This blog will provide you information on franchising agreements, the types of franchising models, and pitfalls that franchisors should watch out for while giving the franchise.
What is Franchising?
Franchising is a business model or a relationship between an established business brand (franchisor) and an independent businessman (franchisee). A franchising agreement is used to govern the relationship of the partners. Under this model, the franchisee uses the branding, the business model, and other intellectual assets of the franchisor.
In return, the franchisees pay a franchise fee and royalty to the franchisor. Although there are several franchising agreements, the most common ones are:
Business Format Franchise
Under this format, the franchisor permits the third party to use their trademark and business model to further their business. In exchange, the franchisee pays certain fees and sales revenue. Franchises based on this arrangement operate under the franchisor company’s rules and regulations
Product Franchise
Under this arrangement, the franchisees exclusively sell the franchisor’s products.
Manufacturing Franchise
Under this arrangement, third-party manufacturers are given rights to manufacture and distribute products using the franchisor’s trade name and trademark.
Franchise Business Models
There are 2 franchise business models. They are:
- Product Distribution Franchise Model
- The Business Format Franchise Model.
Product Distribution Franchise
Under the product distribution model, the franchisee sells the products manufactured by the franchisor. According to this model, the franchisee is not allowed to sell products manufactured by different brands through the same outlet.
Business Format Franchise
The business format franchise uses the brand and trade name of the franchisor to further its business. The franchise remains at an advantage in this format because the franchisor continues training and guiding.
The franchisees also receive operational, production, marketing, training, quality control planning, and guidance from the franchisor. The franchisor also assists in appointing staff and regular marketing activities. It helps the franchise to establish, grow, and expand, such as Bata Franchise does.
Pitfalls a Franchisor Should Watch Out For
A franchise is fraught with its own set of merits and drawbacks for the franchisor and the franchisee. Some of the possible pitfalls for franchisors are as below:
The reputation of Their Company
When a franchisor enters into an agreement with a franchisee, he puts the reputation of his company at stake. Since the franchise is going to grow and expand under the parent company, its performance and achievements can impact the brand positively or negatively. In case the franchisee fails in his business or earns disrepute, it reflects on the reputation of the company, which may erode the goodwill the parent company had earned earlier.
Finding the Right Franchisees
The success of a franchising company depends on its franchisees. The new entrants who opt for franchising must be trained well. Some franchises going through financial constraints become desperate and throw caution to the winds. This may impact the business negatively.
A franchisor must always build a stable and reputable network to find the right franchisee for them. If the franchisees are strong and perform well, the company will also prosper.
Business Plans and Financial Stability of the Franchisee
It is important to know the franchisee’s business plan and financial status before getting into any agreement. The franchisor must gather information like the stature of the franchisee in the market, their capacity to mobilize funds, goodwill, managerial and leadership skills, competitive attitude, and other similar factors.
It is crucial to know the franchisee’s business plan, whether they are interested in expanding the business or plan to relax under an established company’s tutelage. The franchisor should review all these points and enter into an agreement only when totally satisfied and assured of a good deal. Make the Franchisors Document with our experts advice.
Untrusting Franchisees
Franchisees who do not trust the model the franchise has to operate on, and do not trust the franchisor may impact the business negatively. They may try to break free of the operating model or culture of the franchise, thereby causing damage to the parent company’s brand value.
This lack of trust may be due to lack of transparency between the franchisee and franchisor. Franchisors can fix this situation by making their processes transparent and adopting an inclusion policy for their franchisees.
Adjusting to Becoming a Franchise Owner
Although it seems fairly simple, running a franchising company is not a joke. A business person who is immersed in managing the day-to-day operations of a business is laden with a new set of responsibilities and concerns when he decides to franchise his business.
A franchising entrepreneur must have leadership qualities. They should be able to inspire and motivate their employees and franchisees alike. Having a growth mindset, good decision-making abilities and communication skills can go a long way in building a good relationship with the franchisees, and growing the business.
Points to Remember for Franchisors in Franchising Agreement
Below mentioned are some clauses you should check before signing a franchising agreement:
Intellectual Property
Licensing of intellectual property rights is the main point of the franchising agreement. Under this agreement, the franchisee is given the right to use the intellectual property (trademark, know-how, copyright, business concepts, and others) of the franchisor.
You must make sure that the agreement clearly states which of the intellectual property is being licensed to use. It must also be mentioned how the franchisee should use the intellectual property. It must also be mentioned that after the franchising agreement is terminated, the franchisee should be prohibited from using the trademark.
Training
The franchisor should maintain uniformity and consistency in all formal operations. He must provide training, support, and supervision as and when required by the franchise. This point should be clearly mentioned in the franchise agreement.
Royalty
Besides paying an initial fee to the franchisors, the franchisees must pay a certain royalty (on-going royalty) on a monthly basis, i.e., a percentage of the total sales in a month. The percentage and type of royalty, due dates, and mode of payment should also be clearly mentioned in the franchise agreement.
Term and Renewal
Usually, the franchise agreements are of 5 years or 10- year terms. Some carry renewal options too. You must make sure that the renewal fee is reasonable. You must also have the franchise agreement reviewed by a legal professional before signing it.
Advertising and Marketing
To enhance their brand power and visibility, franchisors plan marketing and promotions just like KFC Franchise did. The KFC franchisor promotes the brand, and the franchisees participate in the brand-building activities. The franchising agreement should clearly state the advertising commitment of the franchisees and the fees they must pay towards the costs incurred.
Conclusion
Establishing a franchise and running it efficiently and effectively requires effort, diligence, and dedication. The responsibilities and concerns of running such a business are immense. To run the business smoothly, the franchisor has to make the right choices and watch out for pitfalls which could otherwise impact their business negatively. In case of any queries reach out to Vakilsearch.
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