Franchising – Meaning and Definition

A franchise is an agreement or license between two parties, which

gives a person or group of people (the franchisee) the rights to
market a product or service using the trademark of another
business (the franchisor).
Franchising can be defined as “a contractual agreement between or
license between two parties (Franchisor & Franchisee) for the
purpose of organizing and managing business, where the parties are
mutually benefited”.
Franchise is one form of exclusive retailing. It in fact, is not just a
method of retailing. It is a method of marketing which is lying
between entrepreneurship and employment. A franchiser is an
independent business person who abides by the marketing plan of
the financier and pays him a fee for the use of his brand and known-
how.
Franchise is a form of business organization in which a firm which
already has a successful product or service (the franchisor) enters
into a continuing contractual relationship with other businesses
(franchisees) operating under the franchisor’s trade name and
usually with the franchisor’s guidance, in exchange for a fee.

According to the International Franchise Association (IFA) of

America, “A franchising operation is a contractual relationship
between the franchiser and franchisee in which the franchiser offers
or is obligated to maintain a continuing interest in the business of
the franchisee in such area as know-how and training; wherein the
franchisee operates under a common trade name, format and
procedure owned and controlled by the franchiser, and in which the
franchisee has or will make a substantial capital investment in his
business from his own resources”.

The term ‘franchise’ means an arrangement under which a

manufacturer grants to an individual or an enterprise the exclusive
right to sell the former’s product or service in a specified locality
subject to the terms and conditions of the agreement. The firm
which grants the right is called “franchiser”. The person or
enterprise to which the right is granted is known as the “franchisee”
or franchise holder. The agreement which contains the terms and
conditions of sale by the franchisee is franchise agreement.

Franchising – 7 Salient Features

(i) Two Parties – In a franchise there are at least two sides – the
franchiser and the franchisee. There can be more than one
franchisee.
(ii) Written Agreement – There is an agreement in writing between
the franchiser and the franchisee.
(iii) Exclusive Right – The franchiser owns a brand or trade mark
and allows the franchisee to use it in a specific area under a license.
(iv) Payment – The franchisee makes an initial payment for the
license and becomes a part of the franchiser’s network. He also pays
a regular license fee which may be an agreed percentage of sales or
profits.
(v) Support – The franchiser provides assistance to the franchisee in
marketing, equipment and systems, staff training, record keeping.
The franchiser initially sets up the business to be run by the
franchisee.
(vi) Restrictions – The franchisee is required to operate the
business in accordance with the policies and procedures specified
by the franchiser. He gives an undertaking not to carry on any
competing business and not to disclose confidential information
regarding the franchise. The franchiser cannot terminate the
agreement before its expiry except for ‘good cause’.
(vii) Specified Period – The agreement is for a specific period e.g.,
five years. On the expiry of this period, the agreement may be
renewed with the mutual consent of both the parties

4 Major Types of Franchises (With Examples)

There are four major types of franchises:
a. Business Format Franchises,
b. Product Franchises,
c. Manufacturing Franchises, and
d. Business Opportunity Ventures.
a. Business Format Franchises:
This is the most common type of franchise. Here a company
expands by supplying an established business concept/format,
including its brand name, symbol, and/or trademark to
independent business owners. In this arrangement, the franchisee
acquires the right to use or follow a business format and also the
best practices and processes associated with it.
The franchiser company generally assists the independent owners
significantly in launching and operating their businesses. In return,
the business owners pay fees and royalties to franchiser. Hence, the
franchisee acquires the right to use all the elements of a fully
integrated business operation.
Some of the examples are fast-food restaurants such as
McDonald’s, Domino’s Pizza, and KFC. Such franchisees maintain
the design and styling aspects determined by the franchiser in their
retail environments, ranging from the product offered to store
design, ambience, atmospherics, and internal infrastructure to
service standards to deliveries.
b. Product Franchises:
In these franchise agreements, the franchisee gets the right to use
the brand/trade names, trademark, and/or products from the
franchiser. Through this kind of agreement, manufacturers allow
retailers to distribute their products and use their brand names and
trademarks. They also monitor and control on the way retail stores
distribute their products. In return of these rights, store owners pay
royalties/fees or buy a minimum quantity of products.
Some of the examples are Tommy Hilfiger, Arrow, Scullers,
Cotton King Stores, Reebok stores and Bata stores who operate
under this kind of franchise agreement.
c. Manufacturing Franchises:
In this case, franchiser offers the right to produce and sell goods to a
manufacturer under its brand name and trademark. This type of
franchise is generally popular among food and beverage companies.
For example, soft drink bottlers and canners often obtain
franchise rights from soft drink companies to produce, bottle, and
distribute soft drinks. The major soft drink companies supply the
concentrate to them, which are further processed, packed, and
distributed by the regional manufacturing franchises.
One example is Gemini Distilleries Pvt. Ltd, Goa, a manufacturing
franchise of Bacardi Ltd for manufacturing of winery products.
d. Business Opportunity Ventures:
This concept works on the format in which an independent business
owner buys and distributes the products from one company. The
company supplies the business owner with clients or accounts, in
return of which the business owner pays the company a pre-decided
fee.
For example, the business owners may obtain vending machine
routes and distribution rights, through this type of franchise
arrangement (e.g., coffee vending machine).

Franchising – Franchising Laws in India

1. Intellectual Property Law and Franchising in India:
Intellectual Property rights should be protected very carefully in any
country so as to make the franchising system successful. Otherwise
when the franchiser enters into new territory with its products, its
product may be copied, and brand name may be misused which in
turn affects goodwill of the franchiser.
2. The Trademarks Act, 1999:
This Act has been enacted to provide for the registration and better
protection of trademarks and for the prevention of the use of
fraudulent marks on merchandise. The best way to protect a
trademark must get it registered in India. India has made a step
towards fulfilling its international obligations.
3. The Designs Act, 2000:
Design has now been defined as only the features of shape,
configuration, pattern, ornament or composition of lines or colours
applied to any article whether in two dimensional or 3D or in both
forms. Application for design registration can be made in any class
by the proprietor of the design. Registration is granted only in one
class. The proprietor of the Design shall have copyright in the
Design for 10 years from the date of registration.
4. The Copyright Act, 1957:
The Copyright Act can be used successfully by the franchiser when
he wishes to protect his franchising manual. The manual contains
the entire technique of running the franchise business. The manual
should not be used unauthorized or improperly by any other person
without having the permission of the franchiser as it amounts to
violation of copyright being held by the franchiser.
5. Labour Laws and Franchising:
There are various enactments concerning labourers in India. All
franchising contracts are amenable to labour laws in India. Labour
laws govern the day-to-day conditions of employment in a
franchising system. When a franchise outlet is closed or shut down,
then the labour laws play a vital role in determining the
compensation to be paid to the employees of that franchise outlet by
the master franchisee, franchiser or franchisee.

Franchising – Four Ps of Franchising

The four Ps are:
i. Product:
The product or service of the franchise operation is probably the
most significant and important aspect of the successful franchise. A
franchisee, must maintain the high quality and standards of the
product or service being provided. It is absolutely essential that the
franchise maintain a positive reputation and that you satisfy the
customer needs. It must realize the importance of the product or
service not only satisfying the current needs of the customers, but
also their future needs.
ii. Process:
The business format process is very important to the successful
franchisee. These processes which must be carefully developed and
supported include – marketing, promotion, brand recognition,
management, training, accounting services, and financial support.
The franchisee must develop proper processes to ensure the
continued success of the franchise organization.
iii. Profitability:
The franchisee is in business to ensure profitability. Franchisee are
generally desirous of obtaining a profit, not only for the present day
but also for a long time into the future. They must be able to
ascertain the profits, revenues, and even costs of goods associated
with your specific franchise business. For example, most pizza
restaurants have costs of goods sold and labor costs, which do not
exceed 50% of the total sales for the business.
iv. People:
The greatest asset of the business will be the people with whom you
work. These people are the individuals who will reach and obtain
the high standards of performance which you desire within your
organization. These people may share your vision if properly
explained. These people are the ones who will work with you, or
against you, in developing your business.

Advantages:
1. To the Franchiser:
(i) The franchiser can enter into foreign markets and new territories
in the domestic market safely and easily.
(ii) The franchiser can expand his business without investing a large
amount of money. The cost of new premises and extra staff is done
by the franchisee.
(iii) A regular income is received by way of royalty or fee from
franchisee.
(iv) With expansion of business, the franchiser can obtain
economies of scale through bulk buying from suppliers.
(v) The franchisees have a financial stake in business. Therefore,
they are likely to work very hard to make them succeed.
(vi) The franchiser retains control over the franchisees.
(vii) The franchiser can increase his goodwill by expanding his
network. His brand name becomes popular.
(viii) The franchiser gets feedback about the needs and preferences
of customers from the franchisees.
2. To the Franchisee:
(i) Support and advice is available from the franchiser in respect of
staff training and marketing. Such support is available not only in
the initial stages but also on a continuing basis.
(ii) The franchisee can start his business with less initial investment
than what is required without a franchise.
(iii) The franchisee gains from the established name, brand and
national advertising of the franchiser.
(iv) The chance of failure is minimum due to proven success of the
product and its secure place in the market. Franchising allows
people to start and run their business with less risk.
(v) Banks are more willing to lend money to a franchisee because
documented information relating to the success of other franchisees
with the same product or service is available.
Disadvantages:
1. To the Franchiser:
(i) The franchiser’s trade name and reputation may be tarnished if
the franchisee does not maintain standards of quality and service.
(ii) The franchiser has to provide initial financial assistance and
specialist advice.
(iii) There are ongoing costs of supporting the franchisee and
national advertising.
2. To the Franchisee:
(i) The franchisee does not have complete independence in his
business.
(ii) The franchisee has to make payment of royalties on a regular
basis.
(iii) In some cases the franchisee is required to buy all supplies from
the franchiser even though cheaper local alternatives may be
available.
(iv) The franchisee may not be able to sell the business without the
franchiser’s approval.