Franchising is a business arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications.
When it comes to the definition of franchising, it is a business opportunity that allows the franchisee to start a business by legally using franchiser’ expertise, ideas and process in its business plus assistance in organization training, merchandising and management in return for a consideration from the franchisee.
Features of franchising
Franchising is contractual commitments made by both the franchiser and the franchisee serve as the structure of the franchise system and must be protected at all times to ensure the effectiveness of an expanding franchise network.
To control quality of goods and services, franchisors control those goods and services that franchisees are allowed to sell. From time to time, franchisors may allow franchisees to experiment as a source of possible innovation or as regional variation or different customer base may require such deviations.
- Well established business.
- Need limited investment.
- Easy entry in the new market.
- Business has large establishments.
- Facilities in diverting business risks.
- Results in large turn over.
- Division of labor and specialization.
- Based on mutual agreements.
Types of franchising
- Product franchise
- Manufacturing franchise.
- Business- format franchise.
- Manufacture- retailor franchise.
- Wholesaler- retailor franchise.
- Service sponsor retailor franchise.
- Contractual relationship.
- Intangible property
- Payment (Royalty)
- Specified geographic area
- Specified period time.
· Categories of franchising
- Job franchise
- Product or Distribution franchise
- Business format franchise
- Investment franchise
- Conversion franchise.
Importance of franchising
· Proven market for product or service.
- Advantages of purchasing.
- Advantages of training.
- Advantages of marketing and management.
- Quality control standards.
Buying a franchise can be a quick way to set up own business without starting from scratch. There are many benefits of franchising but there are also a number of drawbacks to consider.
- The risk of business failure is reduced by franchising. Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.·
- Products and services will have already established a market share. Therefore there will be no need for market testing.
- Using a recognized brand name and trade mark. The benefit from any advertising or promotion by the owner of the franchise - the 'franchisor'.
- The franchisor gives a support - usually as a complete package including training, help setting up the business, a manual telling, how to run the business and ongoing advice.
- No prior experience is needed as the training received from the franchisor should ensure the franchisee establishes the skills required to operate the franchise.
- A franchise enables a small business to compete with big businesses, more so than an independent small business, due to the pool of support from the franchisor and network of other franchisees.
- Usually have an exclusive rights in the existing territory. The franchisor won't sell any other franchises in the same territory.
- Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
- It benefits from communicating and sharing ideas with, and receiving support from, other franchisees in the network.
- Relationships with suppliers have already been established.
- Costs may be higher than the expected amount. As well as the initial costs of buying the franchise, the pay continuing management service fees may have to agree to buy products from the franchisor.
- The franchise agreement usually includes restrictions on how people can run the business. People might not be able to make changes to suit the local market.
- It may find that after some time, ongoing franchisor monitoring becomes intrusive.
- The franchisor might go out of business.
- Other franchisees could give the brand a bad reputation, so the recruitment process needs to be thorough.
- It may find that difficult to sell the franchise - It can only sell that to someone approved by the franchisor.
- All profits (a percentage of sales) are usually shared with the franchisor.
- The inflexible nature of a franchise may restrict the ability to introduce changes to the business to respond to the market or make the business grow.
The theory of franchising predicts that when the business model barriers-to-imitation are lower, or the business model applicability is more uncertain, which occurs when the firm’s tacit knowledge, asset specificity, site specificity, brand specificity, etc., are lower, the greater will be the rate of franchising. Barriers-to-imitation and isolating mechanisms help to sustain the economic rent accrued with the business model mechanism. With higher barriers-to-imitation and thus with less uncertain approrpiability, the firm would prefer to retain control of their outlets to maximize the rent appropriation and minimize the potential for franchisee hold-up; in which case, the rate of franchising would be lower 37 since the firms will maintain control of the outlets. Further, when the appropriate rent is high warranting a higher royalty rate and since the royalty rate cannot be arbitrarily increased, the rate of franchising will decrease. The rate of franchising increases when the appropriability is more uncertain or when the size of rent decreases.
- The lower the franchisor’s specific know-how, the greater is the rate of franchising.
- The lower the franchisor’s isolating mechanisms, the greater is the rate of franchising.
- The lower the franchisor’s location specificity, the greater is the rate of franchising.
- The lower the franchisor’s human capital specificity, the greater is the rate of franchising.
- The lower the franchisor’s brand value and customer lock-in, the greater is the rate of franchising.
Managing the franchise business life cycle
Franchisors move through phases of growth, development, maturity and in some cases, decline.
This is the same lifecycle for most businesses (including franchisees), however the nature of franchising and the resources available to a franchise business network to plan a sustainable offering is usually able to ensure the ongoing relevance of the franchise brand and franchise business model, effectively extending the franchise lifecycle and providing longevity in the market.
Franchisors however are not immune from failure and can move through all stages of their business lifecycle including decline and failure, in the same manner as any non-franchised business.
The most dangerous stages in the business lifecycle are the start-up and growth stages. These are where any new businesses, franchised or otherwise, are most vulnerable.
For franchisees during this early phase, the support provided by the franchisor, the strength of the franchise business model, brand, marketing and operating systems all help to provide stability and security to see the franchisee through.
Franchisors on the other hand, do not have the same support available to them as they grow and develop, and potentially are more vulnerable to business failures in their early days, and often prior to, or just shortly after franchising has commenced.
The support provided by the franchisor to the franchisee makes a big difference to the franchisee’s own life cycle.
High levels of support early in the franchise relationship will accelerate a franchisee’s growth and facilitate their early maturation.
Similarly, support provided by franchisees to one another add strength to the franchise business network and also assist in the early maturation of each other’s franchise businesses.
Franchisors usually find the nature of support provided to a franchisee during the course of their lifecycle in the franchise business changes from highly technical and operationally focused at the start, to management, financial and marketing expertise as the franchisee matures.
Extending the Franchisee Life cycle
Due to the limited period over which a franchise operates, franchisees are able to extend their life cycle by committing to additional terms.
Renewing a franchise agreement, and therefore extending the franchise business lifecycle, is a conditional grant.
franchisors and franchisees must agree on the basis of new franchise agreements term in advance, however if the relationship is mutually acceptable to both parties, it is more likely than not to continue.
Exiting the Franchise Business
As well as extending their franchise business lifecycle, franchisees can also choose to exit (usually by selling), which under new management provides the franchise business with a further extension of its lifecycle.
Once franchisees have exited the franchise business, the relationship with the franchisor need not end there.
In Australia and other parts of the world, franchisors are required to maintain a list of contact details of past franchisees as part of the disclosure document information given to potential new franchisees.
This requirement to provide contact details of former franchisees should encourage franchisors to consider the nature of what ongoing relationship is appropriate to maintain goodwill with former franchisees.
Franchisor-identified stages in the life cycle of the franchise
Franchise Life cycle stages
Franchise start-up date between…
Stage 1: Gestation
This stage entails the pre-opening preparation of the franchise ‘store’ (business) and incorporates all facets from the identification of the site, to obtaining approval from the franchisor and the actual launch / opening of the store.
Sep 2009 – Sep 2010
Stage 2: Entrepreneurial
The initial, business start-up phase. The franchisee (and franchise) is simultaneously excited and overwhelmed, anxious, and uncertain about the ‘way things should be done’. Requirements, systems and procedures have not yet been internalised and entrenched (“bedded down”).
Mar 2008 – Aug 2009
Stage 3: Methods and Systems
The franchise business is in place and operating to expectation. The franchisee’s focus is largely directed at refining systems and methods, and on achieving margins.
Mar 2004 – Feb 2004
Stage 4: Maturation / Decline
The franchise business is by now a known quantity and operating effectively - the business is essentially on ‘cruise control’. The management team is established and demands on management innovation and capacity are minimal. The franchisee is not innovating or investing the same degree of effort as he/she did in previous stages and could lose interest (experience boredom). In this stage the original debt incurred when purchasing the franchise (‘store’) in all probability has been repaid and the franchisee often experiences newfound wealth. This situation could lead to a stage of renewal or decline.
Mar 2001 – Feb 2004
Stage 5: Renewal
When reaching this stage, the franchisee is usually confronted with the choice (decision) of revitalising (and revamping) the business or putting it up for sale. This stage typically prompts the onset of the next ‘entrepreneurial’ stage and the life cycle continues at a new level of functioning.
Mar 1993 – Feb 2001
ConclusionSustainability of business format franchising does not appear to be under threat if the prolific growth of this business form is considered. However, franchisees are exiting the franchise system in favor of independent business endeavors and dissatisfaction and unmet expectations in the relationship are some of the important underlying causes (Frazer, Merrilees & Wright, 2007). While little is known about the unique behavioral dynamics at the level of the individual franchise, and how this is influenced by the presence of an overseeing franchisor, the current study has revealed that the franchise (franchisee) has to deal with an extensive range and variety of change dynamics that pose significant challenges to the sustainability of the franchise. A significant proportion of these changes are generated internally by the franchisor. By implementing policies that do not acknowledge the impact, consequences and unintended (and undesirable) side-effects of such changes the franchisor may inadvertently erode the sustainability of franchises. While further research is required to illuminate the idiosyncratic dynamics that permeate the franchisor-franchisee relationship, awareness of the pervasiveness of changes impacting on the franchise (and franchisee) at this initial stage, is in the interest of both the franchisee and the franchisor.