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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 is a great method of expansion. The best attribute of being a franchisor is the functionality of not only using the talents and skills of a franchisee to manage an additional location but also their capital investment. Franchisees if selected correctly can help produce recurring revenues that will enhance a franchisors bottom line profits. However with any business model challenges can arrive. With a franchise operation; many of these issues can be obverted if a proper franchise agreement, operations manual, and franchise disclosure document is created properly and utilized in the beginning. Investing into the services of a franchise consulting agency such as Franchise ASAP can potentially save thousands of dollars in legal fees and hassles if the franchise paperwork was not created with planning and forethought.
A business can more easily expand within a larger geographical area through franchising. Expansion into foreign jurisdictions is often easier, because the franchisee will take responsibility for dealing with local customs, tastes and regulations. The reduced amount of supervision required in a franchise system helps to overcome the problems of distance inherent in conducting business in other provinces or countries. Franchising is sometimes utilized, by a business which has expanded to it limit as a corporate owned network, to exploit markets which would otherwise be neglected.
In business, it is generally recognized that an owner will be more attentive than a manager. This is the central point which makes franchising so attractive. A franchisor can rest assured that the person operating his store will be "attending to business" much as he would.
And, there is strength in numbers. The successful franchisor can command incredible deals with suppliers of all sorts. The sometimes difficult to obtain mall locations will be in easy reach of a business that can assure a landlord of profitable and predictable tenants in all of his developments. Advertising budgets can be generous, and there are often greater resources for research and development. In many systems, franchisees provide the greatest contribution to improving the business.
The benefits of franchising as a means of expanding a business can be significant:
â€¢ It involves a lower of capital investment by the franchisor as the capital used to
expand the network comes from the franchisees. Although the revenue from
franchised units is less than company owned outlets, a higher percentage of the
revenue generated is profit.
â€¢ By franchising the business, the franchisor places the expansion of the business in
the hands of people who have invested their own money and are motivated to make
â€¢ A franchised business can expand more rapidly without incurring the usual overhead
and costs associated with opening new outlets. This expansion builds brand
recognition which benefits the franchisor and franchisee.
â€¢ Franchising can help to lessen the "management stretch" associated with expansion.
A franchise system requires less management than a company owned chain of outlets.
Hiring, training, motivating and
Motivation of Franchisee
Franchising is the fastest and safest way to become a business owner. Rather than making all the mistakes and risking disaster at every turn of the road, a franchisee can buy the necessary experience and expertise. In many systems, franchisees get fantastic value in the knowledge they obtain for the dollars invested.
A franchise purchase is often an opportunity to acquire the use of an already established name with lots of goodwill. As an independent, the franchisee would have to invest many years and dollars to achieve the same name recognition.
These days, many of the best locations are simply not available to a new independent business. However, someone without any prior business experience can obtain a lease in the largest shopping mall in the country as a franchisee of an established system.
The group buying power of franchises can give the franchisee the important edge over the competition and improve profitability. The amount and quality of advertising a franchisee can obtain for his advertising contribution to the regional or national fund of the system is substantially greater than would be the case if the same dollars were spent for an independent business.
Most independent businesses can only dream about the research and development programs available in many franchise systems. Such research and development can make a big difference in competing and profitability.
Local Knowledge of Franchisee
The franchisor will know where the best opportunities lie, what the most successful products are, the best way to advertise, where the pitfalls are, the potential of the market, the effectiveness of the competition and so on. Passing on this accumulated learning will enable the franchisee to save time and money from the beginning. most franchises will have a good knowledge of the local market, the most effective return on investment for advertising spending, the tactics and effectiveness of competition for their products and small business services. This knowledge will save time and money in the marketing research process. Economies of scale-larger franchise ores and have access to better deals with large suppliers by bulk buying raw materials and goods and services. They also have the ability to recruit high-quality staff by offering better employment benefits and career opportunities. This level of technical expertise in the central support function will benefit your ongoing training needs as well as provide a lower operating expense model.
Franchising in Estonia and India
Eighty percent of the world's population lives in emerging markets. Also, the U.S. Department of Commerce estimated that over 75 percent of the expected growth in the world's trade over the next two decades will come from developing countries, particularly big emerging markets, which account for over half the world's population, but only 25 percent of its gross domestic product. Despite the potential, these markets pose a series challenge to franchisors as conditions vary considerably from the developed markets in which international franchisors have the bulk of their experience.
Assessing the economic potential in emerging markets is important for international franchisors who wish to prioritize markets for expansion, choose an appropriate mode of entry, and select a proper fee structure for their franchise system. While a detailed discussion of all the factors relevant to the assessment of economic potential in emerging markets is beyond the scope of this article, I will discuss three commonly-used factors which franchisors need to analyze in more detail. These are the GDP per capita, the level of population and the growth rate of the economy.
Emerging markets are often classified based on their GDP per capita (GDP divided by the level of population). This variable is used because it signifies the level of income and the state of the economic and political well being of the country, but if used incorrectly can distort the view of the country's economic potential. It is important to adjust GDP per capita to purchasing power in emerging markets when examining the economic potential. This is because the prices of inputs and the cost of living is significantly lower in emerging markets compared to the major industrialized countries. Thus, the purchasing power of the citizenry of emerging markets is often higher than what the official unadjusted GDP per capita statistics may show.
The level of population is an often-touted measure of economic potential in emerging markets. With a population of about 1 billion people, China and India (two of the biggest emerging markets) are considered to be among the most attractive locations for expansion. The reality is that the majority of the population in these countries does not earn sufficiently to afford western-style products and services and does not live in the major urbanized areas in which international franchisors are accessible. In the People Republic of China, for example, three key cities Beijing, Shanghai, and Guangzhou, offer the greatest potential for global franchisors.
The economic rate of growth is a variable that needs to be emphasized in analyzing the market potential of developing markets. While developed markets exhibit very low single-digit growth rate, many emerging markets sustain high levels of growth both in the GDP and in the GDP per capita. Such statistics should be viewed favorably by international franchisors because they parallel the development of pent-up demand for western-style goods, lessen the political risk and social discontent of the citizenry, and point at an emergent middle class. According to an Arthur Andersen study, the existence of a middle class is the most important factor in determining whether a host country will be suitable for international franchising expansion.
Proven Business Format Support from Franchisor
When one buys a franchise, he is buying an established concept that has a good record of accomplishment. The franchisee is allowed the use of the company's trademark and brand name. Because of this, the company is, in effect, giving the franchisee a license to market its products carrying a brand that is already familiar with the consumers.
Many popular franchises have instant brand-name recognition and have created a loyal following among consumers. Therefore, the franchisee is getting into a business that already has a ready market
Continuous Support from the Franchisor
Although running his own business, the franchisee can tap the services of the parent company anytime he needs assistance. The services of the head office organization are available to him, too, whenever he needs help. Furthermore, many companies have field operations personnel whom the franchisor can call on to help him deal with any problem he may encounter in the operation of the business. Most franchises being offered nowadays are turnkey operations.
Upon the signing of the franchise agreement and payment of the franchise fee, the franchisee receives the equipment and supplies required in running the business. Furthermore, the franchisor provides assistance in identifying a good business location for the new outlet.
The company assists the franchisee in negotiating his lease, preparing plans for outlet layout, shop fitting, and furnishing his store. It also provides assistance in determining the appropriate stock inventory for the opening of the business. This kind of support and the other benefits under the franchise agreement is what sets franchising apart.
The franchisee is given the necessary training to start his business and eventually run it smoothly. The franchisee as well as his employees are taught all the business systems of the company covering product preparation, quality standards, business controls, recruitment of personnel, and marketing. A good franchisor will provide training to the franchise staff on a continuous basis.
Buying Supplies at Lower Costs
The franchisee is able to procure all necessary supplies at lower costs because the prices are negotiated by the company with the suppliers in behalf of all the franchise units. Because of the size and projected regularity of orders, the franchisor is able to get huge discounts.
Buying wholesale for the whole network means big savings for the individual franchises. This gives the franchises a big advantage over their competitors because they are able to reduce expenditures on a continuous basis. This procurement set-up is definitely more advantageous to the franchisee as against procuring supplies independently.
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