A ‘franchise’ means the special right given by a manufacturer or a parent organization to another individual or firm to sell to the former’s product or service in a specified given area(s). Franchising is a term which defines the business relationship between two organizations where a franchisor, who is the owner of a brand name, product, or system of a business, permits a franchisee to use its brand, product, or business process for a fee.
The individual or firm to whom the right is granted is called franchisee. The right granted by a franchiser to a franchise is given under a special agreement known as the Franchise Agreement.
A franchisor may have such agreement with more than one franchise.
This approach combines a proven, operating formula given by the franchiser with local knowledge and entrepreneurial initiative (possessed by the franchise).
It is appropriate for firms that have developed such a formula.
Meaning of Franchising
Franchising is the practice of using another firm’s successful business model. The word ‘franchise’ is of Anglo-French derivation from the word franc which means ‘free’.
For the franchisor, the franchise is an alternative to building ‘chain stores’ to distribute goods and avoid investment and liability over a chain. The franchisor’s success is the success of the franchisees.
The franchise is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.
The franchisor provides training and continuous assistance to the franchise.
There are so many advantages and disadvantages of franchising for franchisor and franchisee.
Advantages of Franchising
There are so many benefits or advantages of franchising for both the franchisor and franchisee.
TO THE FRANCHISER
- The franchisor can expand his distribution system in the least possible time.
- The franchisor is able to expand the business with little extra capital for the outlet.
- The franchiser gets important feedback about the popularity of the product and specific need and preferences of the local customers from the franchisees.
- Franchising enables the franchisor to increase his goodwill and reputation by expanding his network.
- The franchisor gains wider acceptance of his brand name through the franchisees.
- The rights of the franchisor are protected as only the franchise can use the franchiser’s patents, trademark, brand names, etc.
TO THE FRANCHISEE
- The business is based on a proven ides. The franchisee can check out how successful other franchisees are before committing himself.
- The franchisee can get assistance from the franchiser in training his staff, promotion of the product, designing store layout, etc.
- There are greater chances of success of the franchise because the brand of the franchise is well known.
- The franchise ensures a high degree of quality control. This enables the franchise to satisfy his customers by offering quality products.
- The franchisee enjoys exclusive rights in his territory. The franchiser won’t sell any franchises in the same region.
Disadvantages of Franchising
There are so many demerits or disadvantages of franchising for both the franchisor and franchisee.
TO THE FRANCHISOR
- There is a danger that the franchise may start an identical business with a slightly different brand name.
- The franchisor’s brand name and reputation may get tarnished if the franchise is not able to maintain standards of quality and service.
- The franchisor has to provide initial financial assistance and support in the form of staff training, advertising, etc.
- There is a risk of trade secrets getting leaked out in the foreign market. The leakage may cause serious losses.
- There are ongoing costs of supporting the franchise and national advertising.
TO THE FRANCHISEE
- The franchise does not enjoy complete freedom in his business. The franchise agreement generally contains restrictions on how the franchise would run the business.
- Payment of royalty on a regular basis is to be made to the franchiser.
- There is always a possibility of conflict between the parties regarding maintenance of accounts, payment of royalty, violation of quality norms, etc. It may sometimes lead to litigation between the franchiser and franchisee.
- The franchisee cannot sell his business without taking approval from his franchiser.
The right to use the business know-how and trademark of the franchise is for a limited period of time defined in the franchise agreement. However, the franchise agreement may be renewed from time to time.
Thus, now you know the advantages and disadvantages of franchising.