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The definition of franchising has changed over the years due to advancements in legal structuring and better business practices.
This definition has enabled practitioners to keep their franchises fresh and innovative.
Franchising is a system for expanding a business and distributing goods and services to meet higher consumer demand. It’s based on a relationship between the brand owner and the local operator to skillfully and successfully extend one’s established business system. As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.
From a business perspective, a franchise is a contractual relationship between a licensor and a licensee for the licensee to use the licensor’s method of doing business to distribute products or services using the franchisor’s trade or service mark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark. While every franchise is a license, not every license is a franchise under the law.
Role of the Franchisee
A franchisee has four major responsibilities for the success of the system in which they are granted a franchise:
- To protect the franchised brand by operating the franchise in strict compliance with system operating standards.
- To build a strong and loyal customer base by offering only approved products and services and by providing superior customer service.
- To ensure that all employees are properly trained and the franchise is properly staffed at all times.
- To advertise and promote the franchise and its approved products and services according to the guidelines provided by the franchisor.
Attributes of a Successful Franchisee
- Be willing and able to learn new skills. As the operating manager of a franchise, you will take on a multitude of roles, from a trainer to watchdog to customer service to financial advisor. The franchisor sets the brand standards, but they are not responsible for how the franchisee’s day-to-day business is run. It is a steep learning curve, but if you can master these new skills, you can become a successful franchisee.
- Be able and willing to follow system standards. As a franchisee, you are chiefly agreeing to follow someone else’s operating system, often including specific requirements for what marketing materials to use, what suppliers you must work with, and what specific products or services you must offer.
- This, along with the licensing rights and restrictions on how you can use the franchisor’s intellectual property, is what you are investing in. In exchange for this ready-made operating system, a franchisee has to report their sales and expenses, follow instructions on how to present the products and services, and comply with the franchisor’s advertising requirements. Every day, week, month, and year, the franchisee will be following protocols set up by the franchisor. If the franchisee fails to meet those brand standards, they risk being in breach of their franchise agreement.
- Be ready to move from big business to small business. The former corporate middle manager who wants to be a franchisee has a broad understanding of business, knows how to work within a system, knows how to motivate staff, and certainly is no stranger to long hours. But a franchisee is essentially a small business owner, which means leaving behind the internal support services they have grown accustomed to, as well as the many benefits that come with employment at a larger company, such as retirement plans and paid sick days, expense accounts, and health insurance plans.
- As a franchisee, your success is measured each day in your franchise’s performance, requiring more self-reliance than many corporate managers have had to demonstrate. However, a well-structured franchised system will provide a level of support that contributes to the franchise’s success.
We often think of restaurants like McDonalds, Subway, and Burger King when we hear the term franchise, but these companies aren’t actually franchises themselves. The way it works is the McDonalds Corporation owns the licensing rights to its product names, processes, and distribution network. No other company can call its sandwich the Big Mac without permission from McDonalds. That is where the concept of franchises comes into play.
In an effort to grow their global business McDonalds found out it would be too costly to actually build buildings and run thousands of restaurants. Instead, they decided to sell the rights to use the name McDonalds along with the products and processes. This way the corporation doesn’t have to invest in new fixed assets, but it can make a profit while expanding the reach of its brand.
A franchise McDonalds store is typically privately owned and must pay the greater corporation an amount each year to maintain its franchise. It must also adhere to specific production and quality requirements. Have you ever wondered why every McDonalds franchise is exactly the same? Well, that’s because each franchise is required to make their burgers, shakes, and fries exactly how the corporation tells them to.
What Does Franchise Mean?
We know what McDonalds Corp gets out of this contract, but what do the franchisees get? Well, they get a business plan and access to an already established market. Starting a new McDonalds isn’t like starting a new Mom and Pop restaurant. It already has an established customer base. That is exactly what the franchisee is paying for.
In finer terms, franchising is an arrangement, in which the manufacturer, permits another firm, the right to use its diverse intellectual property rights such as trademark, brand name, technical know-how, designs, etc., in addition to the proven name, goodwill and marketing strategies, for a certain sum. E.g. Mc Donald’s, Subway, & Eleven, Domino’s, Dunkin’ Donuts, etc.
In franchising, the firm that grants a license is called franchiser, and the individual or entity to whom the right is conferred is franchisee. The franchisee acquires franchise by paying initial startup and annual licensing fees to the franchiser, who in return provides training and assistance to the franchisee at regular intervals.
Franchising Agreement is a special agreement between both the parties, under which rights are given, and also the terms and conditions relating to franchising are stated clearly.
Characteristics of Franchising
- License: The franchisee gets the right to use, franchiser’s trademark under a license.
- Policies: The franchisee must follow the policies concerning the mode of conducting business, as stated in the agreement.
- Marketing support and technology: Franchisee is supplied with continuous market support and technology, by the franchiser, to undertake business, in the manner stated in the franchising agreement.
- Training: Complete training and assistance are provided to the personnel working in the franchisee’s enterprise.
- Royalty: For making use of a well-known business model, the franchisee pays the royalty to the franchiser.
- Limited period: Franchisee is allowed to use the business know-how and brand name for a specified period, as mentioned in the franchise agreement. Although, the agreement can be renewed further.
Franchising is a most common practice of expanding the business, through a licensing relationship, wherein the owner provides training, equipment, ingredients, and marketing support to the other entity.
Importance of Franchising
- It allows franchiser to augment his distribution chain in minimum time.
- It provides feedback to the franchiser regarding the product popularity, needs and choices of customers, etc.
- It expands the network of franchiser which helps in increasing goodwill.
- As the business is already established, the franchisee need not make efforts in promoting the product.
- Franchisee get sole rights in providing the product or service
Franchising is a great alternative to developing chain stores, to provide goods and services to the customers and avoid investment. But there are certain demerits attached to it such as there is always a fear that franchisee may open the same business with a different name, after the expiry of the said term. The franchiser’s brand name and reputation will suffer if the franchisee does not provide quality service to the target audience. Besides this, as there is a certain restriction due to which the franchisee lacks freedom in conducting business.