The world has changed in many aspects. Be it the clothing or food, the way of earning, or the way of learning. All of it has been upgraded for the better. Similarly, people have discovered different ways to earn. It includes using the setups started by other persons and using them to earn your own income or working online. But if you use the name of some other business, you will have to pay for using the name. It is because of the goodwill generated by that business’s name. In some terms, it is also called Franchising.
What is Franchising and How Does it Work?
It is an arrangement in which one company grants another company some business rights to sell its products. Those products are usually sold under their brand name. It takes place in exchange for a one-time Franchise fee plus some commission of the sales made. The commission is also known as a royalty. Some typical examples of franchising include various fast-food chains. Clothing Brands, Pizza Hut or Burger King are some typical examples.
The body giving the right is called Franchisor. The group getting the right to the business is the Franchisee. Both companies sign a written agreement that states the terms applicable concerning the franchise. The Franchisor binds the Franchisee to abide by the regulations set by it. The brand name of the branch operating under the Franchisor remains the same.
What are the Different Types of Franchising?
Franchises can have several types. We can further separate them into several groups. It depends upon numerous factors. Those factors include the investment to be made, the business design of the Franchisor, and marketing, etc. The three main types of Franchising are
- Product Franchising
- Manufacturing Franchising
- Business Format Franchising
There are some other types of Franchising. They include job franchising, investment franchising, conversion franchising.
The initial form of Franchising was product franchising. Currently, it is a lot famous in the automobile industry. The Franchisee is the dealer who is given the right to distribute goods on behalf of a Franchisor. The dealer has to make payment for the right to advertise. Then, he will sell the brand-marked products of the manufacturer or the producer.
Sometimes, the Franchisee has been assigned with the manufacturing process. He has to do all the work related to processing, manufacturing, packing, etc. The issuance of the product is by the Franchiser. It is mainly seen in the case of soft drink companies, like Pepsi, etc. It is a manufacturing type of Franchising.
Business Format Franchising
It is the most popular type of franchising these days. The Franchisee gains the Franchisor’s brand name and effective business model. It includes advertising, inventory, training of the personnel, client service protocols, etc. It is this type of franchise in discussion when we refer to franchising these days. An example can be KFC, Subway, and so on.
You can operate this type of franchise alone. Moreover, you can also regulate it with a smaller number of staff. It is usually home-based, and the investment is comparatively low. A franchise initial fee is paid by the Franchisee and the smallest startup costs for various stuff. For example, equipment, basic materials, and in some cases, a vehicle. One example can be travel agencies.
This type of Franchising is common in setups. Those setups must have been established in the past. They require some capital investment in a major proportion. For example, restaurants or hotels, etc. The Franchisee provides this investment. It has minimum personal involvement of the Franchisee.
Conversion franchising is the integration of a large-scale business into a franchise. That business should be preexisting. This type of franchising is very beneficial for the Franchisee. It gets training, guidance, and techniques for advertising its products. It will be to a much broader spectrum of consumers. Thus, that will be leading to growth in the masses. One example of conversion franchising is providing experts for home services. Those services are plumbing, air conditioning, etc.
Franchising is a renowned market strategy to expand a business. The investment to be made in Franchising is minimal. Hence, it is advantageous for the Franchisor as the Franchisor’s brand name is already established. It is valuable in reaching out to more consumers. It is also helpful in reducing the risk of failure for the Franchisee. If the product fails to make a mark, the Franchisee is not held accountable.
Instead, it is the Franchiser whose brand name is tainted. Also, the Franchisor benefits from the experience of the Franchisee. The franchisees have extensive knowledge of the commercial markets of their countries. This knowledge is ultimately helpful to the Franchiser.
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.