Franchising is a form of marketing and distribution in which the owner of a business system (the franchisor) grants to an individual or group of individuals (the franchisee) the right to run a business selling a product or providing a service using the franchisor’s business system.
Franchisees are also given permission to use the franchisor’s branding, trademarks, and identifying marks under specified guidelines. It is important for anyone deciding to start a business by becoming a franchisee to remember that in franchising the franchisee is bound to a partnership agreement with the franchisor for a defined period of time (some exceptions do exist).
As it relates to business, Merriam-Webster defines a franchise as: “the right or license granted to an individual or group to market a company’s goods or services in a particular territory.” While a good definition, it doesn’t exactly touch on many of the nuances involved in franchising.
The definition for franchising given by the International Franchise Association (IFA) gives more detail, stating that a franchise is:
“A contractual relationship between the franchisor and the franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format or procedure owned by or controlled by the franchisor, and in which the franchisee has made or will make a substantial capital investment in his business from his own resources.”
Types of Franchising
1) SINGLE UNIT
A single unit franchise is an agreement in which the franchisor grants the franchisee the rights to open and operate one franchise unit.
This is the simplest and most common type of franchise, and many new franchisees start this way, in order to “get their feet wet”. Many times, after the franchisee opened his single-unit and is prospering, he may negotiate with the Franchisor the possibility of opening other units over time.
2) MULTI UNIT
A multi-unit franchise is an agreement where the franchisor grants a franchisee the rights to open and operate more than one unit. Typically there will be a schedule determined during which the franchisee will be expected to open the units.
3) AREA DEVELOPMENT
As an area developer, a franchisee has the right to open more than one unit during a specific time, within a specified area. As compared to the Multi-Unit agreement, in the Area development agreement, the franchisor grants the franchisee exclusive rights for the development of that territory. For example, a franchisee may agree to open 5 units over a five year period in a specified territory. That territory is restricted to that franchisee, and no one else can open units in the territory during the contract term.
4) MASTER FRANCHISE
So, as we said in the title, we would tell you what the “hidden gem” is in the franchising industry. So here it is: Master Franchise!
A master franchise agreement gives the franchisee more rights than an area development agreement. In addition to having the right and obligation to open and operate a certain number of units in a defined area, the master franchisee also has the right to sell franchises to other people within the territory, known as sub-franchises. It is like being a franchisor, but in a specified territory. You still have great level of support from the Mothership (the main franchisor), but in your territory you take over many of the tasks, duties of the franchisor, such as providing support and training. But naturally, as you are acting as a franchisor in the territory, you are also granted the benefit of receiving fees and royalties from the franchisees in the territory.
Advantages of franchising
The following are some of the advantages of buying franchise.
1. Higher success Rate: When entrepreneurs buy a franchise, they buy an established concept that has been successful. Franchisees stand a much better chance of success than people who start independent businesses.
2. Assistance: When entrepreneurs buy a franchise; they get all the equipment, supplies and instruction or training needed to start the business.
3. Cost reduction: Franchisor can afford to buy in bulk and pass the savings to franchisees. Inventory and supplies will cost less than running an independent company. For example, running a courier company on own could be a difficult task. But by being a franchisee of Overnite Express, the franchisee can save money.
4. Profits: A franchise business can be immensely profitable. The probability for a small business to succeed is high as they have the backup and support of well established big business enterprises.
5. Marketing assistance: When a business is associated with a franchisor then the big-business themselves help in corporate marketing of the goods of the small industry or business they are providing support for.
Disadvantages of franchising
The following are some of the disadvantages of buying franchise.
1. Control: Some franchisors exert a great degree of control. No decision can be taken by the franchisees without consulting the franchisor.
2. Ongoing Costs: Besides the original franchise fee, royalties, a percentage of franchise’s business revenue, will have to be paid to the franchisor each month.
3. Lack of Support: All franchisors do not offer the same degree of assistance in starting a business and operating it successfully. Assistance is provided only at the time of starting the business.
4. Expensive: Buying a well-known franchise is very expensive. Entrepreneurs must have the ability to arrange the necessary finance.
5. Time consuming: Lot of time is required while selecting a franchise. A complete and thorough research is required to select the right franchise and to determine whether it would work for the business or not.
6. Misunderstanding: Franchise is a complex procedure and disputes may arise between the franchisee and franchisor.
Franchising Legal System in India
The franchising of foreign goods and services to India is in its infancy. The first International Exhibition was only held in 2009. India is, however, one of the biggest franchising markets because of its large middle-class of 300 million who are not reticent about spending and because the population is entrepreneurial in character. In a highly diversified society, (see Demographics of India) McDonald’s is a success story despite its menu differing from that of the rest of the world.
So far, franchise agreements are covered under two standard commercial laws: the Contract Act 1872 and the Specific Relief Act 1963, which provide for both specific enforcement of covenants in a contract and remedies in the form of damages for breach of contract.