In simple words, franchising is a practice of using another firm’s successful business model. For instance, Mr. Sharma here, started a Chinese food outlet in Mumbai. Within a span of 6 months, the outlet was doing remarkable sales. Within a year, Mr. Sharma opened three outlets and all of them very doing exceptionally well. This instigated him to open more outlets but it create a hindrance for him both financially and operationally to handle more outlets. Mr. Shah, who used to visit Mr. Sharma’s outlet became a huge fan of his Chinese food outlet and longed to own one such outlet. Hence, Mr. Sharma decided to sell the brand name and operational expertise of the Chinese food counter to Mr. Shah for a certain price. This practice which Mr. Shah followed of using Mr. Sharma’s successful business model is called Franchising and this business is called Franchise business.
The person who sells this business model is Franchisor while the person who buys this business model is Franchisee. For franchisor, franchise is an alternative to building ‘chain stores’ to distribute goods and avoid the need for investments and liability for a chain. The franchisee is said to have a greater incentive than a direct employee because he/she has a direct stake in the business.
However, the business should have certain characteristics to be franchised which are as follows:
1. Unique Concept.
2. Systems, processes and procedures should have ease of duplication.
3. Some of the existing stores run by the Company should be doing well.
4. Geographically the business should have a good appeal.
5. Return on Investment should be significant.
In our paradigm of the Chinese food outlet, point number 3 above holds true which says that a few of the existing stores run by the company should be doing well. Hence this business model has a characteristic to be franchised. Once Mr. Sharma and Mr. Shah get into a franchise agreement, the next thing they have to do is to sign a franchise agreement. There are numerous things which a franchisor and a franchisee need to consider before signing the agreement.
From the perspective of a franchisor, things which need to be taken care of are the trademark of the brand, brand image and most importantly the performance of the franchised outlet as this decides whether the business model proves to a successful one or not. From the perspective of franchisee, things which need to be taken care of are the operational support, advertising-promotional plan for the outlet and also the performance of the outlet. Hence, both parties should make sure that all these points have been considered in the franchise agreement. Before signing this agreement, both the parties need to evolve a business plan which would incorporate aspects to improve sales performance. The franchise agreement is usually for a certain period which would vary depending on the company’s policies.