Franchises can be identified as a business concept which has emerged to face
the rapidly changing business environment. This gives the opportunity to an
entrepreneur to join the large scale businesses and carry on the business activities.
These businesses are operated as sole proprietorships, partnerships or incorporated
companies.
A form of business organization to which the power is granted by an existing
business which sells a product or service, to sell the said product or service in a
specific market area under its trade name are known as franchises.
Starting a franchise
At present, franchises are operating under different forms.
There are two main parties who are involved in a franchise.
1. Franchisor - The party that allows to sell its products in a specific market area under his/
her name. The objective of this party is to expand the market without
investing capital and to earn profits.
2. Franchisee - The party that gets the permission to sell goods or services in a specific
market area using the brand name of the franchisor.
In order to enter in to this type of a business relationship, the franchisor and the
franchisee should enter in to a stipulated (agreed) relationship. This is known as
franchise agreement. Common agreements regarding the commencement and the
conduct of the franchise are given in the franchise agreement.
Examples for some such common agreements are given below.
Examples :-
Services provided by the franchisor to franchisee.
Products that are being allowed to sell.
The value of the payment made by the franchisee to franchisor.
As the result of the franchise agreement entered in to by the franchisor and the
franchisee, franchises are formed. Depending on the permission granted by the
franchisor to sell the products and services in his/her name to the franchisee, charges
have to be made. This charge is known as royalty.
Basic characteristics of a franchise
# Involvement of two parties as franchisor and franchisee
Franchisor grants the permission to sell the products and services in a specific
market area in his/ her trade name. Based on the permission granted, franchisee
sells the products and the services in a specific market areas under the relevant
trade name. Accordingly, two parties as franchisor and franchisee are involved in
a franchise.
# There is a stipulated agreement between the franchisor and the franchisee.
Franchises are formed depending on the agreement entered in to by the franchisor
and franchisee. This written agreement is known as the franchise agreement.
# Franchisee makes a payment to the franchisor.
Franchisor allows the franchisee to sell the products and services in the name of
franchisor for a payment. Details regarding this should be included in the franchise
agreement.
Advantages of franchises
There are few benefits that both the franchisor and the franchisee can obtain in
common due to franchises.
Benefits to the franchisor
# Opportunity to expand the business activities to other markets without his/
her own investment.
# Ability to enjoy large scale benefits by minimizing the pressure of maintaining
a huge staff.
# Franchisor receives an income.
Benefits to the franchisee
# Franchisee gets an opportunity to earn profits using the goodwill of the
franchisor.
# Franchisee can easily enter to a popular market using the goodwill of the
franchisor.
# Franchisor provides management training to franchisee.
Limitations of franchises
To the franchisor
# Due to the unsuccessful business dealings of the franchisee, the goodwill of
the franchisor can be damaged.
# Franchisor has to obey the legal bonds and the limitations that arise when
conducting the business activities of a franchise.
To the franchisee
# Franchisee has to incur the legal charges, bank charges, establishment cost
etc. to get the franchise.
# Franchisee cannot work independently due to the control of franchisor.
# Franchisee may have to pay a high royalty and other charges to franchisor.
