Franchising is an arrangement where franchisor (one party) grants or licenses some rights and authorities to franchisee (another party). Franchising is a well-known marketing strategy for business expansion.
A contractual agreement takes place between Franchisor and Franchisee. Franchisor authorizes franchisee to sell their products, goods, services and give rights to use their trademark and brand name. And these franchisee acts like a dealer.
In return, the franchisee pays a one-time fee or commission to franchisor and some share of revenue. Some advantages to franchisees are they do not have to spend money on training employees, they get to learn about business techniques.
Let us see the opportunities of franchising in India with some examples.
What is the Meaning of Franchising?
Franchising is basically a right which manufacturers or businesses give to others. This right allows the beneficiaries to sell the products or services of these manufacturers or parent businesses. These rights could even be in terms of access to intellectual property rights.
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The individual or business that grants the right to the franchise is called the franchisor, while the beneficiary of the right is called the franchise. Franchising is a business marketing strategy to cover maximum market share.
Franchising is a business relationship between two entities wherein one party allows another to sell its products and intellectual property. For example, several fast food chains like Dominos and McDonalds operate in India through franchising.
Examples of Franchising in India
- Pizza Hut
- Dunkin’ Donuts
- Taco Bell
- Baskin Robbins
- Burger King
Functioning of Franchising
Under a franchise, the two parties generally enter into a Franchise Agreement. This agreement allows the franchise to use the franchisor’s brand name and sell its products or services. In return, the franchisee pays a fee to the franchisor.
The franchisee may sell these products and services by operating as a branch of the parent company. It may even use franchising rights by selling these products under its own business venture.
The franchisor may grant franchising rights to one or several individuals or firms. Consequently, if just one person gets these rights, he becomes the exclusive seller of the franchisor’s products in a specific market or geographical limit.
In return, the franchisor supplies its products, services, technological know-how, brand name and trade secrets to the franchise. It even provides training and assistance in some cases.
Features of Franchising
Firstly, under a franchising agreement, the franchisor grants permission to the franchise to use its intellectual properties like patents and trademarks.
Secondly, the franchise in return pays a fee (i.e. royalty) to the franchisor and may even have to share a part of his profits. On the contrary, the franchisor provides its goods, services, and assistance to the franchise.
Finally, both parties in a franchise sign a franchising agreement. This agreement is basically a contract that states terms and conditions applicable with respect to the franchise.
Advantages and Disadvantages of Franchising
Advantages to Franchisors
- Firstly, franchising is a great way to expand a business without incurring additional costs on expansion. This is because all expenses of selling are borne by the franchise.
- This further also helps in building a brand name, increasing goodwill and reaching more customers.
Advantages to Franchisees
- A franchise can use franchising to start a business on a pre-established brand name of the franchisor. As a result, the franchise can predict his success and reduce risks of failure.
- Furthermore, the franchise also does not need to spend money on training and assistance because the franchisor provides this.
- Another advantage is that sometimes a franchisee may get exclusive rights to sell the franchisor’s products within an area.
- Franchisees will get to know business techniques and trade secrets of brands.
Disadvantages for Franchisors
- The most basic disadvantage is that the franchise does not possess direct control over the sale of its products. As a result, its own goodwill can suffer if the franchisor does not maintain quality standards.
- Furthermore, the franchisee may even leak the franchisor’s secrets to rivals. Franchising also involves ongoing costs of providing maintenance, assistance, and training on the franchisor.
Disadvantages for Franchisees
- First of all, no franchise has complete control over his business. He always has to adhere to policies and conditions of the franchisor.
- Another disadvantage is that he always has to pay some royalty to the franchisor on a routine basis. In some cases, he may even have to share his profits with the franchisor.
Solved Examples for You
Fill in the following blanks
1. The contract between franchisors and franchisees is called __________.
2. Franchisees have to pay a fee termed as __________ to the franchisor.
3. Franchisors have to routinely provide __________ to the franchisees.
1. Franchise agreement