Explained: Franchise and Functioning of a Franchise Business Model in IndiaSeptember 29, 2022 By Sonal Bhatt
The franchise business model is topping the charts in India with people finding the idea of running a business a better option than owning it. Do you think the same? Want to know whether it indeed is a good idea? Allow us to break it to you all about franchising.
The Concept of Franchising
Initiated in the European countries and evolved into an effective business method today, franchising in simpler words means running an already established business than starting one from a scratch.
Derived from the word “franchir”, which means "free" in French, franchise means an independent business owner, known as the "franchisee, is given freedom in the form of the business license by an established brand, known as the 'franchisor,' to use its business model, branding, and other intellectual property to run the business, and in exchange for using its expertise, the franchisee is legally bound to pay the franchisor an initial franchise fee and monthly royalties.
Simply put, a franchisee business model means you will be given a blueprint of the business which you have to follow without owning anything or making any changes. Unlike distributorship where a business gives the right to sell a product in a particular market, franchising means handing over the entire business to someone while you remain the owner of it. Some of the famous franchises in India are Amul, McDonald's, Patanjali, FirstCry, etc.
The Facts & Figures of Franchise Business Model in India
Spurred by the changing lifestyle preferences of the millennials, India has become a sizzling marketplace for franchising. Already being the second-largest franchise market in the world after the US, India's franchising is growing at such an impressive rate of 30-35% year-on-year that it is pegged to touch INR 938 billion by 2024.
With more than 4,600 active franchisors operating nearly 200,000 outlets across all sectors like food, retail, healthcare, beauty and wellness, footwear, apparel, and technology-led business, its contribution to the Indian economy accounts for close to 2% of the national GDP.
Types of Franchise and Franchise Ownership
A franchise business is categorized into different types from which one can choose the type that seems fit and they are;
The oldest form of a franchise is where the franchisees are given exclusive rights to distribute or sell the franchisor's products. It is a product-focused franchise where only certain products of the brand which seem profitable are granted permission to be sold by the franchisee using the brand name of the franchisor after paying a fee for the same.
A category where the franchisee is granted legal permission to make and market the products under the trademark and name of the franchisor’s brand. However, the franchise fee and also a certain amount for the units sold are to be paid to the franchisor.
Business Format Franchise
In this type, the franchise is provided with every aspect of running a business means - the necessary training, raw materials, and even a client base they need to maintain for future trade, and only a royalty fee have to be paid to the franchisor.
In large-scale businesses like hotels, supermarkets, etc., large capital investment is required where the franchisee along with the franchisor invests and even hires its own team to operate the business and they together generate a return on their investment as well as a capital gain on their closure.
It is a low-investment franchise (often home-based) where a franchisee can operate a business alone or with minimal staffing (less than 5) and is only required to pay a franchise fee and minimal startup costs, like equipment, utilities, and basic materials.
A hybrid franchising in which a national brand operating in the same industry as your business approaches you to convert your business into a franchise unit, the benefits of which are you get the license of the parent company’s trademarks, marketing, and advertising programs, training system, and client service protocols.
Under this category, the franchisee (master franchisee) is given rights to control the franchising activities of the brand (like appointing sub-franchisees) within a specified geographical area where there is no competition, interference, or distraction from other players selling the same brand’s products, which eventually leads to more accessible and better ROI for them.
As far as franchise ownership is considered, it can be either - A Single-Unit Franchisee in which a franchisee owns a single branch of business or a Multi-Unit Franchisee in which the franchisee decides to open multiple branches under the same franchisor.
Now, that you understood what a franchise is and what are its types, let’s understand the various franchise business models and how they operate.
Various Franchise Business Models in India
Not all franchises are operated the same way. It’s a mutual decision made by the franchisor and the franchisee and the different types of operating models are as follows:
(FOCO) Franchise Owned Company Operated
The model in which the franchisee invests in the property and other additional capital expenditures while the franchisor takes care of the operations and running costs and gives a fixed percentage or share of the return to the franchisee.
(FOFO) Franchise Owned Franchise Operated
The model in which a franchise is owned and operated by the franchisee but the upper hand is of the franchisor who decides the items and their prices for the outlet. The franchisee is allowed to use the brand name and bear all the operational costs in exchange for a non-refundable (franchise fee).
(COCO) Company Owned and Company Operated
Everything from the franchisee store unit, its operation, and other costs are funded and owned by the franchisor itself while its employees run the franchise.
(COFO) Company Owned, Franchise Operated
A rare model where the company invests in the franchise business but the franchisee operates it according to the franchisor’s directions because most companies (franchisors) that invest in expanding their business operations prefer to run it on their own.
How Does a Franchise Business Model Function?
Each franchise business model is different according to the type of franchisee-franchisor relationship agreement, the state, nature of the business, and franchisor policies yet, it has some basic functionality that remains the same. That said, here's how a typical franchising process works:
Step 1 - Collect background information
Groundwork is important if you are aiming for the sky. The first step of any business is research. Analyze the nature of the business and figure out after extensive research what kind of franchise model would you like to adapt to and which will be profitable to you. Make a list of the benefits that you will get from operating a franchise then hunt for a franchisor that matches your goals, financial constraints, and business expectations. Dig up all the legal matters associated with both the franchisor and the area where the franchisee will be set up to avoid any kind of complications later.
Step 2 - Meet your franchisor
After researching and narrowing down the list of potential franchisors, fix a face-to-face meet-up with a few to learn more about the business, its operations, as well as the benefits that you will get to make a decision and choose the one. Don't forget to squeeze out as much information as you can about the business such as the duration of the company's existence, its growth plan, risk concerns, etc.
Step 3 - Negotiate
Negotiation is a common thing to do in any business hence, don't be ashamed of it. There is nothing wrong with negotiating the partnership conditions even if the franchisor satisfies your primary requirements but you must be well-prepared and have excellent negotiation skills to do that professionally.
Step 4 - Enter into an agreement
The last step is the most crucial part of the whole process as it means both parties agree to the terms on the table. Although there is no separate franchising law in India, a franchise agreement is framed by incorporating various laws such as The Indian Contract Act, 1982, The Competition Act, 2002, Income Tax Act, 1961, The Trademarks Act, 1999, Patent Act, 1970, Design Act, 2000, Copyright Act 1957, Consumer Protection Act, 1986, Indian Labour Laws, etc., that only an experienced corporate lawyer can get it done for you.
Since the franchise agreement will be the foundation of the franchisor-franchisee relationship, it has to have the following elements without fail which you can verify with a legal advisor before signing it off.
Details of both - franchisor and franchisee
Obtaining a license and appointing a franchisee
Development and maintenance of the franchisee location
Trademarks or proprietary marks that franchisees may use
Licenses or permissions the franchisee must obtain or is permitted to use
Operation and quality standards
If applicable, training and assistance from the franchisor
Consideration for granting franchisee
Franchisee license fee, if any
Marketing assistance from Franchisor, if any
Services or products that Franchisees can provide
Terms and tenure of the franchise agreement
Renewal and termination of the franchise agreement
In a nutshell
Although franchising seems to be easy since you do not have to start a business from scratch and comes with a lot of benefits such as a higher chance of success, independence, reduced risk, low operating costs, rapid expansion, brand recognition, etc., there are still a lot many aspects that must be taken care of legally to avoid getting stuck in any complications or disputes later.
Therefore, seek advice from the best lawyers in India at Parker and Parker Co. LLP, for your franchise to flourish in the proper manner.