Business Format Franchise

A franchising arrangement is a format which provides the franchisee with an already set up business. The company expands by providing independent business owners with an established business in this arrangement, including its name and trademark.

In other words, it can be said that Business format franchising is a distribution network that operates under a shared trademark wherein the franchisor gives the franchisees the right to do business under his name for a specified period in exchange of money.

Characteristics of a Business Format Franchise

Characteristics of a business format franchise are:

• The Concept:
  • The franchise concept is an established business with a certain degree of success, a proven reputation and an established and recognized brand name.
• The training:
  • As part of the business format, the franchisor promises paid training on program performance before opening a business, and assists with opening a business. The franchisor must make his brand and business success in the long-term and it is incumbent on him to offer ongoing training that will keep pace with the expansion of the franchise and its future success.
• Support in operations:
  • Whether at the technical, operational or management level, franchisors should provide ongoing guidance on where the business is headed, what research and development needs to be done to keep it high and always improve management efficiency.
• Assistance in Marketing:
  • The success of many franchise brands results from marketing innovation that ensures that the spread of merchants is supported by effective advertising and promotion. In many cases the funds raised by shareholders go to national advertising campaigns to benefit both the brand and the individual franchises.

People Also Read This: Types of Franchise Business Models

Business Format Franchise Agreement

A business format franchise agreement has the following clauses:

• Description of the business which is being franchised.
• Territory or area in which the franchise is given. Typically, one franchise per area is provided.
• Determination of prices: Franchisor’s typically determine the prices for the products sold through the franchise.
• An estimate of costs, names of suppliers etc. are also included in a business format franchise agreement.
• Exit provisions.
• Tenure: Typically, the parties want a long tenure ranging between 5-15 years to realise their costs.

People Also Read This: Franchise Terms And Conditions In India

Advantages and Disadvantages of Business Format Franchise

Advantages:

Marketing:

One of the franchisor's primary responsibilities is using the best efforts to advertise and promote its brand name. Therefore, the franchise business is often better advertised and branded than a traditional business. Also, in the case of a franchise business, as advertising or sales costs are shared by all franchisees, the total sales costs are lower in the franchise model.

Lower operating cost:

In some models, the franchisor would negotiate price and group purchases on behalf of the franchises. This will help reduce the operating costs of the franchisee business. In addition, as the business owner is aware of the local market conditions, the franchisor can save by conducting costly research on local markets, business processes, etc.,

Ease in expansion:

For standard business models, developers will need large sums of money or bank loans to grow their business. However, in the franchise model, the franchisee provides large amounts of money and the franchisor provides product information and technical knowledge to grow faster with the minimum amount of money required.

Low risk for the franchisee:

As the franchisor makes every effort to market the product, the franchisee poses a small risk. Moreover, in the franchise model, as the business model is also proven, the business risk for the business owner is reduced.

Easy access to capital:

With many well-established franchise business models with a proven name, it is easy for a franchise owner to get a bank loan to start a franchise business.

Business Knowledge:

Many businesses do not have sufficient business, legal, or real estate knowledge and investment experience in all the provinces and cities of India. However, in this format, franchisors have the ability to work with franchises to recognize information about local market conditions.

Training and technical knowledge:

In the franchise business, the franchisor provides the franchisee with training and technical knowledge. Therefore, it prevents the possibility of costly mistakes due to the lack of training on the franchisee side.

People Also Read This: Advantages and Disadvantages of Selling a Franchise

Disadvantages:

Franchisee Independence:

In a franchisee model, although the franchisee owns a business, the franchisee owner cannot act independently. The franchisor manages the franchisees and it is necessary to submit various reports to the franchisor.

Lock-in period/Commitment:

Franchisees are usually made to commit to a franchisor a closing period until they are legally obliged to conduct business regardless of profit or loss. During the locking period, the lender will not change the business model or change the franchisor.

Negative publicity:

If a retail business gets a bad name because of the actions of a franchisor or another trader, the entire product will suffer. This could result in the loss of sales or customers of the business owner who was not involved in the transaction.

It can be said that although the Business Format Franchise brings with it a lot of advantages for both the parties that enter into the Contract, it also poses certain challenges that serve as disadvantages for both the parties. Therefore, the advantages and disadvantages of the franchise format should be taken into due consideration for a particular business model.