Franchise: Definition, Working, Advantages & Disadvantages Explained

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What is Franchise? Franchise Kya Hai?

What is franchise? or franchise kya hai? is the first thing to know when anyone is looking to become an entrepreneur through the franchising route. Franchising has a different meaning to different people, so before going forward, it is essential to have clarity on its definition. Once this definition is clear, then it will enable everybody to be on the same page. We will look at its modern definition, i.e., the way it is practiced in todays time.

Definition Of Franchise

”A brand owner (of goods or services) granting the rights or license to an individual/group/organization for a decided territory and a fixed term, to use its name and business model with pre-decided terms and conditions along with pre-decided compensation.” 

Those who understand Hindi can also watch this video to understand the topic.


For a franchising to work successfully, it needs to have two partners. One is a franchisee, and the other is a franchisor.

From the definition given above, we can define franchisee as someone; 

Franchisee Definition

An individual or an organisation willing to work within the provided systems & processes of a brand and also Pay franchise fee for the franchising rights and royalty on the franchise business turnover . 

From the same definition, we can define a franchisor as someone;

Franchisor Definition

A brand owner, granting rights or license to an individual to use its brand name, product and its systems & process in a territory in return of compensation for a fixed term. 

How does Franchise work ?

Let us understand how franchising works with an example:

Brand owner of XYZ brand is Mr. J grants franchising rights to Mr. K for the entire Gotham city for five years against the franchise fees of Rs. 5 lacs and a royalty of 5% of the total monthly sales. 

On the other hand, Mr. K ensures that he runs the business 

(1) according to laid down standard operating procedures of brand XYZ

(2) According to the terms mentioned in the agreement. 

The example mentioned above covers all the basics of the definition given. 

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History Of Franchise

If we re-visit our history and go some centuries back then, can we say that the ‘Lagaan’ system was the most primitive form of franchising. A King would give rights to specific individuals called jagirdaars/lords to collect Lagaan or royalty, and these individuals would either themselves collect it or would further provide rights for others to raise the same. Whoever collected Lagaan or royalty would keep a portion for themselves and pass the rest to higher-ups. 

Franchising, as we know, today is a form of entrepreneurship whose history is just over a century old. Still, it is a recent phenomenon when we look at the entire history of entrepreneurship. 

The first instance of modern franchising dates back to the late nineteenth century. The person who introduced this concept was Issac Singer, maker of Singer sewing machine. Though it was an unsuccessful business model from the perspective of Issac Singer, it gave entrepreneurs a new way to reach out to their customers. 

Raymond Albert Kroc or popularly known as Ray Kroc of McDonald’s fame was the person who gets the credit to popularize franchising in the middle of the twentieth century. 


Why Is Franchising Popular?


Franchising is not even 150 years old, but it has created an impact in the world of business and entrepreneurship because of its inherited strengths, which have resulted in creating some of the most successful brands of our time. 

The success of franchising is comparable with that of a more traditional business model of dealership or distributorship. While traditional distributorship model gave us ‘Coke’ and ‘Pepsi’ and traditional dealership model gave us ‘Ford’ and ‘General Motors,’ franchising gave us brands like ‘McDonald’ and ‘KFC.’ 

Like every business model, franchising also reflects the traits and needs of that particular period, and with the time, it grew from strength to strength. Franchising has genuinely democratized the businesses in the sense that the owner of a successful business model does not need to invest its cash or take a loan to expand and reach the other areas. Thus anybody who has a successful business model could reach out to the world through franchise by investing a fraction of what one would have to invest in expanding in any other way.

Which Is better, Franchise Or Starting Own?

Franchising is a win-win proposition as on another side of the franchisor is a person interested in becoming an entrepreneur but does not want to venture into uncharted territory. Thus the franchise model is most suitable for such a person, and by becoming a franchisee, that person gets a tried and tested business model. On the other hand, the franchisor gets the new market for its brand and products. 

So does this mean that a franchising business carries no risk? 

Or do all the franchising models succeed? 

No, this is not the case. Like every business, franchising business also has its risks called calculated risks, so the chance of the failure is low. 

Though there is no comprehensive study that says that franchising is better than starting its brand, but the inherited strengths of the franchise model make it better than starting its business model. 

Lets us ask ourselves a question that which has more risk, becoming a franchisee of an established cafe or starting own cafe brand from scratch? 

Like any other business, franchising also has risks. People interested in starting an enterprise should be ready to take some risk. If an individual thinks that taking a calculated risk is not their cup of tea, then such a person 

(1)Should avoid doing business

(2) Invest money in a fixed deposit. 

Advantages Of Franchise For A Franchisee

Let us quickly look at some of the advantages of franchising for a franchisee

Extensive options and business ideas: A simple Google search would yield thousands of franchising options. Thus a high chance of encountering desirable business opportunities.

Tried and tested systems & processes: A franchisor provides systems and processes developed from experience. So they are tried and tested and have less chance of going wrong.

Supply chain: A franchisee gets the immediate solution on the issue of the supply chain for raw material. As either the franchisor provides it or helps in the tie-up with the vendors.

New Product Introduction: As new product development is part of the franchisor’s role. So a franchisee does not have to waste its time, money, and energy into it.

Competitive Pricing: A franchisor with multiple franchisee outlets has the advantage in the form of economies of scale. Which enable the competitive procurement cost resulting in a competitive selling price.

Disadvantages Of Franchise For A Franchisee

From the perspective of a franchisee, a franchising business does not have a disadvantage, but it has limitations. Which are as follows

  • The franchisor could be a reason for failure: A franchisee is dependent on its franchisor for survival. So in case if a franchisor is unable to play its part, then a franchisee could suffer losses.
  • Tenure: Every franchising business comes with a fixed tenure, which may or may not get renewed after the expiry of the term.
  • Single fit Model: As it helps a franchisor in managing its franchise business, so a franchisor has the same franchising model across the country. Thus there are chances that in a specific part of a country, that model would not be sufficient.
  • Success depends on franchisor: Even if a franchisee plays its role effectively, but to succeed, the franchisor would also need to play its part. Else it would be like trying to clap with one hand.
  • No scope for creativity: Most of the franchisors are rigid about the franchisee following laid down guidelines and systems & processes. Hence there is no scope for creativity from franchisees end.

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Summary 

If we summarize the key point of this blog, then they will be as follows

  • Franchising business has two parties, namely franchisor, and franchisee.
  • A legal agreement binds them.
  • While franchisor gives his products, brand name, systems & processes, and other know-how, in return, a franchisee pays the fees and royalty.
  • The modern history of the franchising is nearly 150 years only.
  • Franchising has both advantages and limitations.
  • To become an entrepreneur, an individual has two choices; first is to start their brand, and second is to become a franchisee.

Conclusion

Like any other business, franchising too has its own set of strengths and weaknesses. Today franchising is going from strength to strength not just internationally but also in India. As per The Economic Times* , franchising in India was worth $47-48 billion in 2018 and growing at 35%. It is expected that India would be $150billion market for franchising by 2023 

Excerpts from Franchisee Notes, available at Amazon Kindle click here . A must read book for people interested in taking a franchise business.

Copy right © Sumeet Garg.

No part of this blog can be used without the written permission of the author.

Disclaimer: reading this blog does not create an advisor-client relationship between us. This blog should not be used as a substitute for the advice of a competent franchise professional.