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The Business of Franchising

Franchising as a concept was pioneered way back in the 1840s in Germany when certain major Ale brewers granted franchises to certain taverns to exclusively sell their ale. However it was in 1851 in the US that Isaac Singer of the Singer Sewing Machines introduced what is generally known as the Business Format Franchising today. Singer introduced one of the most sophisticated written franchise contracts, which is still considered the basis of modern franchise agreements. Since then, success of this business model has been unprecedented. Across the world franchising has emerged as the fastest and most popular route for expanding business operations. In fact, franchising is probably the only concept that has found equal favor amongst both small and big business houses.

How Franchising Works

Franchising essentially works by replicating a successful and proven business model across multiple locations through a network of entrepreneurs. The person who develops the business format, known as the Franchisor, grants access to his Business Name, Goodwill and Business Model to another person, known as the Franchisee in return for a certain fee. This ensures that the franchisor can extend his reach without having to invest substantial amount of money in new markets. The franchisee on the other hand profits by having a readymade business model with access to Support Facilities like Training, Marketing Tools, Technology etc. Thus, He benefits from the security provided by a Tried and Tested business model

Many variations of franchising model exist within the sector. Some of the more popular ones include Master Franchisee, Area Development Rights and Unit Franchise. India has seen the emergence of other models also like Joint Venture cum franchise Agreement, Management Contract etc.

Franchising Highlights

Franchising is a business model that combines the best aspects of Sole proprietorship and Corporate . It can be described as a “hybrid” model that fills the gap between working for somebody else (whether a large corporation or a small business) and working for yourself.
Franchising is not an industry in itself. Rather, it’s a way of doing business that can be applied in almost any sector. Today about all the established franchise brands KFC, Mcdonalds, Pizza Hut , Gold Gym , and many more operate through franchise route .

Franchising has two main forms

In Product / Trade name Franchising, a franchisor owns the right to a name or trademark and sells or licenses the right to use that name or trademark.
In Business Format Franchising, the franchisor provides franchisees with a full range of services and support, and franchisees sign an agreement to conduct operations in conformity with specific rules laid out by the franchisor.

Franchising is a team effort. For any franchisor to succeed, the vast majority of its franchisees (all, ideally) must operate profitable individual franchise units over the long term. A brand’s success depends on an ongoing partnership between franchisor and franchisee. One of the most common sayings in franchising is: “Franchising means working for yourself, but not by yourself.”

For many, franchise’s greatest appeal is the opportunity for an individual to control their destiny and secure their future. In its earlier days, franchising was a way for an independent-minded business person to “buy a job” – a sandwich shop or a home repair service, for example, and showing up every day as a hands-on operator.

In recent years, the franchise model has caught on as an attractive business opportunity for wealthier individuals and investors who buy many units at once; or who buy the rights to develop a geographical area or “territory” and develop a certain number of units within a specified timeframe. These multi-unit owners, area developers, or area representatives (some of whom also recruit new franchisees and support them within their territory) are part of a growing trend in franchising.

“Multi-brand” franchisees are also on the rise. These franchisees operate different brands under a single organization, creating efficiencies, economies of scale, and market penetration to increase sales and profitability. The primary reasons successful franchisees seek additional brands are 1) they have “built out” their territory for their current brand, and/or 2) they are seeking a new, complementary brand to smooth out the ups and downs of business or seasonal cycles. Franchisors, too, are combining several different brands under one roof, and frequently offer discounts to current franchisees who take on a second (or third) brand.

“Co-branding,” in which a franchisee operates two brands from the same location, is another recent trend. Co-branding saves on real estate or leasing costs, allowing more profit per square foot and often balancing out day parts (breakfast, lunch, dinner). An increasing number of franchisors now offer several different brands, and often provide incentives to franchisees to co-brand.

Much of what prospective franchisees are seeking to buy in a franchise brand is peace of mind. They want to know, with as much certainty as possible, that if:

1.The franchise opportunity is presented accurately and realistically by the franchisor
2.They take the time to perform “due diligence” by speaking with current franchisees, reading the Franchise Disclosure Document (FDD) carefully with the aid of an experienced franchise attorney
3.After comparing the brand and sector under consideration with the competition (franchised or not); then
4.Their chances of making money and building a successful business are better than if they started a business from scratch.

Legally, franchisees do not “own” the franchise they “buy.” They are granted, or awarded, a license that gives them the right to operate and manage their franchise business. However, franchisees do own the assets of their company, and as long as they adhere to the franchise agreement have specific rights under state and federal law. Franchisees can form franchisee associations that can participate in corporate decision-making if the franchisor is amenable, or band together to oppose decisions they see as detrimental to their operation and the brand in general.

The Growth of Franchising Internationally

Starting with food related businesses, franchising has now spread to retail operations, automotive industry, education and recently in health related services. Franchise operations in all these industries are benefiting from the combined buying power, operational speed & efficiency and brand strength that the franchise business model is able to generate.

Over the last fifty years, Franchising as a business model has proved to be extremely successful across the world. So much so that it is estimated that in developed economies like the US, over 50% of all retail sales come through franchised businesses. Similar trends are being seen in Europe and increasingly in the Asia Pacific economies. In fact, the last few years have seen the fastest franchising growth taking place in the Asian and South American markets.

Typically, it has been observed that it is the entrance of the major American franchises into new markets that spur the growth of a particular market. However, the result is that local entrepreneurs catch on to the potential of the franchise model, which increases the acceptability for franchises as a whole.

Increasingly, management experts are recognizing that franchising offers significant advantages over other conventional business models. These include reduced management structures and maximum capitalization of intellectual & proprietary products. These advantages help franchise operations achieve economies of scale without having to create the huge management structures they would have otherwise required.

Perhaps the greatest indication of the value of franchising comes from the governments of states like Malaysia, Singapore and China who have started to promote franchising positively as a way of encouraging locals to acquire business skills by learning from successful systems. Some of these governments have in fact started giving grants to new franchisors to help them promote their business.

The Author is the Founder of Franchise Connect India (P) LTD Mr. Ravi Kumar , one of India’s Best Franchise Solution Provider Company you may speak to him on Legal assistance , Feasibility Reports , Business Operation , Lead Management ,Franchise Recruitment,New Business Idea ,Private Equity information on franchising in india or expanding Internationally write to him at :

Email: ravi@franchiseconnectindia.com

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