Franchising – the Cyclic Model
Many people have this misconception that a franchisor is the owner of some business model and ideas who sells the same to the franchisee for raising the money. Such an understatement makes franchisor-franchisee relationship unilateral and terminating the franchisee signing on the agreement.
Franchising is a cyclic process, which starts with the agreement signed between the franchisor and the franchisee. Both the franchisor and franchisee are bound by some obligations and duties that each needs to perform for the smooth operations and functioning of the business.
It is quite true that the franchisee has to invest the money, but every single rupee invested by the franchisee is counted and given an equivalent return. There are two kinds of payments to be made by the franchisee – the franchise fee and the royalty. The fee is well-calculated and not just any demand made at random. To give you an idea, the franchisor takes the following points in mind while devising the franchisee fee:
a) The market value of the brand in any particular region
b) Cost on procurements to be received by the franchisee
c) Equipments Cost
d) Training Cost
e) Business Development Fee for the Brand and the individual unit of the franchisee
Similarly, the royalty that is to be paid is calculated on the basis of the services and support that would be received by the franchisee. One point worth noting is that the franchisor estimates the business profit that would be gained by the franchisee.
Franchise fee is not the final price and negotiations do take place. But in most cases the royalty is fixed and non negotiable.
The cyclic process of franchising therefore starts with the franchisor and franchisee signing the agreement, following the payment of fees by the franchise and then services and returns provided by the franchisor every time the franchisee pays the money.