Franchising, and its advantages and disadvantages for the franchiser

Meaning of franchising

Franchising is an arrangement in which the owner of a brand, product or business system (the franchiser) gives another person or firm (the franchisee) the right to sell its product or service in a stated area, in return for a fee. The right is granted under a franchise agreement, and one franchiser may sign such agreements with many franchisees. It is a contractual licence under which the franchisee runs the business as an independent unit using the franchiser's know-how and brand, while the franchiser controls how the business is run and gives continuing support. The franchisee pays a royalty for the know-how and trademark, the right lasts for a fixed term, and the franchiser usually supplies marketing support, technology and staff training. When the term ends, the agreement can be renewed if both parties agree to it. Franchising is close to licensing but is used mainly for services, and franchisers lay down stricter rules on how franchisees must operate.

Take a Kolkata sweet-shop chain that wants outlets in Bhubaneswar, Ranchi and Guwahati without opening each one itself.

Advantages for the franchiser

1. Wider acceptance of the brand. Every new outlet carries the franchiser's name, so the brand becomes known in more places and its goodwill and reputation grow with the network.
2. Fast growth with little capital. The franchisee puts up the money for the outlet, so the franchiser can extend its distribution quickly with little extra capital of its own. In foreign markets too, licensing and franchising need almost no investment by the franchiser.
3. Local knowledge. Franchisees report how popular the product is and what local customers want, and a local franchisee has market knowledge and contacts the franchiser lacks. The sweet chain's Guwahati partner will know which festival boxes sell there.
4. A steady royalty. The fee, fixed in advance as a share of production or sales, keeps coming in for as long as the franchisee's unit goes on producing and selling.
5. Lower risk. Because it invests little, the franchiser does not bear the franchisee's losses; abroad, a business run by a local person also faces lower risk of takeover or government intervention.

Disadvantages for the franchiser

1. Cost of support. At the start the franchiser has to give the franchisee financial help as well as support such as staff training and advertising, and afterwards it bears the continuing cost of supporting franchisees and national advertising.
2. Risk to reputation. If a franchisee fails to maintain standards of quality and service, the franchiser's brand name and reputation suffer.
3. A trained rival. A franchisee who has mastered making and selling the product may start selling an identical product under a slightly different brand and compete with the franchiser.
4. Disputes. Conflicts often arise over accounts, payment of royalty and quality norms, and they can end in costly litigation that harms both sides; a franchisee's poor performance or failure to pay is another common cause.
5. Leak of secrets. Trade secrets that are not properly guarded by the franchisee can reach others and cause the franchiser serious loss.
6. Tied hands. The agreement usually bars the franchiser from selling another franchise in the same region and from ending the agreement before its term except for good cause.

Conclusion

Franchising lets a franchiser grow quickly on other people's capital and local knowledge, but it hands part of its brand to people it does not employ. Careful choice of franchisees, a clear franchise manual and steady supervision decide whether the advantages outweigh the risks.