Franchise business? What’s this? Is it a kind of a business? What kind of work is done in this particular business? Name sounds familiar but unaware of the detailed knowledge? These questions are somehow familiar when people encounter the work franchise.
Franchise is method of business expansion which is not fully comprehended among people. In India, when FDI rules were rolled out in multi-brand retail expansion, the term franchise spread widely in people’s conscious. However, there is handful of them who are aloof to the important terms that are frequently applied in the industry.
Now that the method is majorly adopted by various firms in India’s business fraternity, it is necessary to get familiar with universal terminology of franchising. First of all, what is franchise? Franchise is a mode of business expansion in which there is a contract signed between by the main company with the investor(s). The licence is hence granted to the investor, allowing him/her to employ the trademark of the company, so to retail its products and services in any particular region or locality. The contract is time-bound and can be terminated or extended based the will of both the parties. However, the crucial clutch remains in the hands of the company.
Moving ahead, there are five essential terminologies under franchising, which are mandatory to understand, if entering or planning to enter into franchise arena. Here are they:
1. Franchisor: The whole franchise web starts with the idea of this person, who is having a business and plans to expand it extensively. For say, there is an entrepreneur who nurtures a business for years, develop its name in the market, and invest its time and money into it, to make it grow. And when the business finally gets mature and stable enough to reap profits, the entrepreneur decides to expand its idea throughout. For rapid sprouting in different types of market, without capital breakage, it chooses to invite investors to buy its business idea under a contract, and permit them to use its company’s trademarked name to start a business. The process of entering into franchise-based expansion turns an entrepreneur into a franchisor.
2. Franchisee: A franchisee is an individual who buys the rights to use company’s trademarked name and business, to run a business. An investor who wishes to run a business but do not want to start from a drawing board, purchases a franchise from the franchisor, under certain rules and regulations, and according to some industries or business rules, franchisee is liable to pay timely royalty fee to the franchisor. The fee is charged by some franchisors, which is decided prior to any formal commitments.
For example, A is having investments and wants to start a business. But he wishes not to take a risk by starting a whole new venture. So, therefore, he decides to buy the franchise of an already established company. For this A needs to pay certain sum of initial fees, and location can be his own or he can rent a space, in consent with the franchisor, to start franchised business. Now, if the company has a clause of royalty fee in its franchise agreement, then A needs to pay monthly fee to the franchisor. The fee of a certain amount is charged periodically for using the name and business of the company.
3. Master franchisee/ developer/ sub-franchisee: The franchisor company signs a contract with a person or an entity to give them the right to recruit franchisees in specific territory. The person or the entity is termed as master franchisee or sub-franchisee. The master franchisee is responsible for opening certain number of units of franchised outlets, and providing all necessary training and support to the franchisees of that particular locality. For this, the master franchisee shares the revenue generated from the franchisees with the franchise company. Not all franchisors offers master franchisees, but if the opportunity is offers by any company, then it is motivated to have rapid penetration in the territory.
For example: Your master franchise agreement with the franchisor may state that you will receive 50% of the franchise fee and 50% of the royalty fees for each unit sold within your territory. You will be responsible for recruiting and training other franchisees. You will also need to be available for ongoing support.
4. Conversion Franchise: when an independent business is converted into the franchisee unit of a larger franchise system, then it is called as conversion franchise. For example, X is having an independent business at a small level. Now he wants to expand his business reach and profits, so what he will do is sign a contract with Z, a bigger franchise system, and agree to convert his business into franchisee outlet of Z. Now X’s business would no longer be known by its former name, but rather by the name of the franchise chain.
5. Franchise Fee: The initialamount of money asked by a respective franchise company, in order to sell the franchise to franchisees, is known as franchise fee. For example, XY is a company that is inviting investors to purchase the franchise of its company at an amount of Rs. 5 Lacs.