Check out this blog for information on franchises and their models. Also, learn about the process of franchising and things to be considered before taking a franchise.
What is a Franchise?
Distributing goods and services under an established brand’s trademark and business system is known as a franchise. A Franchise Business Models involves a relationship between a franchisor and a franchisee. The franchisor establishes the trade and business system, while the franchisee is an individual who wishes to do business under the franchisor’s name and system.
For such an agreement to happen, a franchisee pays royalty and sometimes an initial payment to the franchisor. This business relationship is known as a Franchise Agreement. Creating and then distributing the brand is known as franchising.
Nowadays, new entrepreneurs prefer to indulge in franchising as it is safer, and the initial homework has already been done. The brand is already a recognized name in the market, the business system has been established, and is operational.
Franchise Business Models
There are two franchise business models. They are:
- Product Distribution Franchise Model
- The Business Format Franchise Model
Product Distribution Franchise
Under this model, the manufacturer (franchisor) produces the goods/ products, and the franchisee makes the sales. This setup is very similar to the supplier-dealer relationship, with only a few variations.
However, the similarity ends there. In a franchise, the franchisee can only sell the products manufactured by the franchisor. In contrast, in a supplier-dealer setup, the dealer may be allowed to sell products of various brands under the same roof.
Business Format Franchise
The business format franchise model is more popular and common. In this model, the relationship between the franchisor and the franchisee is much stronger than other formats.
Like the product distribution model, the business format franchise uses the brand and trade name of the franchisor.
The franchisee is at an added advantage because they receive marketing, operational, production, training, advertising, planning, and quality control guidance from the franchisor. The franchisor also assists in appointing the staff and planning day-to-day marketing activities. This guidance and support are very desirable since it helps the franchisee easily establish himself in the market. The franchisor also helps the franchise to grow/ expand.
Advantages of a Franchise Agreement:-
Some of the advantages of owning a franchise are:
- The franchisee works under an already established trade name
- An established brand reassures the customers and ascertains their loyalty
- Opens up more opportunities for sales
- An established business is already a competition for other brands
- When working with a top franchisor, the risk of failure is substantially low
- The franchisee gets easy access to good deals and quality suppliers
- The franchisee benefits from the promotion and the ad campaigns of the brand
- The franchisor also keeps the franchisee up to date about the business’s latest market research
- The franchisor trains and guides you to employ the best strategies to manage the business operations effectively and efficiently and reduce the overall cost.
Franchise Regulations
Franchise regulations play a crucial role in shaping the dynamics of the franchising industry, providing a legal framework to govern the relationships and interactions between franchisors and franchisees. These regulations are designed to ensure fair practices, protect the rights of both parties, and maintain the integrity of the franchise system.
Disclosure Requirements
Franchise regulations often mandate franchisors to provide comprehensive disclosure documents to potential franchisees. These documents contain essential information about the business, fees, obligations, and other critical details.
Territorial Rights
Regulations define the geographic territories granted to franchisees, preventing conflicts and competition between franchisees within a specified area.
Contractual Agreements
Legal frameworks govern the content and structure of franchise agreements, ensuring they are fair, transparent, and in compliance with the law.
Consumer Protection
Franchise regulations often include provisions to safeguard consumer interests, enforcing quality standards and truth in advertising.
Intellectual Property
These regulations define the use and protection of intellectual property rights, including trademarks and trade secrets.
Advantages and Disadvantages of Different Franchise Models
Franchising is a popular business model in India, offering various structures, each with its own set of advantages and disadvantages. Let’s delve into the benefits and drawbacks of each franchise model:
COCO Model
Advantages
- Entire profit goes to the company, enhancing financial gains.
- Facilitates expansion in challenging locations where finding franchisees is difficult.
- Showcases the company’s outlet and product range effectively.
Disadvantages
- The corporation diverts resources to activities outside its core business, like owning and managing a store.
COFO Model
Advantages
- No operational expenses for the company.
- High productivity and efficiency with entrepreneur-managed outlets.
- Allows the company to open outlets in areas lacking franchisee interest.
Disadvantages
- Franchisees hold responsibility for customer experience, impacting the company’s reputation.
- Risk of uncertainty if a franchisee decides to exit the business.
FOCO Model
Advantages
- Enhanced customer handling since the company controls the customer experience.
- Cost savings for the company as franchisees cover operational expenses.
Disadvantages
- Not suitable for those aiming to rent property for franchising.
- Franchisee’s limited involvement in day-to-day operations may affect business growth.
FOFO Model
Advantages
- Diverse franchise opportunities to select from.
- Offers a great return on investment with a successful franchise.
Disadvantages
- Higher failure rate compared to other franchise models.
- Some franchisors view it as a shortcut to success, potentially leading to longer return on investment time due to hefty fees and investments.
- Each franchise model presents unique opportunities and challenges, requiring careful consideration and alignment with business goals before making a choice.
Franchising Process
Doing the Background Research
If you wish to start a franchise, you must be sure of the type of franchise you would want to operate and your expectations. Draw a list of franchisors you wish to work under. Choose businesses that suit your budget, targets, objectives, and capacity. You must pay attention to the legal aspects and perform in-depth research about the business you would like to invest in.
Contact the Franchisor
It is always better to meet the franchisor in person as you will gather more knowledge about the business and the person. At this point, you must ask questions and gather information regarding the business operations, growth plans, and others, thereby driving you to make an informed decision
Negotiate
If the initial meeting with the franchisor goes well and you are satisfied, you can go ahead with negotiations. This is a complicated and tricky process. So, you must use your best strategies and skills to negotiate. Remember that all your terms and conditions cannot be accepted/ fulfilled. Both parties have to agree to each other’s terms.
Signing the Agreement
This is the final stage of sealing the franchise deal. At this point, you should hire a legal representative to guide you. Also, go through the agreement thoroughly and review it a couple of times. You must make sure that everything is clear in the agreement, and this is necessary to safeguard your interests and avoid disputes at a later date.
Factors to Consider While Buying a Franchise:-
Some of the factors to be considered before taking on a franchise are:
Market Requirement
Before starting any business, it is only sensible to know and understand the market and its demands. You must study the market trends and only then decide what you want. You must also keep your budget in mind throughout the process.
Before deciding on the brand you wish to opt for, you must study the business’s potential and the growth opportunities. You should invest only after you are convinced by the information you have gathered.
Listing and Tracking Brands
There are various brands in the market offering franchises. It would be sensible to make a list of some good brands, and study their records, growth, business policies, and financial status in the market.
This is very important because offering a franchise does not mean that the company is reliable. You must ensure that it is a strong and successful brand before investing in it.
Costs/ Expenditure to Start a Franchise
You also need to understand and mull over your budget. Once you step down to franchising, you will have to pay royalty and an initial fee to the franchisor besides payment for staff, material, location, and other things. It is advisable to pen down the expected expenditure and then look for suitable franchises.
( We can take KFC Franchise and Bata Franchise for reference )
Competition
The business market is fraught with competition, so it is advisable to opt for a strategic business as it would be easier to work in. Look for a brand that will help you grow your business and their brand’s name. You must review different franchising brands and their competitors before deciding on a particular franchise.
Training
Since a franchising brand offers training to its franchisees, you should choose a franchise that will train you well. Brands that provide good training and guidance are the best to opt for.
Restrictions
Once you take up a franchise, certain rules and regulations/ guidelines the brand offers need to be followed. These guidelines are according to the experience and expectations of the franchisor, and they are based on the standard of the brand. The franchisor indirectly handles everything at the store, so a franchise is much different than what it appears to be.
Conclusion
The current generation has seen many youngsters venturing into being entrepreneurs. While being a franchisee may look attractive at the outset, everything comes with merits and drawbacks. Being mindful of what a franchise is, its process, and the factors to consider before entering into a franchisor-franchisee relationship can ensure fewer challenges in your entrepreneurial journey. If you have any queries reach out to Vakilsearch.
FAQs
A franchise business model is a strategy where the owner (franchisor) grants individuals or entities (franchisees) the right to operate under their established brand, utilising their business processes, support, and resources in exchange for fees and royalties.
The four main types are Product Franchises, Business Format Franchises, Manufacturing Franchises, and Business Opportunity Ventures.
Common types include Company Owned Company Operated (COCO), Company Owned Franchise Operated (COFO), Franchise Owned Company Operated (FOCO), and Franchise Owned Franchise Operated (FOFO).
Business Format Franchises and Multi-unit franchises often prove highly effective due to standardised processes, comprehensive support, and economies of scale.
High-margin franchises like fast-food, health, and fitness tend to be the most profitable.
An example is Subway, where franchisees operate under the Subway brand, following their business processes and standards. What is a franchise business model?
What are the 4 types of franchise business?
What are the different types of franchise models?
What are the most effective franchise models?
What kind of franchise is most profitable?
What is a franchise model example?
Read more:-
- Master Franchise Advantages and Disadvantages
- Types of Franchise Business
- Elements of a Franchise Agreement
