How to take franchise in India is an important question. The franchise market in India is not as developed and professional as it is in the west. Hence Indian franchise markets need to be assessed independently. This independent assessment became more critical, especially after the havoc that the COVID 19 pandemics had played with the country’s economy.
In business, there are no perfect circumstances, and all the decisions should be taken by keeping in mind the risks attached to the prevailing scenario and the rewards in return. We cannot remove all the risks connected with a business. Still, we can reduce them by converting pure risks into calculated risk. To turn a risk into calculated risk, we need information and more the information we have, better we will be in a position to calculate risk in a venture.
The logic, as mentioned above, for converting risk into a calculated risk also applies to the franchise. Anybody intending to take a franchise in India should also try to get as much information as possible to reduce the risk in a franchise business. Now comes the critical question, what information should a prospective franchisee have to reduce the franchise risk?
In this blog, I would try to answer this question through the franchise selection process.
A prospective franchisee should have information on the following points before starting a franchise in India.
Own Business in India or Franchise in India
When an individual decides to become an entrepreneur, then that person has two options. One is to start their brand, and the second is to take a dealership/distributorship/franchise of an established brand.
Of the options mentioned above, there is no right or wrong choice but only a right or a wrong approach towards entrepreneurship.
In India, most of the people who intend to become an entrepreneur follow a straight forward trick. And it is that they try their hand on the most popular form of entrepreneurship then with budget permitting. If developing an app (application) for a mobile operating system is a popular entrepreneurial option, then people decide to become an app developer. If they feel that franchising is widespread, then they would like to become a franchisee.
People interested in becoming an entrepreneur should first try to assess their need, strengths, weaknesses, likes, and dislikes. These people should also evaluate their resources then decide what kind of entrepreneur they want to be. Unfortunately, this is precisely how many people do not go about when they want to become an entrepreneur.
There are advantages and disadvantages of both starting their brand and franchising. An individual should do a detailed analysis of the advantages and disadvantages of launching their brand and franchising concerning its strengths and weaknesses. The outcome of this in-depth analysis should be the way forward concerning the entrepreneurial journey.
Understanding The Role Of A Franchise in India
A franchisee plays a critical role in the success of its franchise business. The saying that a franchise business is the reflection of its franchisee is not further from the truth. The way a franchisee leads the show mostly decides the present and the future of its franchise business. From the time of signing an agreement to the time, a franchise business ends its tenure. The role played by a franchisee repeatedly comes into the picture. How a franchisee acts and reacts, or does not act and does not react, shapes the destiny of the franchise business.
If the actions and inactions of a franchisee are so significant, then it is required that we understand them and have clarity about the role of a franchise in India.
Freezing the budget for a franchise business is very important and also a critical exercise. Once the budget gets finalized; only then will an individual have clarity about what franchise options one can consider during the search process.
An important thing to remember while deciding the budget is that it should not be so high that the entire revenue of the franchise business goes towards debt servicing. As a result of the high debt, the future franchisee would be left with negligible profit to take home (in the worst case, leave no gain). Also, the budget cannot be so conservative that an individual misses out on lucrative franchise opportunities. Which otherwise would have been affordable if only the budget planning were precise.
A budget is a sacrosanct number and until and unless an opportunity which is very lucrative and which requires little bit stretching of the budget does not come by the budget stands as it is.
Deciding On The Type Of Franchise in India
Unit franchise in India is the most common type of franchisee that we see. It is so common that it is a synonym for a franchisee. In a unit franchise, the franchisee manages a franchise business as per the franchise agreement and the systems and processes laid down by the franchisor.
There are three different types of unit franchise models namely
Company Owned Franchisee Operated (COFO)
Franchisee Owned Company Operated (FOCO)
Franchisee Owned Franchisee Operated (FOFO)
I have in detail explained about all the franchise model in a blog. Here is the link.
When we usually think of starting a franchise business, we mostly think of owning a new franchise business. But the resale franchise is also an option, though less explored. When we are talking about a resale franchise, first we should understand what a ‘resale franchise.’ Is
“An operational franchise business sold by a franchisee due to any reason.”
The reasons for selling an existing franchise business vary from not being able to find sufficient time to run the franchise to something like getting an opportunity to settle abroad. Different people may have various reasons to sell off their franchise business.
An area franchise in India means that a franchisee gets a particular area to open and manage as many outlets it can. In this franchise concept, generally, a franchisee has to provide the minimum commitment for the number of outlets it will open in a specified time.
Master Franchise in India
A master franchise in India means a person/organization that operates in a predefined territory as a replica of the franchisor. While a franchisor appoints a master franchisee, the master franchisee appoints the franchisees and take care of all the support and training needs that otherwise a franchisor would have handled.
Thus we see in this arrangement; there are two layers. The first layer is between the franchiser and the master franchisee. Another layer is between the master franchisee and the franchisees.
There are also cases where, in some markets, a franchisor directly appoints the franchisees. While in some other markets, they take the help of a master franchisee. The difference in strategy for different markets is because different markets have different needs. So where it suits a franchisor to go directly with franchisees there, a franchisor would not go with master franchisees. But in markets where it suits a franchisor to go with master franchisee, there they would go with the master franchisee and not recruit franchisees directly.
Avoid Pitfalls While Taking A Franchise in India
While it is essential to follow the process when taking a franchise business, it is equally important to avoid the pitfalls which invariably come in the way while making the franchise decisions. Sometimes, these pitfalls are visible. Sometimes, they are not so apparent. And sometimes individuals find difficult to recognize them as they get blindsided. So let us try and understand some pitfalls that an individual could encounter while taking a franchise business.
Like, signing a franchise contract in a hurry or not knowing all the terms and conditions before signing the franchise contract or taking a franchise just because it is in high demand. There are many other pitfalls a prospective franchisee can counter while starting a franchise in India.
Initial research for taking a franchise in India could begin from understanding the following
- What products are available for the franchise?
- What are the different costs of owning the franchise?
- In which market those products/services sold?
- In which market or region is a brand interested in expanding.
- How are these brands promoting themselves in the market and reaching their customers?
The purpose of the initial research is to get the basic idea about the franchising industry, see what all opportunities are available, and understand the typical pattern among the franchise opportunities.
For detailed information, an in-depth research is essential. Better the research more ‘the food for thought.’ Proper research will encompass a mix of reading and personal meetings.
Research through Reading
Today, the internet has so much information that reading articles online is a great way to do the initial research. And in case more information is required, then
(a) The catalog of business books from various publications is an alternate.
(b) The research report from multiple research agencies and industry associations is an excellent material in this scenario.
Research through Personal Meetings
After going through the internet and some books, we do get a fair idea about a business or multiple businesses. Still, numerous queries are waiting for answers. Now comes the critical part, which is getting real information from people from the relevant industry. An individual should try to get as many answers as possible to all their queries from these people.
Identify the opportunities For Franchise In India
Analyze the sectors and select one
While doing the initial research franchise in India, an individual would come across various franchising opportunities. A prospect should then dig a little deeper and classify the franchise opportunities in India as per the industry category they belong to. Once the note on all the industry categories gets made, the next step is to understand how these industries are performing.
Identify the opportunities in the selected industry
Once an industry category is identified, the next step is to determine the franchising opportunity in that particular industry category. To identify franchise opportunities in India, an individual can visit the companies’ websites in the shortlisted industry category. Also, fill the franchise form online or drop a mail at the provided email address (as the case may be). Another option is to take help from a franchise consultant with experience and information about the identified industry category.
Shortlist the suitable companies
Among the companies which an individual would have contacted for franchise details, some would have responded, and some would not have bothered to reply. Of all the responses received, some of the franchise opportunities in India may be out of the budget. Among the franchise opportunities within the budget, it is essential to analyses all the aspects like expected income from franchise business, expenditure, support from the company, brand/product pull, product price vis-a-vis competitors before deciding on a suitable franchise in India.
Analyse the franchise model
The franchisor reverts to the interested parties with the brand information and franchise model whenever a prospective franchisee contacts a franchisor for the information. A franchise model is essentially a piece of indicative information on the capital expenditure, operational expenditure, income, and the expected ROI tenure. A prospective franchisee should understand the following in detail before taking a franchise in India
An individual becomes a franchisee to make some money. And as there could be more than one source of revenue for a franchisee, a potential franchisee should know all the potential revenue sources. Here, by income, we mean the money coming in the franchise business in any form.
Just like in any other business, a franchisee has to incur many expenses during the franchise tenure. We know the costs born while setting up of franchise business, as capital expenditure (CAPEX) or set-up expenditure. We call the expenses incurred while operating the franchise business as operating expenses (OPEX) or running expenses.
It is essential to understand various types of expenses before venturing into the franchise business. This helps in preparing the budget more precisely. A good understanding of the costs involved enables a future franchisee to read between the lines of the various documents & information provided by a franchisor and also helps in understanding the potential profitability of that business.
Expected ROI Term
Return on investment in short is known as ROI. Prospective franchisees need to be aware of, return on their investment under different scenarios.
The four components required to calculate the ROI period, are
• Margin on products
• Expected operational expenses
- Expected sales (which of course is an assumption)
- Total Investment
A prospective franchisee can calculate the expected ROI by deducting average monthly expenses from monthly average income. Further, the total investment made in the franchise business gets divided by this amount. Hence the entire months to recover the investment would be known, and that is the ROI period.
Meet The Existing franchisees Before Taking Franchise In India
Everything said and done, words of an existing franchisee carry much weight while taking the final decision. If the majority of the franchisees are happy, it is the biggest plus in favor of that franchisor. However, if most of the franchisees are unhappy, then without a doubt, it is negative against that company. Moreover, the reaction requires investigation in detail in case of a mixed response. Like, if some franchisee is satisfied, then why are they so? And those who are unhappy then why are they so?
Not every franchisee will be forthcoming in giving the information. Also, not every franchisee will provide the correct information. Hence every information collected From a franchisee requires a cross-check with the franchisor or with another franchisee.
Meet the Franchisors Before Taking A Franchise In India
The purpose of the Meeting with the franchisors is to understand them and their brand. Apart from knowing the number of years since when a brand is franchising and the number of franchisees it has, there are other things to review as well like
- How frequently the franchisor has been coming out with new products.
- What is the product range?
- How is the quality of the products Vis a Vis competition?
- Product prices Vis a Vis competition?
- How far and wide is the reach of the company regarding outlets and distribution?
- What is the marketing strategy? How are franchising brands connecting with their customers?
- At what places are they looking to have a new franchisee?
- How are the finances of the company?
Finalise The Location of Franchise in India
The location of the property (own or rented) where an individual intends to do a franchise business is the most critical aspect of the franchising. It is a ‘make or break’ kind of an essential element. If an individual does everything else right but gets the location wrong then half the battle is lost even before it begins.
The damage caused due to starting a franchise business at a wrong location would depend on how the wrong franchisee got with the site of a property.
The following statement highlights the importance of the right location for a property in the franchise business. An individual with the wrong franchise business selection can survive if the location of the property is right. If the case is opposite, then a franchise business cannot survive.
For different types of franchises, there are different specifications for the right property. Like in the case of B2C (Business to Customer, e.g., retail) visibility, footfall, parking space, and other factors become important. In the case of B2B (Business to Business) nearness to the business district, within the market known for that business and other factors are essential.
Finalise the franchise opportunity
It is important to finalise a franchise opportunity only after completing the due-diligence and after satisfying one-self with all the possible information. After finalising the franchisor comes the stage for signing the franchise contract or the Letter Of Intent(LOI). With the signing of contract or LOI franchise fees is paid either fully or partially depending on the franchisor.
Should A Franchise Consultant Have a Role?
When an individual thinks of becoming a franchisee, then one question that comes in mind is, should a franchise consultant have a role in guiding through the entire franchise taking process. As there are consultants for different industries similarly, there are consultants for the franchising industry also. Similar to consultants of other sectors who have information and knowledge about their respective industry, franchise consultants also have information related to various aspects of franchising.
Some people prefer to hire a consultant to get franchising solutions. Then some people prefer to find franchising solutions on their own. People who are hiring a franchise consultant should remember the following points
- Most of the franchise consultants are franchise brokers.
- Franchise Consultants make money when they sell a franchise, called success fees.
- An overwhelming majority of the cases, a franchise consultant gets the success fees only from the franchisor; hence many of them are keen on selling a franchise by every means.
The solution to the above situation is
Ask the consultant for the full disclosure of the brands it represents. In this way, a prospective franchisee would be clear about where the interest of the franchise consultant lies.
Alternately a prospective franchisee could hire a franchise consultant (who is not a broker) to consult on the viability of the franchise model shared by the franchisors and the additional information required. In this way, a prospective franchisee would get the unbiased analysis of the franchise models.
In the conclusion we can say that selecting a right franchise business opportunity is a rigorous process. This process should be followed before taking any franchise in India. The franchise opportunity coming out of this rigorous process would have less chance of failure and more chance to turn profitable at earliest.
We can summarise the process of taking franchise in India with following points:
Own business in India or franchise in India
Understanding the role of franchise in India
Deciding On the type of franchise in India
Avoid pitfalls while taking a franchise in India
Identify the opportunities for franchise in India
Analyse the franchise model
Meeting the existing franchisees
Meet the franchisors
Finalise the location of franchise in India
Finalise the franchise opportunity
Should a franchise consultant have a role
These were some of the critical points to keep in mind while taking a franchise in India. I hope this blog would have given the required clarity. In case there is still some doubt, please feel free to contact and try my best to answer those queries.
A part of this blog is reproduced from my book Franchisee Notes. Copyright © Sumeet Garg
No part of this blog can be used without the written permission of the author.
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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 on the topic of How To Franchise In India.