A simple definition of a franchise is the right to sell a company's products or services in a certain geographic area under the name of the company. Though this definition seems quite simple, there are actually many nuances to a franchise agreement. The differences pertain to geographic area, the scale of business, manner of operations and sales. In business parlance, models are differentiated on the basis of these differences. The suitability for a particular business entity will depend on the model of business in question. The main types of franchise models are product or service franchise, manufacturing format, business format franchise. It is also necessary to understand what is meant by a master franchise or unit franchise. Master franchise: Companies operating on a large scale use this route for expansion. When new markets in entirely new geographic areas have to be tapped, companies sell master franchise rights to a single entity for a relatively vast zone or region and often for an entire country. The master franchise will have the right to directly sell products and services in the market or appoint sub-franchises under their supervision. The details of the franchise disclosure document will decide the same. This method is used for expansion when a company is entering a new market that is very different from its previous exposure. It often becomes a necessity in countries like India where Foreign Direct Investment rules may not allow a company to sell directly. The responsibilities involved are administration, selection, training, and providing a support system. In lieu of it, a percentage of royalty on sales and franchise fees are received. A high level of management expertise is needed to establish smooth operations and guide an entire region towards growth in sales and revenue. The company benefits by gaining an edge over the local competition by leveraging the advantage of local players and fast penetration. As an entrepreneur, you can gain from expert management skills, the large scale of operations and international brand value. It is the best option for one who has the infrastructure and basic skills in manufacturing. Unit franchise: This is a good option for an entrepreneur with limited resources to sell high quality and well-known products or services. The territory would be relatively small and specific but by demonstrating the successful operation of one unit, he can attempt to buy more territories. The disadvantage is that he would have to follow the agreement rules and more often than not, be limited to a single brand of products or services. Payment of franchise fees and royalty fees decreases actual profit from a business. It will be easier for you if you are a beginner to establish yourself with support such as training, sourcing, and marketing from a more experienced central source. It is a low-risk proposition with ample scope for expansion. Product or service franchise: This is one of the earliest models used by businesses. Herein, an entrepreneur buys the rights to sell a particular product or service of a company in a specified territory. A few examples of this are computer peripherals, car sales and service, and mobile phones. The brand name and trademarks of the company are allowed to be used for business purposes. Products, training and related stuff such uniforms are provided by the franchisor. This works for the service sector too. In India, services such as carpentry, plumbing, laundry, and home cleaning are unorganized and unreliable to a large extent. Service franchises aggregate these service providers, provide opportunities to upgrades their skills and services and provide them with a large customer base which they can access through various forms of marketing. This also enables good service providers to benchmark their services through ratings by customers on an online company portal. Customers are increasingly inclined to avail of such services due to the standardization of rates, easy access, reliability, and safety concerns. There is a vast scope for service franchise in India in the unorganized skill sector such as driver service, laundry, and painting homes. Manufacturing franchise: In this agreement, a company issues a license for the production and associates their trademark and brand name with the product. Usually, a company has derived very specific products and transfers the process know-how to a manufacturer who has bought the license from it. Apart from know-how, sometimes, pre-processed raw materials, and training are given to ensure the manufacture of the desired product. This method is very commonly adopted in the food industry and is also applicable to products involving intellectual rights and patented technology. An entrepreneur stands to gain a lot from operating a manufacturing franchise by learning from the technology transferred and exploiting a ready market base developed by a franchisor. The company also gains by getting the chance to reduce operation related overheads. Business format: The term refers to a business model developed by a franchisor and then replicated at other locations by selling franchise rights. Once a business model is refined in every aspect such as product, service, operations, pricing, and sales, it can be replicated many times successfully. In order to achieve standardization of product or service, fully processed or semi-processed products are supplied at a national or regional level. Initial and regular training and other support is given for operations, accounts, and administration. The business space, its décor, and even location bear the signature of the trademark which is easily identifiable by the customers. Marketing is done at a national level and a high level of brand recognition is ensured. In return for all this assistance, a one-time franchise fee for a fixed number of years and ongoing royalty fees have to be paid. There are a number of other charges such as regular training costs, marketing fees, and software upgrading costs. In fact, a few models are coming up, wherein, there are no royalty fees. Once an entrepreneur establishes the business in one location he can invest in another or many such outlets to expand his business. The main purpose of buying a franchise is to take advantage of the scale of operations, marketing, professional expertise, and brand value that a big company can provide. There is a limitation on the decisions that can be made regarding business but at the same time, one learns a lot about business in a short time. Some models are more suitable for a businessman who is just beginning with limited capital, less experience, and lower managerial skills. Some models are suitable for those with high managerial skills and are looking for a scope of investment spanning across a large zone but wish to tap existing brand value.
In the absence of the well-defined franchise law in India, the franchise agreement is based on a bunch of business laws including the Contract Law. Due to this, it is very important to understand the nature of the franchise that is being offered, the period of validity and the territorial implications. Careful consideration of market, investment, competition, and Unique Selling Proposition will give an idea of the feasibility of a project that is being considered by you. There are pros and cons in all the types of franchises but by ensuring that your experience, financial and human resources, skill, and interest complement your chosen business, you will ensure success, profit, and growth.
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