Franchise is the business organisation that allow an inverstor or entrepreneur use an existing and proven system to distribute goods and services, allowing many inverstors to operate and manage a business whilst reducing the risks associated with the initial start up and management of a small business, (source, www.cashive.com)
Franchise business in current days is very mostly known in different part of the world, a country like USA has got lots of big company operating in franchising business. "According to Price Waterhouse Coopers, in 2001 there were estimates of 767,483 establishments in franchise systems in the United States which provided about 9,797,117 direct jobs" (Teixeira, Franchising pg19).United States Example well known company in the world for food franchising business is McDonald's which started during 1950's, according book of Franchising inside out 2005 by Teixeira (pg 20,21) and there about more than 30000 McDonalds and operaring in about 118 countries, Coca cola also is the company producing beverage, does it operations through franchising almost across all part of the world.
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In franchise there is two terms can be used, franchisor and franchisee. According to Longman Business English Dictionary defined those two terms as follows:
Franchisor is the company that sells a franchise and Franchisee is someone who is sold a franchise.
According to www.cashive.com website defined those two terms above as follows below,
Franchisor is the owner of the distribution rights to a company or business and who the one determines the criteria for franchisees to purchase the rights and takes upfront fee as well as ongoing royalties.
Franchisee is the individual who purchases the right to use a franchise trademark from the franchiser which consists of the products and services, brand name and the franchise business model.
Franchise business seems to be potential in U.S.A, there number of emerging business franchise everday which give much competition in the business environment, a person who want to be a franchisee neeed to do lots of assesments, example individual assement if he/she can able to cope and run the buiness under other part (franchisor) authority.
Sample format of Franchise organisation structure as shown bellow.
Simple format of franchise structure. Source: by simmons 2009, google scholar.
There are two types of franchises. One, business format franchises. Second, Product distribution franchises.
Business format franchises,
The franchisor allow the franchisee to use his trademarks, logo and product, while also the franchisor will help to the franchisee in overall in how to conduct the business itself and also giving guidance in overall management by full helping in operational manuals and designing marketing plans. This type of business is well known in Unitated States of America, Example Mc Donalds, Subway.
Product distribution franchises,
The franchisor give permission to franchisee to sell their products, the franchisee allowed to use trademark, logo and licence to run his/her business, without any management support from franchisor in how to run that business. there is creation of relationship between two part as a supplier, dealer and retailer relationship.
Individual or an entrepreneur who want to start a business as franchisee there certain things he/she needs to be aware with. According to book of Franchising inside out, pointed that an individual (person) needs to identify if the franchise type of business is right decision for him/herself because there number of involments in franchising contract.
First there must be business freedom between two parts (franchisor and franchisee), so the synergy can be achieved , also is part of franchise operation in process and system design and in other hand require conformity and consistency for both part to successful. Second Franchisee will operate under a greement or contract that frachisee mighty sometimes find is very restrictive because all guideness of how to conduct the business will come from franchisor and must be followed to bring mutual agreement between two parts (franchisor and franchisee). Tough challenges to franchisee as own boss to run the business and involvement of personal willingness and decision making, sometimes franchisee can face disapointment example a key staff left the job. Also as franchisee needs to understand that he/she will be under control of franchisor staffs which they will bring certain amount of authority over franchisee.
Always on Time
Marked to Standard
Three key factors that should guide a frachisee (an entrepeneur) decision in selecting an franchise company, according to book of Franchising Inside Out by Teixeira like as follows bellow:
Choosing a business or product that you will fell most confident marketing and operating, frachisee need to be carefull in his/her decision by choosing a franchise business that can comfortably market and sell, selection should based on product or services that have the greatest appeal.
Having the amount of experience that is required to operate the particular type of business you select, knowledge and skills to operate that franchise is vital, some franchise require few staffs and skilled and some require high skilled staffs this depend what kind of franchise chosen
Having the necessary working capital available to invest in a franchise. The amount of capital that required to run the selected franchise is very important. Franchise companies differ in terms of capital restrictions to start up and run the business, a franchisee needs good preparation to have enough working capital for selected franchise to sustain the growth of the business.
Franchising is a specialised form of licensing in which the franchiser will not only sells intangible a trade mark or property to the franchisee, but also the franchiser will insists that the franchisee to agree and abide with rules nad regulations in terms of how it does the business. The franchiser will also make sure time to time to assist the franchiser to run that business on going basis to make sure to minimise the risk of the business to franchisee. The franchiser typically will receives a royalty payment, which that amounts is going to be the percentage of the franchee's revenues from that franchised business. The licensing actualy is pursued primarily by manufacturing firms and franchising is employed primarily by service firms.
According toInternational Franchise Association (IFA), says "the agreement or license between two legally independent parties which gives: a person or group of people (known as franchisee) the right to market a product or service using trademarks or trade name of another business, the franchisee the right to market a product or service using the operating methods of the franchisor, the franchisee the obligation to pay the franchisor fees for these rights, the franchisor the obligation to provide rights and support to franchisees" source: www.franchise.org.
Example of food franchising firm that can apply rules in the extend to control over the menu, cooking methods, design and staffing policies and place (location) of a restaurant. Example of franchising business organisation are Burger King, Nandos, McDonald's, Kentucky Fried Chicken (KFC). McDonald's is one of good franchising form that has been growing up through using a franchising strategy, has got very strict rules to how the franchisees should operate a restaurant also even organises the supply chain to their franchisees, conducting research and development for their franchisees, helps provide financial assistance and management training.
In Franchise business there lots of advantage created by franchisor to franchisee like as follows bellow:
By using well proven franchise idea, is easy to raise up business finance from bank. Because the franchise organisation can be well known and proven.
There is minimisation of risk compared to start your own business, the franchisor helps to minimise the risk of franchisee when he/she start the new business, because the franchisee sometimes has got not enough knowledge in start up of new business so the franchisor will play the major part by helping the franchisee. In terms of marketing research this always the franchisor has already done it to franchisee and will keep uptodate the researching activities to minimal level so to protect franchisee position.
There is minimum amount to start up the business which helps franchisee or entrepreneur who wants to start and run their own business, also is part of opportunities to franchisee too.
Franchisor sometimes can helps franchisee to raise finance, and because there is connection between two parts in terms of prosperity between each other, franchisor can sometimes helps to supply finance to franchisee in case of shortage of finance or organisation growth.
Franchisee can build the business and sell that business on at a profit, because is the franchise business and connected with well known franchise organisation this helps to give good perception to other entrepreneur or organisation who would like to buy that business.
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Franchisor will helps to assess a franchisee if is suitable for the business, this will help franchisee to be able to determine his or her ability and cability to run franchise type of the business and to avoid huge loss that mighty happen in the future which will be probably the end of franchisee to run that business.
Easy for franchisee to sell the business back to franchisor incase if there is any mistake has been made in the start of the business. because the franchisor is acting as the parent company to franchisees so any problem happent to franchisees is easy to stand and rescue them from major loss.
Franchisor gives business support to their franchisees through on going basis by helping to manage and many further support in products by new designing and developing them, selling, new technology, training to staffs and business marketing through testing the market.
Franchisor because acting as parent company, has high purchasing power from their suppliers which buys large quantity of materials and passing those savings down to franchisees.
Franchisee can be allowed by franchisor to expand the business and own more than one franchise unit without any problem, this depends to francisee in entrepreneur ability and capability.
Incase of expansion which will made so many franchise units, franchisee can able to hire the managers who will run those franchise units, and he/she as franchisee can be as the main leader to those franchise units and will control each unit manager which will help the owner (franchisee) to have flexible management.
The marketing knowledge is for small business but using experience and strength for national and sometimes is for international experience too.
Franchisor uses national advertising and promotion which franchisee could not afford to do so or would be very expensive for franchisee if was on his/her own.
Franchise as business firm has created very good brand image to the public environment across the national and international geographical locations, because of that helps franchisee to adopt the ready made brand image.
Is quickest and safest way for franchisee to get into business, because franchisor does the major part to franchisee and failure rates is lower than ordinary business for franchisee to starts up.
Franchisor help to enables franchisee as small business person to run their own small business with all the backing and experience of national or sometimes global organisation behind the franchisee.