Franchising is a very old practice that has been followed since decades in the business and commerce industries. It is a mode of expanding the customer base by entering into a legal contract with a partner, referred as franchisee. As per the popular practice, the franchisee buys some exclusive rights from an established business firm or individual in lieu of payments. The rights include the popular name of the brand and trademark rights. In addition the provider or franchisor also supports the franchisee in the initial stages of setting up the business.
Ownership in Business Franchising
In franchising, the franchisee owns the rights to use the brand and carry out key business activities in a particular area. The right is exclusive, meaning no other person or party can engage in any business activity with the same brand name. The owner itself cannot do business in the franchisee owned territory. Therefore, franchisee is the operational head in a given territory and may conduct the business with least interference from the brand owner. The franchisee is also liable to the rights for a given period of time, as provided in the franchise agreement.
Need for Franchising
It is obvious that not all businesses survive or enjoy the same success. Some business ventures prove to be very successful, whereas others strive for sometime and collapse in unfavourable conditions. People behind the successful business ventures over a period of time are interested in expanding their business. In many cases a simple multiplication of the units or business process serves the purpose. However, the conditions may not suit to some and therefore call for different provisions or to see alliances.
Franchising is a kind of alliance, which allows minimum participation of the owner and more commitment from the buyer or franchisee. The franchisee learns about the business and the required training and amenities are provided by the owner, who becomes franchisor. The established unit goes under the same name and follows the same business strategies and methodology.
Business Format Franchise
There are basically two kinds of franchise models – business format franchise and product franchising. Business format franchising refers to the one wherein a complete business model is shared with the franchisee. For example, chain of restaurants. The business owner of the restaurant chain allows other people to invest money and start a restaurant in a specified area. The owner provides the brand name and shares his business model of effectively running the restaurant with the investor (franchisee). The franchisee establishes the restaurant and runs the restaurant in consultation with the owner (franchisor). The owner further provides support services as training of the chefs, hiring of the chefs, etc.
In product franchising, an investor is liable to rights regarding buying and selling of a particular product under a given brand name.
Franchising and Growing Chains of Business
Franchising encourages the growth of business chains. By adding the units under its banner, the business keeps on expanding to new territories. With large business chains, the need to standardise the services becomes very necessary. At the same time, the franchise chain may also allow customizing its business model to customer base located in different regions. McDonalds is one good example. The fast food outlets in India may take care of taste of Indian customers, rather than customers in other countries.
Business franchising is a very useful mode to expand the business and also to start a business with minimum risks.