Franchising can be defined as a business relationship between two parties (franchisor and franchisee). Under the franchising business protocol, the franchisor provides the franchisee’s license to use its business’s name, knowledge, processes, and trademarks to sell products and services in return for annual franchising fees.
What is Franchising?
Franchising is one of the most popular methods of starting your own business. If you don’t have an innovative idea to create a new business or don’t feel confident enough to start from scratch, acquiring a franchise is the best option for you to start your business.
Franchising is acquiring the right to use the name of a well-established brand to sell products and services. Investing your money by starting the branch of an already established business reduces your chances of failing.
A business’s franchise is acquired by paying an initial fee and ongoing royalty fee of the business. After that, you get the rights to use the name of the brand to conduct business. In addition to the brand’s reputation, the franchisee can also use its knowledge, processes, and marketing strategies. The franchisor also provides support to the franchisee to run the business.
The primary idea of franchising business models is to expand the business and to increase market share. Letting entrepreneurs use the business franchise makes it easy for businesses to reach a wide range of audiences. The franchisor enjoys the advantage of expanding business. The franchisee also gets several benefits by acquiring the franchise of a famous brand.
By obtaining the franchise, you also receive various benefits that you will not get if you start your business from scratch. For example, you will get to use the already proven training and operation system. You can avoid making mistakes that the business owners make when they start their business from scratch.
In addition to this, you will also get the benefits of economies of scale. For example, you will get to buy material and supplies at bargained prices. Whereas, as an entrepreneur, it will be an additional task for you to find suppliers who will provide you good-quality supplies at favorable prices.
How does a Business become a Franchise?
A business that turns into a franchise usually starts as a small business. The idea of creating a franchise hits the mind of the owner when the business becomes successful in the neighborhood, and people from different places start showing interest in their products and services.
However, turning your local business into a franchise is not an easy task. You will be required to deal with several legal studies. You will need to get a consultation from your attorney.
Features of Franchising
The following are the main features
A franchisor is an individual who is the business owner and shares the knowledge, processes, and brand name of the business with a franchisee if the franchisee fulfills the certain conditions set by the franchisor.
A franchisee is an individual that obtains the right to use the brand name, knowledge, and processes by paying initial fees and royalty fees of the business.
3. Franchising agreement
A franchising agreement is an agreement between a franchisor and franchisee. Under the franchising agreement, the franchisor grants permission to the franchisee to use its brand name, patents, trademarks, etc.
Advantages of Franchising
There are various benefits of franchising your business. Let us first learn about the advantages of franchising for franchisors.
1. Additional Income
Franchising is an excellent way of making additional income for franchisors. The franchisors earn extra income by letting the franchisees use the name of their business, patents, and business processes in return for royalties paid by them.
The additional income made by franchisors is made of startup fees, monthly payment out of the franchisee’s gross sales, and other additional payments per the terms mentioned in the franchise agreement.
2. Opportunities to Expand the Business
Most of the time, corporations prefer franchising rather than starting their branches in different cities and countries. In addition to this, the franchisors get the opportunity to benefit from the franchise’s local knowledge.
The franchisee can expand his business in the local vicinity. Moreover, by providing the franchise, the franchisors also get free from the financial burden of setting up and running the business in a new place.
By providing franchise, the franchisors can expand their business worldwide with a little fear of business failure.
3. Easy to Scale Up and Down the Business
Scaling their business up or down is one of the most challenging decisions that a businessman makes. However, it becomes easy to take this decision when a business is converted into a franchise.
The business can be scaled up or down depending on different areas. For example, in low-volume regional growth, the franchisee can easily scale-down their business to avoid unnecessary losses.
4. Increased Market Shares
Another crucial benefit of franchising a business is the increased market share. In addition to expanding the business, every business wants to increase its market share.
It becomes easy to maximize your market share by franchising your business. The franchisors make efforts to open maximum outlets of their business. A franchisor is not required to increase the expenditure to increase their market share.
The overhead of expanding the market share is divided among the franchisees who buy the business’s franchise.
Franchising is a great way to enhance the reachability of your business. People from different parts of the world can access your products and services in their local vicinity.
In this way, you can not only keep your old customers but can also attract new customers.
Advantages of Franchising Business for Franchisees
1. Pre-established brand
One fear that every entrepreneur faces while starting a new business is not gaining brand popularity. However, this fear reduces when they buy the franchise of an already established business.
They are not required to spend on marketing and advertising efforts to increase the popularity of the brand. It becomes easy to estimate the success of the business and minimize the risk of failure.
2. No expenditure on the training of staff
When a new business is started, it is essential to provide essential training to the staff members to run the business successfully. But in the case of a franchise, there is no need to provide training to the staff members as the franchisor provides it.
3. Right to sell in the area
4. Opportunity to learn about the trade secret of the brand
Buying franchising of business provides you an opportunity to learn about the business’s techniques and trade secrets. You can use this knowledge in the future to start your own business.
Disadvantages of Franchising
Even though the franchising business has several benefits, it is not free from some disadvantages. The following are a few disadvantages of franchising as a franchisor.
1. Legal and Regulatory Fee
Franchising your business is a legal process. You are required to spend a considerable sum of money to acquire the license to franchise your business.
In addition to this, you would be required to take legal actions if one of your franchisees doesn’t abide by the rules and conditions mentioned in the franchising contract.
These legal actions are expensive and can also harm the franchisor’s image.
2. Initial Capital Investment
Franchising your business requires a considerable sum of investment in terms of both money and time in the initial stage.
Franchising your business consists of various tasks such as getting your products and services registered, preparing a process, providing training to your staff members, getting all the legal formalities done, and finally, marketing your business.
3. Failure of the Franchise
No matter how much you plan, there is always a chance of failure of your business. If this happens, all of the efforts can go in vain, and you might end up in a pile of debts.
4. Loss of control
When you provide your business franchise to the franchisor, you lose control of your business. The franchisee can refuse to follow your instructions and can start working with their ideas and temperament. Loss of control affects your image in the market and can result in the loss of customers.
Disadvantages for franchisee
1. Royalty fees
The first and foremost disadvantage of the franchise for the franchisee is the regular payment of royalty fees. You will be required to pay a fixed sum of money to the franchisor to keep using the brand’s name.
In some cases, you will be required to share your monthly profits with the franchisor.
2. Control of franchisor
Another disadvantage of buying franchising of a business is that you will never get control of your business. The franchisor will always be there to boss you around. You will be required to adhere to the rules and regulations of the franchisor.
Franchising is a type of business protocol to expand your business. It is a special type of arrangement between the franchisor and franchisee. The franchisee pays a particular sum of money to the franchisor to use the name of the brand of business and sell its products and services.
By selling the franchise, the franchisors can earn additional income and can grow their business.