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It is a type of a contractual legal agreement where the parent company (the franchisor) delivers products package, systems and operation management and process whereas the franchisee contributes capital, market knowledge and personnel. Franchisor permits the franchisee to use the its brand name, trademark and business system and the franchisee agrees to pay the royalty and fee for using the right to do business under franchisor's brand. The legal binding contract and also sometimes the business run by franchisee are called "franchise". It is a continuing relationship between franchisor and the franchisee. Franchisor grants licensed rights to franchisee to carryout business and provides with training, processes, marketing and merchandising in return of money. Due to its proven processes, systems and track record, franchise has more chance of succeeding that any other business that is just starting up.
The franchise business model is a hierarchical. Normally, it consists of the following levels.
It is the actual owner of the business. It can be the person or firm that conceived the franchise idea and oversees all the franchise business aspects.
It is the person or organisation that mostly deals with the franchisee and sells the franchise license. The master franchisor would have a specific number of franchisors in a specific territory who sell the business concept in that specific territory.
Franchisee is the final level of the franchise business model. Franchisee can operate from sole trader to a limited company after getting the franchise license. Franchisee will be guided towards the correct business format by the level of risk involved in the business.
Franchise is a tried and tested business model. Franchisee gets a readymade business that is just coming off the shelf. Franchisee does not have to do formulate new processes or make huge investment of time and money to create a new process and systems. There are some unique features in franchise business model. It gives a speedy start up to business. The idea of franchise business that is just coming out-of-the-box gives the opportunity to establish a new franchise within days of getting the license.
Because of its very nature the franchising business can be expanded markedly considering the market size. Franchisor would take any given number of franchises in a particular territory into account so that too many of them might not affect the profitability and operations. In some franchises, market knowledge is not at all necessary. Full and comprehensive franchise training is included in the business model. Training might be included in the fee of license. The business model would take a period in which the franchise might operate at a loss into account. Franchisee's hard work for their franchise would eventually take the business into profit.
Franchisee's payments to the franchisor every year is another aspect of the franchise business model. Franchisee must find out the level of payments when it needs to pay. Franchisee has a certain degree of autonomy over the business but franchisee is not the ultimate owner. Franchisor controls almost all feature of the business. Franchisee is actually only leasing the business.
Business Format Franchising
In this type of franchising the business owner, the franchisor, gives the person or business, normally franchisee, the licensed permission to use their business idea often particular territory. It is very common type of franchise business. In this type of franchising, the franchisee is distributing the products and services from the franchisor, uses its brand name and trademarks and takes advantage of its help and support. Franchisee, in return, pays a start up fee and a royalty or sales revenue percentage every year to the franchisor. Franchisee is the owner of franchise business they run but the marketing and sale of the products and use of the business concept is controlled by the franchisor. In this type of franchise, the franchisee is given a comprehensive business plan or format by the franchisor to manage the business operations. In this type of franchise, the system, the ways of distributing products and services are developed, checked and related to the trademark. This way a successful retail idea can rapidly expand than expansion through company. McDonald's, Dyno-Rod and Prontaprint are some examples of this type of franchising.
Expansion on Franchisee's Capital
Franchising can prove to be a great way to expand into new markets. There are huge advantages of franchising as a way of expanding the business. It is very useful to expand a business in a greater geographical territory. The main benefit of being a franchisor is that it can use franchisee's knowledge, skills and talent to expand into foreign countries more easily, manage extra outlet and use their capital. Franchisor's investment in capital to expand the network is lesser as much of the chunk comes from the franchisor. Usually, an owner is a lot more interested in the well being of business that is why a franchisee would take more responsibility and interest in business, local customs, legal regulations and consumer tastes. Profits can improve by the help of Franchisee generating recurring revenues. Franchisor can tackle distance problem when operating in far away countries because of lesser supervision required in this type of business model. In franchising, the expansion is given in the hands of the franchisees that have also invested their own funds into the business and are more interested and motivated for this task. Management stretch caused by expansion can be lowered with this business model as lesser management is required to hire, train and motive staff than in company owned outlets chain. Also it can expand more quickly as it save the costs and overheads involved in putting new outlets. The expansion builds brand image. Better agreement, information papers and process instruction manual can help to overcome many challenges arising within this business model. Over grown firms with corporate run network can use this model to expand into markets it could have otherwise neglected. Franchisor can use the franchise numbers strength to strike better deals with its suppliers. A profitable and much predictable franchise will be better able to rent locations in malls where it would have not been possible otherwise. Franchises can enjoy rather generous advertisement, marketing and product research and development budgets.
Motivation of Franchisee
A franchisee is obviously more motivated to make the business work as his he has his own money invested into it. The fact that it is an easier, safer and quicker method of owning a business serves as another motivational factor. Franchisee has the opportunity to invest into necessary expertise and experience instead of making mistakes and taking risks. Franchisees get great value in experience and knowledge for their investment. Getting an established brand name with great goodwill buy acquiring a franchise is another motivational factor. On the other hand, on its own, franchisee might have to invest huge time and money to achieve same level of reputation and name. If an investor decides to start a business individually, he would face great difficulty in getting the best location. Whereas, if he is a franchisee of an established firm, he can get a lease in the finest mall in the area.
Franchisee can get great competitive advantage and increase profitability due to the franchises' immense buying power of a group. A franchisee can get far better quality and quantity of advertisement from its advertising funds for its market by the business than if it would have made an individual investment. Also it is eligible for some of the best research and developmental programmes that other individual businesses can only dream of. These programmes can prove a huge edge in competing and increasing profitability. These factors are good enough to keep the franchisee positively motivated for the business.
Local Market Knowledge of Franchisee
As the franchisee is chosen from the local market, logically, it would have the first hand knowledge of where the best opportunities are, what are the thriving products or services that it can offer, local consumer taste, best methods for marketing and advertising, possible risks , advertisement's most reasonable return on investment, effectiveness and nature of market competition and much more. Franchisee can save on time and money in marketing research by communicating this market knowledge that he gathered by accumulated learning in the very start. Franchisees can use their knowledge to get greater franchise ores, economies of scale and availability of better bargains with suppliers by getting raw materials, goods and services in bulk. Franchisees also have the skills of recruiting the best quality staff from the local market by targeting their employment advertisements in the right areas. Franchisee's technical knowledge in the local market can be useful in their training and also providing a lower expense operating model.
Franchising in Estonia and India
Franchising is a great way to enter the emerging markets like India and newly capitalized countries such as Estonia. Emerging markets have around eighty percent of the world's population. In next two decades, the world's trade is expected to come mainly from the emerging markets. These markets present different kind of challenges than markets in developed countries because of different conditions where franchisors are more experienced. Franchisors should assess the economic and growth potential in these markets and then devise a reasonable fee structure for their business model. Franchisors should analyse the GDP per capita, population level as well as the economy's growth rate. GDP is often the basis of classification of the emerging markets as it indicates the economic and political situation of the country as well as the income level. GDP should be seen in context with the purchasing power as input prices and living costs are quite lower in these markets. The population level is also a widely discussed factor in economic potential. China and India, each with about one billion people population are considered the most suitable place for business expansion. A large chunk of the population is poorer and lives in lesser developed areas where there are a few franchises. Growth rate of economy is another factor. Higher the growth rate along with the control demand for better life style reduces political risk and creates a middle class. This growing middle class should be seen as the most appropriate opportunity for expanding the business through franchising.
Proven Business Format Support from Franchisor
Apart from getting an established business and brand name, trademark, recognition and tried and tested processes, operations and business practices, the franchisee gets a ready market to start with. Franchisee gets a well proven business format support from the franchisor who does not want franchisee to go under as it would tarnish their reputation. Franchisee can use the franchisor's services and help that it needs while running his own business. Head office's assistance is also available. Field operation personnel are used by many international companies whom can be contacted by the franchisor to resolve their issues for the smooth running of the business. Turnkey operation is a widely offered franchised format these days. The franchisee gets the necessary equipment and supplies to run the business when the agreement is signed and initial franchise fee is made. Franchisor also helps franchisee in choosing the best location for the new franchise. Business can also help in discussing lease negotiations, shop layout plans, furnishing and shop fitting etc. A suitable inventory of stock to open the business can be determined by the help of franchisor. These advantages and support from the franchisor under the agreement are the main factors in choosing franchising.
Much needed training is also provided by the franchisor to start the business initially. The franchisee and his staff are taught about the business model that includes production, quality control, and management, hiring and marketing.
Buying Supplies at Lower Costs
Due to the group buying power of the franchising business, it can help the franchisee to get all necessary supplies at lower cost. Franchisor can manage to get huge discounts for the franchisee because of the predicted regularity and size of the order. Each franchise gets huge savings because of the wholesale purchase of the supplies for all the franchisees in the network. By reducing expenses, the franchises can gain a vital competitive advantage. Franchisee has more benefits in this type of set up than getting independent supplies.