Franchising is a proven way of making your business reach out to a large number of consumers across a large geographic area. The franchise business model is more cost-effective than traditional chain stores and has a higher probability of success. But what exactly is franchising? How is it beneficial for your business? And what are the advantages and disadvantages of franchising your brand? In this article, we shall explore franchising in detail and seek the answers to this question.
What is Franchising?
Franchising is a way of distributing services and products involving two parties- the franchisor and the franchisee.
The franchisor is the brand or company that intends to distribute its services and the franchisee is the distributor that works at the grassroots level to provide those services to the consumer. The franchisor provides the franchisee with the right to use its brand name, logo, products, and services while the franchisee pays the franchisor a royalty and an initial fee in return. The franchisor extends its business system and guidelines and provides training and resources to the franchisees in order to ensure that smooth service is provided to the customers.
On the other hand, the franchisees license the right to use the brand’s trademark in order to do business. It has to pay the franchisor an initial fee for buying a franchise and also royalty from time to time. They have to look after the business at the local level and are responsible for the smooth running of business operations. It is the duty of the franchisee to operate according to the franchisor’s system and live up to the consumers’ expectations of the brand.
Types of Franchise Business Model
There are 5 main categories of franchises:
Job-Franchise
This is a low-investment franchise business model in which a single person operates as the franchisee. There is a small or no team at all involved in its operation. The franchisee has to pay a franchise fee and start-up costs like equipment and basic materials. Examples of job franchising are cell phone accessories, cleaning services, event planning, and travel agencies.
Product Franchise
This is the type of franchise business model that drives the most sales. In a product franchise, the franchisee distributes the products of the franchisor in return for the right to benefit from the franchisor’s trademark. Sometimes, this is also referred to as Distribution Franchise. There is a vast number of industries that operate through product franchising. Some examples include cars and automobiles, computers, bicycles, and electrical appliances.
Business Format Franchise
This is the most popular type of franchising. Most people refer to business format franchises when they talk about franchises. In this franchising model, the brand provides the franchisee with the entire business model under which the franchisees need to operate. The franchisor provides entire training programs and lays out detailed plans about the procedures. Examples include fast food, restaurant, fitness, and retail.
Investment Franchise
This is a large-scale business in which an investor invests a large sum of money in franchises. Sometimes, they even have their own franchisees for operation. Investment franchise is primarily done in hopes of producing a return on investment and a capital gain on exit. Some examples of investment franchises are hotels and large restaurants.
Conversion Franchise
This is a hybrid type of franchising in which an existing company becomes the franchisee of a larger brand. This is more beneficial for the franchisor than other forms of franchising because there is already a business that is up and running. There is no need of starting a franchise from the scratch. The company that becomes the franchisee also benefits from the popular trademark, business model, and support system of a successful brand. Examples include electricians, florists, real estate brokers, and professional service companies.
Advantages of Franchise Business Model
Adapting the franchise model for business comes with a lot of pros. A franchisor can benefit heavily from this business model. The advantages of franchising a business are:
Low Capital Needs
As a franchisor, you do not have to invest heavily in the distribution of your product. Franchisees are the ones who are going to pay you a franchise fee in order to use your brand name and keep paying royalty from time to time. You just need to provide your franchisees with minimal equipment and services to ensure smooth sailing.
Franchisees are the ones who take care of the capital needs for retailing your products. Thus, the company’s need to organize capital is limited.
Low Marketing Costs
Franchisees themselves become brand ambassadors in their local community. A franchise retail storefront at a prime location can become a billboard for the brand. This will attract prospective clients and also drive in prospective franchisees. This will limit marketing costs as franchisees themselves will be marketing your brand.
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Low Early Barriers
As a franchisor, you are not required to have extensive knowledge about retailing or operating your business at the grassroots level. Franchisees will look after these factors themselves. What you are required to do is create a business model for your franchises and put together the franchising materials.
Easy Management
In a franchising model, it is the responsibility of the franchisees to look after the day-to-day management of individual franchising units. As a result, the franchisor is able to spend time on the research and development of the products. This will ensure better product quality, leading to more success for the franchises. Also, with the responsibility of day-to-day management removed from the franchisor’s shoulders, the franchisor can direct more focus on marketing the brand.
Disadvantages of the Franchise Business Model
With so many advantages of the franchise model, there are also some disadvantages. One needs to keep these disadvantages in mind while adopting this model. The disadvantages of franchising are:
Negative publicity
The way your brand is perceived by the customers is dependent to some extent on the way your franchisees present themselves. If a franchisee fails to meet the expectations of your brand or does not provide quality service then it will affect other franchisees as well. The image that all your franchisees are poor in service will arise. This will fetch you negative publicity and affect your brand name in a negative way.
Lack of control
When you lend out your brand name and operations to several franchises, you may lose some of your control over them. Franchisees would want to have their own creative liberty and may tend to operate a business that is suitable at the local level. A strong franchising agreement can prevent this from happening but then it would be difficult to draw in prospective franchisees.
Legal regulation
The laws regarding franchising can vary from region to region. It is often confusing and sometimes may even get in the way of lending out your business to franchises. A franchisor needs to have good knowledge about the laws in different regions and create franchising agreements accordingly. This may cause the franchises to have different levels of liberty and would prove difficult to manage.
Points to Remember💡
While lending out your business to franchises, there are several important things to keep in mind.
Franchising is about branding
The most important thing that makes a franchise successful is the brand name attached to it. The more popular and trusted a brand, the more successful its franchises will be. For this, your brand needs to have some prior recognition in the market. If your company is not well-known then it would be difficult to attract franchisees. Franchisees pay a lot of capital and spend a lot of time managing the retail of products in hopes of a large number of sales. But if your brand is not well-recognized, then you would not have an adequate amount of customers to drive those sales. Hence, if you are considering the franchise model for your business, make sure that your brand is placed well in the market.
Franchising is about communication
A franchising agreement is based on mutual understanding between the franchisor and the franchisee. As a franchisor, you have to work closely with the franchisees. You have to communicate with them regularly and take care of their needs. You have to make sure that they receive the service that you promised them. Hence, you will be required to have good communication skills. If you do not know how you should connect with your franchisees and work with them, then you will not be able to successfully run your business via franchises.
Franchising is for simpler ideas
When you wish to franchise your business, you need to make sure that your business model is understandable to others. Your business strategies, operational systems, and most importantly the mission of your company need to be simple enough. This is because, with overcomplicated ideas and business models, it would be difficult to draw in franchisees. Your ideas and values need to be simple enough so that you can pitch them to prospective franchisees. After all, no franchisee would want to invest in a brand that they do not understand.
Franchising is about support systems
An important part of franchising is that the franchisor will provide the franchisee with a support system. The franchisor needs to ensure that ample resources and products are being provided to the franchises. The franchisor also needs to provide training to the franchisees so that they can effectively portray the brand image of the franchisor. Also, a franchisor may be required to provide extensive plans, guidelines, and business strategies that the franchisees would be required to adhere to.
Industries that are suitable for franchising
Not every industry is suitable for franchising, but there are a lot of industries that can achieve great success through franchising. Following is the list of industries that can benefit by franchising their business:
1. Service-related fields
- Home repair
- Cleaning service
- Furnishing
- Maintenance services
2. Business support services
- Accounting
- Mail processing
- Advertising services
- Package shipping
- Personal services
- Printing services
3. Food
- Fast food
- Restaurants
- Specialty coffee
- Eating joints
- Ice-cream parlors
4. Other industries
- Automotive repairs and services
- Environmental services
- Hair salons
- Health aids and services
- Computer and phone repair
- Clothing store
- Children’s services
Conclusion
Franchising can be a great way of extending your business over a large geographic area. Franchisees from different regions can effectively set up businesses as they possess deep knowledge of the local market. Franchisees will look after your business at the grassroots level and cater to the needs of your consumers. They will also be the ones to spend the majority of capital. This will allow you to focus your capital and time on effectively marketing your brand in order to ensure increased recognition of your franchises.
But just like any other business model, franchising has its cons. Not every industry is suitable for blogging and you need to understand the local laws while franchising your business. As a franchisor, you are also required to keep a check on your franchises from time to time. You also need to ensure that your franchises receive proper training and services from you in order to represent your brand.
Keeping these thoughts in mind, you need to weigh the advantages and disadvantages of franchising your business. You need to recognize your industry and understand if your company is suitable for franchising.
I hope this article was helpful in providing you with an insight into what franchising is and if you should consider franchising for the growth of your brand.
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