26 May 2022, 11:13 — 11 min read
A franchise is a marketing and distribution strategy that many businesses adopt for quick business expansion. In the case of franchising, an established company- known as a franchisor, gives license to other small partners- known as franchisees, to use its brand name and proprietary knowledge for selling its trademark product or service. All of these are duly mentioned in the franchise agreement. In exchange, the franchiser charges a license fee and a start-up fee. On the other hand, the franchisees can carry on their businesses without worrying about the product/service, quality, supply chain, branding, etc.
Thus, it is a perfect win-win situation for both franchisors and franchisees. Both partners can gain from such business collaboration if they follow a legitimate business contract or franchise agreement. Adhering to such a contract is crucial for the smooth running of the business of both the Franchisor and the Franchisees.
The Agreement of Franchise layout determines the terms and conditions, obligations, and restrictions of both the partners involved in a business. The franchise agreement also ensures that the franchisor remains committed to disclosing its key operating information to its franchise partners. Simultaneously, it also provides an ongoing royalty fee that needs to be paid by the franchise partners to its parent partner, that is, in this case – the franchisor.
This Agreement protects the interest of both partners and makes sure they both remain committed to working in collaboration to improve the service. Take-aways of the partners from an Agreement of Franchise:
Also read: Choosing the right franchise - how to do it?
The earliest history of the franchise form of business can be traced back to the middle of the 19th Century in the United States. The I.M. Singer Company and the McCormick Harvesting Machine Company were reported to have joined hands to manage their organisational, marketing, and distributional system. It identifies as one of the earliest forms of the franchising model.
This model introduces to handle their very high-volume manufacturing. This collaboration also helped the partners, namely Singer and McCormick, trade their mowers and sewing machines over a large geographical area. Thus, it helped them in business expansion and establishing business dominance.
The food and beverage industry has had a long history of gaining franchisee business. A&W Root Beer launched its franchise way back in the 1920s & 1930s. The restaurant chains of Howard Johnson expanded their restaurant business across the country. They have a pioneering vision of franchising which defined the future roadmap for the fast-food business of America.
Even today, the word ‘franchise” quickly reminds the name of many famous fast-food chains like McDonald’s or Subway or Taco Bell and Dunkin’ Donuts. Even though undoubtedly the fast-food sector sees the dominance of franchise business, the grocery business, hotel business, nowadays even the fitness or wellness clinics predominantly run following a franchise model. There are nearly 8 million franchise establishments in the US, which reports contributing almost $500 billion to the economy.
The term ‘franchising’ encapsulates various kinds of business relationships.
Franchising is most used to refer to as Business Format Franchising. In this case, a business first licenses its trademarks for its already proven business methods to other small partners. In exchange, the smaller partners are liable to pay a licensee fee and a recurring fee in the form of a percentage of their gross sales.
The company or business which lends such licenses and, in exchange, receives payments is known as a franchisor. And the partners who pay the license fees and part of their earnings in exchange for the selling rights of the product/services using the franchisor’s trademark are known as the franchisees.
This is a low-investment franchise. It can be managed from home, and the number of parties involved can be as low as 5. This can be started by paying a small token amount as the start-up cost for procuring some essential equipment and other materials to run the business. This franchise business model shows in skill-based or semi-skill-based services. For example, artisans, cleaning, or other maintenance services fall in this category.
A product franchise is also known as Distribution Franchise. This type of franchise business is product-driven. Here the franchise partners work mainly as the distributors of the products possessed by the franchisor. This form of a franchise business can be seen in the case of large product dealers. Presently they constitute the highest percentage of total US retail sales. Dell, Hewlett Packard, Ford, and Caterpillar are all famous businesses run by product franchising.
A large-scale business uses an investment franchise model. Franchises require huge capital investment. For this business and franchisees undertake major monetary and human resource investments. This collaboration expects to yield a high return on investment and a potential capital gain on exit. Usually, hotel businesses run following the Investment franchise model.
This is a hybrid form of the franchise model. Here the franchisor selects partners who were in the business before. However, now they are willing to convert their business into a franchise unit for an already established player in that field. Thus, they do not have to start the business from scratch. Instead, they can modify their previous business and start using the parent company’s trademarks, marketing, and advertising programs by signing the franchise agreement and following their service protocols.
Thus, to summarise, the franchise form of business is one of the most common and most popular strategies for business expansion. However, the success of this form of business lies in the franchise agreement, which defines the basic premises for both the partners – the franchisor and the franchisees. For a sound and smooth sailing of businesses of both these partners, each must adhere to the terms and conditions laid out in the contract.
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Posted byVakilsearch Staff
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22 Jun 2022, 10:30
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