Definition: The term ‘franchise‘ is understood as an exclusive right conferred by the parent organisation to an individual or enterprise to use the former’s successful business model, in stipulated areas. Franchising is a business relationship; wherein the owner authorises another party to use their brand, product, business system and process in return for adequate consideration.
In finer terms, franchising is an arrangement, in which the manufacturer, permits another firm, the right to use its diverse intellectual property rights such as trademark, brand name, technical know-how, designs, etc., in addition to the proven name, goodwill and marketing strategies, for a certain sum. E.g. Mc Donald’s, Subway, & Eleven, Domino’s, Dunkin’ Donuts, etc.
In franchising, the firm that grants a license is called franchiser, and the individual or entity to whom the right is conferred is franchisee. The franchisee acquires franchise by paying initial startup and annual licensing fees to the franchiser, who in return provides training and assistance to the franchisee at regular intervals.
Franchising Agreement is a special agreement between both the parties, under which rights are given, and also the terms and conditions relating to franchising are stated clearly.
Characteristics of Franchising
- License: The franchisee gets the right to use, franchiser’s trademark under a license.
- Policies: The franchisee must follow the policies concerning the mode of conducting business, as stated in the agreement.
- Marketing support and technology: Franchisee is supplied with continuous market support and technology, by the franchiser, to undertake business, in the manner stated in the franchising agreement.
- Training: Complete training and assistance are provided to the personnel working in the franchisee’s enterprise.
- Royalty: For making use of a well-known business model, the franchisee pays the royalty to the franchiser.
- Limited period: Franchisee is allowed to use the business know-how and brand name for a specified period, as mentioned in the franchise agreement. Although, the agreement can be renewed further.
Franchising is a most common practice of expanding the business, through a licensing relationship, wherein the owner provides training, equipment, ingredients, and marketing support to the other entity.
Importance of Franchising
- It allows franchiser to augment his distribution chain in minimum time.
- It provides feedback to the franchiser regarding the product popularity, needs and choices of customers, etc.
- It expands the network of franchiser which helps in increasing goodwill.
- As the business is already established, the franchisee need not make efforts in promoting the product.
- Franchisee get sole rights in providing the product or service
Franchising is a great alternative to developing chain stores, to provide goods and services to the customers and avoid investment. But there are certain demerits attached to it such as there is always a fear that franchisee may open the same business with a different name, after the expiry of the said term. The franchiser’s brand name and reputation will suffer if the franchisee does not provide quality service to the target audience. Besides this, as there is a certain restriction due to which the franchisee lacks freedom in conducting business.