An Introduction to the concepts of franchising

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Franchising started in late 1850s by Isaac Singer who is maker of sewing machine. He trained customer to extend the business and sell his machine to other part of his country. After words Singer started selling of his company's licenses to manufacturer all other rest of the country. Ray Kroc established of small chain of fast food in 1955 and franchised world's the most successful and huge fast food chain McDonald's. McDonald's presently operating sufficient amount of franchises around the world in. Franchising these days is a very attractive way of business in the business world.

Franchise is a business means an organisation's contract or agreement by which franchisee gets rights to sell or offer franchisor's products or services in the market according to the rules which are described by franchisor.

Franchisee is an individual who pays ongoing franchise fee mostly to get rights to sell, offer and distribute goods according to marketing plan which is defined by franchisor.


Franchisor could be a person of an organization or a big organization itself who gives training and support to franchisee to sell or market their product and run franchise under a prescribed system.

Business model

Franchising business model is considered to extent business through paying fees and sovereigns; in franchising business, franchisee gets rights to sell and promote franchisor's goods and services as franchisor prescribed. We can classify franchising business model in three levels.

The macro level

The organizational level

The individual level

The macro level

The macro or societal level of franchising is the most disused aspect of franchising. At this level cultural, economic and political contexts may be favourable or unfavourable to franchising and the main influences on franchising may shift from one to the other over time. (frank hoy, john stanworth, 2003)

The organizational level

The organizational level of franchising depends on the development of a business which transforms into a conventional form whether the business is stable from of the organization or temporary.

The individual level

The individual level of franchising with which model is concerned at the level of individual motivation in franchising although a narrow usage will be employed than migh be the first thought appropriate. The individual motivation aspect concerns franchisees who own and run business which is associated with the franchisor.

Types of franchising

There are four type of franchising



Business opportunity

Business format

Product franchise

In this type of franchise, manufactures gives rights to retail stores by product franchising agreement to use their label for offering and marketing their products and these stores are controlled by manufactures that how they distribute their product.

Example: Tire stores work under the product franchising agreement.

Manufacturing franchise

In this type of franchise, a manufacturer gets rights to sell and market the products by franchisor. Drink and food companies mostly use this type of franchising agreement.

Example: Franchisor gives rights to bottle soft drink manufacturer to sell and market their produce.

Business opportunity franchise

In this type of franchise, an organization gives right to owner of business for purchasing and marketing their goods. Business owner pays fee to the company and gets their customer and their account.

Example: Business owner gets distributorship of a company through this franchising agreement.

Business format franchise

Business format franchising is a frequent type of franchising which works all type of business. In this type of franchising, franchisor gives a way to franchisees for doing business. Franchisees generally responsible for the making of the final consumer products and pays a combination of franchise fee and a royalty rate to franchisor whereas a franchisor receives the most of its income from the sale of inputs to its franchisees at a mark up. Franchisor prescribes way to do business and consistently monitors all production which is done by franchisee. (frank hoy, john stanworth, 2003).

Example: all fast food chains are best examples of business format franchising.

Benefits of franchising to expand business

Franchising is successful way to expand the big organisation and achieve huge profit for the company. Franchising depends on franchisor and franchisee relationship. Franchisor assesses franchisee's capital, resources and commitment so that he or she will be more efficient to achieve company's settled goals because they have invested their capital. A potential franchisee usually has pride of ownership and self motivation because of his or her capital investment and stake in future profits. Bankers, lawyers and accountants make money through franchising procedures. Some benefits are as follows: (frank hoy, john stanworth, 2003).

There is a strong possibility for rapid maximum expansion with minimum capital expenditures.

Direct managing responsibilities become the franchisee's obligation and allow the franchisor more freedom to other things.

The franchisee will usually have less line management employees and greater staff advisor employees.

Research and development facilities are available to the franchisor through reports and franchisee.

Local and national advertising fund are available for franchisee more than the franchisee and franchisor might generate separately.

The franchisor could have stable cash flow from royalties.

Enhanced buying power resulting lower buying price to the franchisee than for a company owned entity.

The franchisor satisfies greater control over franchisees through sensible and fair contract requirements.

The franchisee gets less risk by franchising a business rather than if they start their business from scratch.

The Franchisees get higher profit margins and provide greater market for the franchisor than usually achievable by company's employees.

Why franchisees more motivated than employees

In many companies choose franchising as a growth vehicle because of its ability to minimize the risk and achieve company's goal. Franchisees are more congruent than those found in an employee relationship. Because franchisees share the wealth with franchisors through the profits of the business, there is less incentive for them to shirk in the same manner as an employee might.

Example: if an employee steals 1 pound by putting payment from a customer in her his pocket instead of ringing it up on the cash register, the employer loses the entire 1 pound. If the same action by a franchisee result in the franchisor losing only the royalty percentage of the 1 pound, usually between 5 percent and 8 percent. In other words, some element of ownerships transferred from the franchisor to franchisees. Furthermore because franchisees invest their capital into franchise relationship, they normally have more lose than the franchisor if their individual unit should fail, so franchisee have less incentive to misrepresent their abilities to the franchisor than do prospective employee. (Stephen spinelli, Robert Rosenberg, sue birley, 2004)

Author: Stephen spinelli, Robert Rosenberg, sue birley, Book: franchising pathway to wealth creation Edition: 2004, Publication: prentice hall, chapter: selecting and monitoring franchises page no78

Technology and business transfer

franchising will not work unless the franchiser continuously supports the franchisee. Such support includes supplying equipment, tools, training, finance and general management assistance. The steps to establish franchising systems abroad resemble those of traditional licensing. The nature of technology/ service is the core consideration of technology transfer, price, method of transfer term exchange and buyer-seller relationships all revolve around this centre. The price of a technology/ service is usually based on the cost of its development. A company with a uniqe product or service can sell that product or service at whatever price the market will bear. A service centred on common knowledge will not be able to charge the same price. A technology/ service may be based on a patent, trademark right, company know how and trade secrets. Even if a western firm is employing a standard manufacturing process, a potential customer may approach the firm to purchase trademark rights that are essential to the success of the end product.

Author: S tamer cavusgil, pervvez N. ghauri, milind R agarwal, Book: Doing business in emerging markets, Edition: 2002, Publication: sage publication Inc, chapter: entry and negotiation strategies, page no96

Local knowledge of franchisee

The growth of franchising has been truly remarkable. Franchisors have proved themselves capable of thinking globally but acting locally by adjusting their product and service offering local markets. If franchisee is foreign national he or she should have a local knowledge to sell or offer their product where they are investing capital. Consumer buying behaviour is necessary to be successful in the local market. Franchisee should aware regarding local environment and local culture to capture the local market

Example: if franchisees want to invest in Saudi Arabia in fast food business they should know Saudi Arabia is the Islamic country. They eat Halal meat. It means animal should be slaughtered in Islamic pattern. So in this circumstance franchisees have to manage halal meat for them to sell their product.

Proven business format

Business format franchise agreement is granted to franchisee by franchisor. Under this agreement franchisee has right to market a product or service and can use trademark to develop business system which is defined by the franchisor. The contract imposes obligations on the both parties in that the franchisor must provide the product or service, a proven business format, and management and marketing support, while the franchisee must provide local financing, management skill and a determination to operate a profitable business. For the company with successful product or service line, franchising offers a cost effective strategy for achieving rapid expansion with minimal direct involvement at the local level and a minimal financial commitment. For franchisees, franchise represents a proven business format system with a reduced financial risk. For customers, franchised products and services offer predictable and reliable guarantees of satisfaction.

Author: john A, jakle, keith A. sculle, Jefferson S. Rogers Book: The motel in America, Edition: 1996, Publication: the johns Hopkins university press, chapter: franchising and segmentation page no: 152

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