Franchising – Features, Examples and Types

Published by: Madhubala Minda

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What is Franchising?

Franchising is a contractual agreement or a binding arrangement between two parties where one of them called the franchisor offers exclusive rights to the other party which is called the franchisee. The business model is a marketing strategy related to business expansion through other interested parties.

The franchising agreement gives the authority to the franchise system to sell and distribute products, goods or services in a specific territory or specific market. In simple terms, the other franchisees gain exclusive rights to use the trade name of a well-known brand.

The franchisee is a dealer in the franchise agreement that pays a one-time initial fee as commission to the franchisor. In this business method, the franchisee gains instant brand recognition although he has to share revenue or ongoing royalties regularly with the brand for using the licenses

What is the Meaning of Franchising

Franchising is a popular business model of recent times where an established business owner creates a business format franchise, offers a franchisor license to prospective franchisees and allows them to use the brand’s trademark and the trade name of the company along with rights to distribute products or services for a franchise fee

The meaning of the term Franchising can be explained through the following

Franchising in terms of Relationships

Franchising is a contractual relationship between a franchisor and a franchisee where the franchisee pays a fee for the use of the business system. The franchising agreement allows the franchisor to offer support to the franchise model in delivering a product or service as per the set standards of the Federal Trade Commission in the industry

Franchising in terms of Brands

It is the consumers no doubt who make a brand popular but it is the franchisor and franchisee who reaps the benefit of that popularity. The consumers do not care who the owner is as long as their expectations and quality control standards are met.

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The franchisor’s brand uses its intellectual property for business expansion. It makes sure that the new businesses are meeting the standards set up by the International Franchise Association, maintaining quality control while selling the product or service and developing a favourable relationship with customers so that the brand name keeps flourishing.

Franchising in terms of Systems and Support

The business format franchise system is a boon for prospective franchisees as it offers support, tools and systems that help to meet consumer needs and ensure customer satisfaction. When a new business owner decides to step into the franchise industry he talks to the other franchisees, does due diligence on the company he is interested in, looks at their operations, goes through their products or services, evaluates the type of support they provide and tries to understand how the franchisor is managing to keep with the changing consumer expectations

Franchising in terms of Contractual Relationship

The franchisee benefits from the franchise opportunity no doubt but the franchisor is also the beneficiary in this contractual relationship or franchise investment. His products and services are sold easily through independent operators in the local market, his trade name becomes more popular, brand recognition and fame are high and he gets an initial fee along with the franchise fee and ongoing royalties.

Although the franchisee operates independently it still has to meet the guidelines set up by the franchisor’s brand in the franchise agreement. As per the law, every franchise is a license but every license is not a franchise.

In the U.S a franchise is a specific licensing arrangement between the franchisee and franchisor that is defined by the Federal Trade Commission. The franchisor licenses a franchisee the right to use its service or trade mark.

Examples of Franchising in India

Several fast-food chains operate in India through franchising. Some popular models are as follows

  1. Burger King
  2. Pizza Hut
  3. KFC
  4. Baskin Robbins
  5. Taco Bell
  6. Subway
  7. Dominos
  8. McDonald’s

Common Services provided by a Franchisor to Most Franchises

Common services offered by a franchisor include

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  1. Recognized brand name
  2. Assistance in site selection and development
  3. Training for the new business owner as well as his management team
  4. Research and development of new products and service
  5. Field support
  6. Top-notch marketing and advertising strategies

Features of Franchising

Features of Franchising

The main feature of franchising is the franchising agreement where the franchisor grants rights and licenses to the franchisee to use its intellectual property for instance brand name, patents etc.

The second feature of franchising is that the franchisee pays an initial fee and shares its profits for using the franchise system with the franchisor who in return also provides goods and services as well as training opportunities and marketing assistance to the franchise.

The final feature of franchising is that the business-based agreement is a legally binding contract which categorically states the terms and conditions that the franchise has to apply at all costs. The franchisor protects his franchise investment through this contract and permits other businesses to reap the benefits of this franchise opportunity

Functioning of Franchising

The functioning of franchising is based on the franchise agreement between the franchisee and the franchisor. This legally binding arrangement allows the franchise systems to use the franchisor licenses, operating manuals, trade name and franchisor’s brand name to sell its products and services in the local market. In return, the franchisee pays a fee to the original business owner.

The franchise system permits the franchise to operate as independent operators of the parent company. The franchising rights allow the franchisees to sell products and services under their own business venture.

The franchisor often grants the franchising rights to several other franchisees where one franchisee covers a specific territory and the other franchises cover different local markets. The franchise can use the franchise model or the business system for a specific period after which it has to return the franchisee to the original company.

Types of Franchises

Types of Franchises

The different types of franchises are as follows

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1. Business Format Franchising

Most franchise systems come under the category of business format where the franchisor licenses a business-based format, trademark rights and operating business system to the franchisees. The franchise receives selection and development support for the site, training opportunities, marketing assistance that includes best marketing strategies and business advisory support. Examples of business-format include the fast-food chains

2. Product Distribution Franchising

The product distribution is a supplier-dealer setup where the franchisor permits the franchisee to use his trade name, logo, brand recognition and other trademarks to sell goods and services. In this type of franchising the franchisor does not provide an operating system to run the business. Examples of product distribution include the automotive and bottling industries

3. Manufacturing Franchising

In manufacturing, the franchisor permits the other franchisees to manufacture their products and sell them under its trademarks. An example of manufacturing is the sewing machine industry where sewing machines are manufactured by the franchisees and sold under the brand name of the franchisor

Advantages of Franchising

  1. Business growth is easy as the additional costs associated with the expansion process are borne by the franchises
  2. The franchise system results in high popularity of the company and greater brand recognition
  3. Increased goodwill
  4. The customer reach is higher
  5. Greater chance of success
  6. Less risk of failure
  7. Franchises get to know the trade secrets of established businesses

Disadvantages of Franchising

  1. Franchises do not have direct control over the business or the sale of products
  2. Franchises will have to share profits with the franchisor regularly
  3. The goodwill of an established brand will suffer if quality standards are not met

Conclusion

To summarize, franchising is a business relationship and a marketing strategy where a franchisor allows franchisees to use its intellectual property, sell the products and services and cover specific market share.

The franchise opportunity is a blessing in disguise for new businesses as the franchisees are served an established business that already has been tested in the market, has a loyal client base and is still going strong.

 

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Article by:

Madhubala Minda

Madhubala Minda is a content writer for Digiaide. She writes unique and research-driven content on various Brands, Competitors, Management topics and wellness. With years of content writing under her belt, Madhu Bala is one of the strengthening pillars of Digiaide content team.