FRANCHISING

A franchise is a type of license that grants a franchisee access to a franchisor's proprietary

business knowledge, processes, and trademarks, thus allowing the franchisee to sell a product or
service under the franchisor's business name. In exchange for acquiring a franchise, the
franchisee usually pays the franchisor an initial start-up fee and annual licensing fees.

 A franchise is a business whereby the owner licenses its operations—along with its
products, branding, and knowledge—in exchange for a franchise fee.
 The franchisor is the business that grants licenses to franchisees.
 The Franchise Rule requires franchisors to disclose key operating information to
prospective franchisees.1
 Ongoing royalties paid to franchisors vary by industry and can range between 4.6% and
12.5%.2
 When a business wants to increase its market share or geographical reach at a low cost,
it may franchise its product and brand name. A franchise is a joint venture between a
franchisor and a franchisee. The franchisor is the original business. It sells the right to
use its name and idea. The franchisee buys this right to sell the franchisor's goods or
services under an existing business model and trademark.
 Franchises are an effective way for entrepreneurs to start a business, especially when
entering a highly competitive industry such as fast food, or an industry that is
established and requires time to develop its operating processes from scratch. One big
advantage to purchasing a franchise is you have access to an established
company's brand name, management knowledge, processes and procedures, financial
toolbox, and metrics. You won't need to spend time and resources building them and
getting your name and product out to customers.
 The franchise business model has a storied history in the United States. The concept
dates to the mid-19th century when two companies—the McCormick Harvesting
Machine Company and the I.M. Singer Company—developed organizational, marketing,
and distribution systems recognized as the forerunners to franchising. These novel
business structures were developed in response to high-volume production and allowed
McCormick and Singer to sell their reapers and sewing machines to an expanding
domestic market
 The earliest food and hospitality franchises were developed in the 1920s and 1930s.
A&W Root Beer launched franchise operations in 1925. Howard Johnson
Restaurants opened its first outlet in 1935, expanding rapidly and paving the way for the
restaurant chains and franchises that define the American fast-food industry until this
day.4
 There were 790,492 franchise establishments in 2022 that supported the U.S. economy,
with an expected 805,436 for 2023. These franchises contributed over $500 billion to the
economy. In the food sector, franchises included recognizable brands such as
 McDonald's, Taco Bell, Dairy Queen, Denny's, Jimmy John's, and Dunkin'. Other
popular franchises include Hampton by Hilton and Days Inn, as well as 7-Eleven and
Anytime Fitness.

Franchise Basics and Regulations

Franchise contracts are complex and vary for each franchisor. Typically, a franchise agreement
includes three categories of payment to the franchisor. First, the franchisee must purchase the
controlled rights, or trademark, from the franchisor in the form of an upfront fee. Second, the
franchisor often receives payment for providing training, equipment, or business advisory
services. Finally, the franchisor receives ongoing royalties or a percentage of the operation's
sales.

A franchise contract is temporary, akin to a lease or rental of a business. It does not signify
business ownership by the franchisee. Depending on the contract, franchise agreements
typically last between five and 30 years, with serious penalties if a franchisee violates or
prematurely terminates the contract.

In the U.S., franchises are regulated at the state level; however, the Federal Trade
Commission (FTC) established one federal regulation in 1979. The Franchise Rule is a legal
disclosure a franchisor must give to prospective buyers. The franchisor must fully disclose any
risks, benefits, or limits to a franchise investment.1

This information covers fees and expenses, litigation history, approved business vendors or
suppliers, estimated financial performance expectations, and other key details. This disclosure
requirement was previously known as the Uniform Franchise Offering Circular before it was
renamed the Franchise Disclosure Document in 2007.1

Advantages and Disadvantages of Franchises

Advantages

There are many advantages to investing in a franchise, and also drawbacks. Widely recognized
benefits include a ready-made business formula to follow. A franchise comes with market-
tested products and services, and in many cases established brand recognition.

If you're a McDonald's franchisee, decisions about what products to sell, how to layout your
store, or even how to design your employee uniforms have already been made. Some
franchisors offer training and financial planning, or lists of approved suppliers. But while
franchises come with a formula and track record, success is never guaranteed.

Disadvantages
Disadvantages include heavy start-up costs as well as ongoing royalty costs. To take the
McDonald’s example further, the estimated total amount of money it costs to start a
McDonald’s franchise ranges from $1.3 million to $2.3 million, on top of needing liquid capital
of $500,000.6

By definition, franchises have ongoing fees that must be paid to the franchisor in the form of a
percentage of sales or revenue. This percentage can range between 4.6% and 12.5%, depending
on the industry.2

For uprising brands, there are those who publicize inaccurate information and boast about
ratings, rankings, and awards that are not required to be proven. So, franchisees might pay high
dollar amounts for no or low franchise value.

Franchisees also lack control over territory or creativity with their business. Financing from the
franchisor or elsewhere may be difficult to come by. Other factors that impact all businesses,
such as poor location or management, are also possibilities.

Pros
 Ready-made business formula
 Market-tested products and services
 Established brand recognition
 Large decisions already made
 List of approved suppliers
 Training and financial planning provided

Cons
 Success not guaranteed
 Large start-up costs
 Ongoing fees
 Lack of territory choice
 Lack of creative control

Franchise vs. Startup

If you don't want to run a business based on someone else's idea, you can start your own. But
starting your own company is risky, though it offers rewards both monetary and personal. When
you start your own business, you're on your own. Much is unknown. "Will my product sell?",
"Will customers like what I have to offer?", "Will I make enough money to survive?"
The failure rate for new businesses is high. Two-thirds of businesses survive just two years, and
50% survive just five years. If your business is going to beat the odds, you alone can make that
happen.7

To turn your dream into reality, expect to work long and hard hours with no support or expert
training. If you venture out solo with little or no experience, the deck is stacked against you. If
this sounds like too big a burden, the franchise route may be a wiser choice.

People typically purchase a franchise because they see other franchisees' success stories.
Franchises offer careful entrepreneurs a stable, tested model for running a successful business.
On the other hand, for entrepreneurs with a big idea and a solid understanding of how to run a
business, launching your own startup presents an opportunity for personal and financial
freedom. Deciding which model is right for you is a choice only you can make.

Franchising – 7 Salient Features

The salient features of the franchising system are given below:

(i) Two Parties – In a franchise there are at least two sides – the franchiser and the
franchisee. There can be more than one franchisee.

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(ii) Written Agreement – There is an agreement in writing between the franchiser and the
franchisee.

(iii) Exclusive Right – The franchiser owns a brand or trade mark and allows the franchisee
to use it in a specific area under a license.

(iv) Payment – The franchisee makes an initial payment for the license and becomes a part
of the franchiser’s network. He also pays a regular license fee which may be an agreed
percentage of sales or profits.

(v) Support – The franchiser provides assistance to the franchisee in marketing, equipment
and systems, staff training, record keeping. The franchiser initially sets up the business to be
run by the franchisee.

(vi) Restrictions – The franchisee is required to operate the business in accordance with the
policies and procedures specified by the franchiser. He gives an undertaking not to carry on
any competing business and not to disclose confidential information regarding the franchise.
The franchiser cannot terminate the agreement before its expiry except for ‘good cause’.
(vii) Specified Period – The agreement is for a specific period e.g., five years. On the expiry
of this period, the agreement may be renewed with the mutual consent of both the parties.

Franchising – 4 Major Types of Franchises (With Examples)

There are four major types of franchises:

a. Business Format Franchises,

b. Product Franchises,

c. Manufacturing Franchises, and

d. Business Opportunity Ventures.

a. Business Format Franchises:

This is the most common type of franchise. Here a company expands by supplying an
established business concept/format, including its brand name, symbol, and/or trademark to
independent business owners. In this arrangement, the franchisee acquires the right to use or
follow a business format and also the best practices and processes associated with it.

The franchiser company generally assists the independent owners significantly in launching
and operating their businesses. In return, the business owners pay fees and royalties to
franchiser. Hence, the franchisee acquires the right to use all the elements of a fully
integrated business operation.

Some of the examples are fast-food restaurants such as McDonald’s, Domino’s Pizza, and
KFC. Such franchisees maintain the design and styling aspects determined by the franchiser
in their retail environments, ranging from the product offered to store design, ambience,
atmospherics, and internal infrastructure to service standards to deliveries.

b. Product Franchises:

In these franchise agreements, the franchisee gets the right to use the brand/trade names,
trademark, and/or products from the franchiser. Through this kind of agreement,
manufacturers allow retailers to distribute their products and use their brand names and
trademarks. They also monitor and control on the way retail stores distribute their products.
In return of these rights, store owners pay royalties/fees or buy a minimum quantity of
products.
Some of the examples are Tommy Hilfiger, Arrow, Scullers, Cotton King Stores, Reebok
stores and Bata stores who operate under this kind of franchise agreement.

c. Manufacturing Franchises:

In this case, franchiser offers the right to produce and sell goods to a manufacturer under its
brand name and trademark. This type of franchise is generally popular among food and
beverage companies.

For example, soft drink bottlers and canners often obtain franchise rights from soft drink
companies to produce, bottle, and distribute soft drinks. The major soft drink companies
supply the concentrate to them, which are further processed, packed, and distributed by the
regional manufacturing franchises.

One example is Gemini Distilleries Pvt. Ltd, Goa, a manufacturing franchise of Bacardi Ltd
for manufacturing of winery products.

d. Business Opportunity Ventures:

This concept works on the format in which an independent business owner buys and
distributes the products from one company. The company supplies the business owner with
clients or accounts, in return of which the business owner pays the company a pre-decided
fee.

For example, the business owners may obtain vending machine routes and distribution
rights, through this type of franchise arrangement (e.g., coffee vending machine).

Retailer brands and companies often look toward franchising as a key operating model for
expansion from scale, geographical coverage, and time perspectives.

For example, Gap is looking forward to script a new story in India as it struggles to
maintain customer loyalty in markets across the world. The company was set up in 1969 by
Doris and Donald Fisher and has presence in around in 90 countries through around 3,300
company- operated stores and 400 franchise stores.

In India, its franchisee is Arvind Lifestyle Brands and opened its first store in Delhi, five
years after its rival Zara did and a few weeks before H&M announced its plans. Zara, Gap’s
Spanish rival, has JV with Tata’s Trent. Gap, Zara, and H&M are the brands that are popular
even before they entered India. So Gap hopes to leverage the increasing fashion
consciousness and latent awareness the Indian consumer has about its brands.
Under the franchise arrangement that the two have drawn up, Arvind has invested in
infrastructure and Gap is providing support in terms of brand name, merchandise, layouts,
fixtures, and so on. Arvind sources the merchandise from Gap’s global sourcing to which
they have a direct access. Gap has manufacturing facilities in and around India, which is
another strategic advantage.

Franchising – 4 Important Points which Help the Company to go for Franchising

There are various points which will help a company to go for franchising.

Following are the important points of franchising:

1. Market Growth:

Franchise is the key to rapid market expansion. It helps a company to growth rapidly and
expands the range of markets in quick time and without incurring large investments. The
computer education network of NIIT is a good example of rapid growth through franchising.
It has able to build a network of over 100 branches across the country through franchising.

2. Helps in Brand Building:

Brand building is indeed a journey. Building a brand has everything to do with capturing the
hearts and minds of consumers. A brand incorporates and conveys the values and traits that
a company wants associated with their product or service. Establishing a strong brand can
have significant value, and truly is a journey that companies should embark upon in their
quest to be successful.

3. Choosing your Own Job Description:

The owner of a business can delegate certain aspects of the business to others and it creates
a job description. A quality job description is one that not only works for your employees,
but is legally compliant, and also fulfils many other requirements.

4. Lower Costs:

When someone is buying an existing company through franchising, it is almost always less
expensive. The business owners live the scripture, “you reap what you sow”.

Setting up of a franchise follows the following steps:

1. Developing a good business case for franchising

2. Create a business plan which will be a blue print

3. Aspects connected with Intellectual Property (IP)

4. Preparation of legal documents

5. Identifying the right franchisee

Franchising – Working of Franchising System

Franchising system depends upon a continuous contractual relationship between the

franchiser and the franchisee. The franchiser may be a manufacturer or a service
organisation. The franchisee is an independent business firm which buys the right to run and
operate a business by using the franchiser’s brand name or trade mark.

A franchise agreement is based on a unique product or service owned by the franchiser.

The success of a franchising system depends upon mutual faith and trust between both the
parties.

Before Becoming a Franchisee:

(i) Critically examine franchiser’s financial position

(ii) Look for a business or a product with considerable market presence

(iii) Research whether the franchiser’s business is temporarily fashionable or can be

successful long term.

(iv) Ask an expert solicitor to double check the agreement with franchiser

(v) Compare notes with existing franchisees about their experiences with the franchiser

(vi) Consider the risk – not every franchisee may succeed in doing good business.

Franchising – Franchising Laws in India

Franchising is a popular way to start a new business yet like everything else in life it also
has some pros and cons. One must be aware of all the concerning features of franchising
business. There are plenty of lucrative franchising business opportunities. But the first thing
one need to figure out is the type of business that he wants to get into.
The laws relating to franchising are excellent so far as western countries are concerned. In
India the concept of franchising is in its nascent stages. So the rights and liabilities of the
franchiser and the franchisee have not been dealt with elaborately under any law. Generally
the law of contracts is applicable to franchise agreements. The franchise agreement must be
lawful and not against the public policy in India. The franchising agreement is considered
licensing contract in India with a single difference relating to the territorial operation of the
business.

Some of the laws that indirectly cover the area of franchising in India are:

1. Intellectual Property Law and Franchising in India:

Intellectual Property rights should be protected very carefully in any country so as to make
the franchising system successful. Otherwise when the franchiser enters into new territory
with its products, its product may be copied, and brand name may be misused which in turn
affects goodwill of the franchiser.

2. The Trademarks Act, 1999:

This Act has been enacted to provide for the registration and better protection of trademarks
and for the prevention of the use of fraudulent marks on merchandise. The best way to
protect a trademark must get it registered in India. India has made a step towards fulfilling
its international obligations.

3. The Designs Act, 2000:

Design has now been defined as only the features of shape, configuration, pattern, ornament
or composition of lines or colours applied to any article whether in two dimensional or 3D
or in both forms. Application for design registration can be made in any class by the
proprietor of the design. Registration is granted only in one class. The proprietor of the
Design shall have copyright in the Design for 10 years from the date of registration.

4. The Copyright Act, 1957:

The Copyright Act can be used successfully by the franchiser when he wishes to protect his
franchising manual. The manual contains the entire technique of running the franchise
business. The manual should not be used unauthorized or improperly by any other person
without having the permission of the franchiser as it amounts to violation of copyright being
held by the franchiser.

5. Labour Laws and Franchising:

There are various enactments concerning labourers in India. All franchising contracts are
amenable to labour laws in India. Labour laws govern the day-to-day conditions of
employment in a franchising system. When a franchise outlet is closed or shut down, then
the labour laws play a vital role in determining the compensation to be paid to the
employees of that franchise outlet by the master franchisee, franchiser or franchisee.

Franchising – Four Ps of Franchising

The successful franchisee realizes quite early that there is a necessity of establishing and
maintaining high standards and working with the four ‘P’s of franchising.

The four Ps are:

i. Product:

The product or service of the franchise operation is probably the most significant and
important aspect of the successful franchise. A franchisee, must maintain t he high quality
and standards of the product or service being provided. It is absolutely essential that the
franchise maintain a positive reputation and that you satisfy the customer needs. It must
realize the importance of the product or service not only satisfying the current needs of the
customers, but also their future needs.

ii. Process:

The business format process is very important to the successful franchisee. These processes
which must be carefully developed and supported include – marketing, promotion, brand
recognition, management, training, accounting services, and financial support. The
franchisee must develop proper processes to ensure the continued success of the franchise
organization.

iii. Profitability:

The franchisee is in business to ensure profitability. Franchisee are generally desirous of

obtaining a profit, not only for the present day but also for a long time into the future. They
must be able to ascertain the profits, revenues, and even costs of goods associated with your
specific franchise business. For example, most pizza restaurants have costs of goods sold
and labor costs, which do not exceed 50% of the total sales for the business.

Another example is that of certain sit-down quick service restaurants which provide food
costs in the 29-32% range and labor costs in the 15-18% range. You need to be able to
accurately determine what the important costs of goods sold, labor costs, and expenses are
in your specific business.

The franchisee needs also to be able to ascertain all start-up costs, franchising fees, royalty
fees, advertising fees, and other fees which must be paid by him to the specific franchisor.
The ‘franchisee should go over this document in great detail to ensure exactly what costs
and fees are associated with the operation of the business.

iv. People:

The greatest asset of the business will be the people with whom you work. These people are
the individuals who will reach and obtain the high standards of performance which you
desire within your organization. These people may share your vision if properly explained.
These people are the ones who will work with you, or against you, in developing your
business.

Many franchisees spend considerable amount of time away from their desks helping their
employees during the peak periods of their business. This allows the franchisee not only to
work actually with the different employees but to also to help them see his/her intense
desire to provide quality service and products to the consumer. Quality is infectious. The
franchisee needs to instill this desire for excellence through example in all employees.