In this article we take a closer look at the industry of franchise businesses and how to go about setting up a successful franchise business.
The word franchise has become very common, not just within the business community but even in the common language, because many popular consumer brands operate on what is known as a ‘franchise’ model. We hear about a KFC franchise opening up in some place or a Bata franchise where you can get a particular type of shoe. So what is this franchise, and how is it different from a normal store or an outlet?
A franchise business is a kind of business structure where instead of starting a brand new business from scratch, one can opt to approach a successful brand in the same industry and offer to expand their brand into your locality and run the business for them a share in profits.
Many big brands follow this model where they allow someone else to use the brand name, the business model and certain other intellectual properties in exchange for a fixed amount every month as a ‘franchising fee.’ And the person who has taken the franchise can enjoy the risks and rewards of running the business. Let us look at what are the reasons franchise businesses are attractive.
Why Start a Franchise Business?
Now there are two parties in a franchise. One is the ‘franchisor’ and the other a ‘franchisee.’ A franchisor is a person or entity that owns the brand and all its business interests. They have a successfully running brand in a particular industry with sizable brand recognition and intellectual property that gives the brand an edge over its competitors.
The franchisee is the person who is seeking to use the franchisor’s brand, business model and other intellectual property to conduct their own business. And the two of these parties enter into what is known as a ‘Franchise agreement’ where they lay down the conditions and rules of this franchise arrangement.
Now, for an agreement to be valid, both sides must gain something from the arrangement. Let’s look at it from those two different perspectives.
- The franchisor doesn’t have to spend anything on investment in property, furnishings, logistics or, in short, any of the set-up costs. The franchisee completely bears that. The franchisee has to do all the groundwork, bear all the setting up costs and coordinate the entire process of setting up
- Not just setting up costs but even the running costs are none for the franchisor. The franchisee is responsible for hiring the staff, training them, buying the supplies or the products, bearing the selling and logistical costs etc. So, once again, the franchisor can operate an outlet at virtually no cost at all
- As the brand spreads to more remote areas that previously seemed unreachable, the brand value increases, thereby increasing the overall valuation of the business itself
- Also, even though a customer tries out a product of a particular brand at a franchise, they become a customer of the brand and not of that particular franchise. So even if the customer moves to another location, they will likely use the same brand from a different franchise. So, in essence, this increases the customer base of the brand without spending anything on acquisition costs
- Also, this business model is great for brands looking to do some aggressive expansion because you can open several outlets in several locations in a short period of time at almost no cost.
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- Building a brand is not just an effort. It is also about timing. One might do everything right, put in every ounce of effort, and may still have to wait years before the brand gets any recognition. Building a brand requires knowing the deepest cravings, aesthetics, and moods. And most importantly, it needs the right timing. In a franchise model, the franchisee can save years of time and effort by using the franchisor’s existing brand, which already has market recognition.
- The franchisee also doesn’t have to spend time or effort setting up any business processes or systems. The existing business model of the franchisor is bound to have all the best practices in place already. So the franchisee doesn’t have to spend too much administrative effort.
- The franchise model also drastically reduces the chances of failure, given that the brand has already been tested and approved by the market. So the chances of rejection from the market are not likely.
- The franchisee also gets access to intellectual property, which is out of reach of the rest of the market. The franchisee can use the intellectual property that the rest of the market is legally barred from using. So the franchisee gets an edge in the market early into the game.
- The franchisee also has access to good guidance from the franchisor, an industry expert. This helps deal with operational problems more efficiently and decisively.
How to Start a Franchise Business
There are no fixed steps to starting a franchise. However, there are some basic requirements to starting a franchise. And since those requirements come in a particular order, some general steps can be outlined in setting up a franchise business.
- Meeting with the franchisor – The first step is meeting with the franchisor and putting forward the proposal. Here the franchisee explains the business and financial benefits of letting him run a franchise. They will tell the franchisor the business plan, show the numbers, discuss the location and discuss profitability. The franchisor, in turn, explains the terms of offering his brand as a franchise, what they expect in terms of standards and what will be the financial split of the turnover.
- If the franchisor agrees, they will expect the franchisee to do a costing of what it will cost to set up the franchise and want to see if the franchisee has the funds to set it up. If the franchisee is planning on taking financing of some kind, then they are expected to have a letter from the intended financier.
- Once all these arrangements are made to the franchisor’s satisfaction, the franchisor and the franchisee will draft and sign a ‘Franchise Agreement Drafting.’
A franchise business is great for people entering a competitive industry or an industry where the inside workings are not very well known. It can be a quick way to learn the ropes of the business while making money at the same time. However, the franchise agreement is the key to determining how well the arrangement would work.
So it is important to consult a legal expert to help you through the process of setting up your franchise and drafting your franchise agreement, making sure all your interests are protected. If you wish to start a franchise, or have any franchise-related queries, feel free to reach out to us, and we will connect you to our legal experts to guide you through the process.
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