarifying the advantages and aspects of franchising we would recommend all entrepreneurs to meticulously study any business venture before engaging in any new venture.
Comments