Franchising is an addition to modern business concepts. A franchise is a type of license grant for a business that provides franchisee access to the franchisor’s proprietary business processes, business knowledge, trademarks. This allows the franchisee to sell a product or a service to the customers under the franchisor’s business name.
There are two main parties involved in the franchising business.
Franchisor – The company or the individual who grants the franchise facility to sell goods or services using their name or the trademark
Franchisee – The company or the individual that receives the franchise facility from the franchisee to sell goods or services under the franchisor’s name or the trademark
To acquire and maintain the franchise status, the franchisee has to pay an initial start-up fee and an annual licensing fee to the franchisor. There are several reasons for a business to acquire or provide a franchising license.
1. Increase the market share of the business.
2. Reach a new geographical location at a lower cost
3. Lower operating cost due to franchisee being an independent contractor
4. Low failure rate as the franchisee has to follow the franchisor’s business model which is already tested to be successful
The franchising business method can be used to achieve competitive advantage through expanding the market share for a lower cost.
Types of Franchising
There are five main types of franchising that can be identified in the modern business world.
This is known as a low investment franchise usually taken by a person who is planning to run a small franchise business. The franchisee needs to purchase a minimal amount of capital equipment and a limited amount of stock to start the business. The franchising options in the service industry fall into this category.
Eg: Plumbing, travel agency, cleaning services, pool or garden maintenance, corporate or private event planning, cell phone or electrical repairing services
02. Product Franchise (Distribution franchise)
This is one of the most common franchising methods in selling large products such as vehicles or vehicle parts, computers, heavy machinery, and vending machines. Product franchises are based on supplier-dealer relationships where the franchisee distributes the franchisor’s products to a selected market. Under this method, the franchisor licenses its name or the trademark to the franchisee, but it does not provide the entire business system to run the business independently. In some instances, the franchisor licenses a part of the manufacturing process as well apart from the distribution. Pepsi and coca-cola are two examples of such franchising methods.
03. Business Format Franchise
This is a method that gets the entire system from the franchisor to the franchisee to operate the business and sell the products to the customers under the franchisor’s trademark or name. When licensing under this method, the franchisor provides a detailed procedure on every aspect of the business and provides training and support to the franchisee. This is considered the most popular type of franchising as it is beneficial to both franchisor and franchisee. This method is most commonly used in business industries such as fast food, fitness, retail, and business services.
04. Investment Franchise
Investment franchises are generally large-scale franchising projects that require investing a large amount of capital. The franchisee has to invest the capital and use their own management team to operate the business. This type of franchising is usually used in businesses such as hotels or large restaurants.
05. Conversion Franchise
Conversion franchise is a way of adding a modification to the standard franchise relationships. The franchisees adopt trademarks, training and development systems, marketing and advertising programs, etc. Most of the franchising systems achieve growth by converting independent businesses to franchising units in the same industry. Under this franchising method, the franchisor has the potential for rapid growth by receiving units and royalty fee income. This franchise method is mostly used in industries such as real-estate brokering, air-conditioning, florists, and professional services.