Franchising is when two parties agree to come under a contract that allows one party to provide the license or rights to another party. The party who provides rights is called the franchisor, whereas the one receiving rights is called the franchisee. The license and right can allow the other party to sell the franchisor’s goods, services, or products by paying a fee. The brand name & trademark of the franchisor is free to use by the franchisee.
A franchisor receives a commission or a one-time fee paid by the franchisee. Marketing is also another way they are benefitted that helps their business grow. The franchisor has full access to provide the rights to one or more people or companies. The person holding the rights has the exclusive right to sell their products or services. The parent company provides trade secrets, services, technical work, and products.
What is international franchising?
International franchising is a strategic way to diversify a brand globally & create new revenues and profit centers because it reduces its dependence on domestic demand. This franchising involves low risk, requires minimal investment, and offers huge upside potential in scaling a business to new heights.
Structure of international franchising
Master franchising
The simplest structure for expanding a franchise internationally is a master franchise. In this situation, the franchisor grants master franchise rights to an appropriate indigenous people or organization (master franchisee) in the target country, often in exchange for a significant investment.
Direct Franchising
If the franchisor can provide support, he can opt for a Country Direct Franchise, be directly in charge of recruiting, training and supporting the network of franchisees, by directing remotely from headquarters, or opening a subsidiary in the target country, or hire a designated agent.
Area development
In some businesses or industries where sub-franchising is not allowed and franchisees must own brand new branches that are opened, the entire country may not be the most efficient size for a license, so regional franchises and regions are similar to franchises and regions divided. When sub-franchising does not occur, this practice is usually called community development franchising.
Regional franchising
In some countries (such as the United States), one master franchisee may not be able to control an entire region. The regional franchise approach divides the target country into regions. For example, divide the US into states and treat them as mini-master franchises. Franchisees in these regions should work together on national initiatives such as marketing.
Types of franchising
Business format franchising
This type of franchise facilitates the expansion of the franchisor’s business by allowing individuals to purchase the business under an established brand name. New business owners are often supported in the early stages of their business and continue to be supported in running their business. The best example of this type of franchising is the fast-food industry.
Product franchising
This type of franchise model focuses on individuals selling products or providing services in a particular segment of commerce or industry. Product franchises are a top-notch choice for first-time commercial enterprise owners, impartial contractors, and domestic businesses. Example: Independent contractors investing in franchises with an established name and reputation in their field.
Conversion franchising
It is a method of building a franchise where a franchisee enters a relationship with an existing business and transforms it into a franchised entity. Franchisees inherit the parent company’s brand, marketing and promotion programs, training systems, and customer service protocols. This type of franchise includes electricians, real estate agents, etc.
Job franchising
This is generally a low-investment (often home-based) franchise that can operate alone or with minimal staff (less than 5 people). Franchisees only need to pay franchise fees and minimal upfront costs such as equipment, basic materials, and possibly vehicles. Numerous industries can be franchised and commonly serve in this manner. For example, vending machines.
Investment franchising
This is typically a large deal that requires a large capital investment (which is huge compared to other franchise options). Franchisees are large investors who provide funding and management teams and sometimes even hire their franchisees to run the business. This type of franchise is primarily used to generate a high return on investment with little personal effort and capital gains upon exit. Example: large restaurants.
The Bottomline: Advantages and Risks of Franchising
Advantages
Capital
Although much less capital is required to expand, the risk is largely limited to the capital invested in developing the franchise business. This amount is often less than the cost of opening an additional company-owned location.
Growth potential
Franchising allows the franchisor not only financial leverage but also the use of human resources. Franchising allows companies to overcome competition, thus saturating the market before companies can react.
Profits
Franchisors typically have much leaner organizations (and often leverage existing organizations to support their business operations). The result, therefore, is that franchise organizations can be more profitable.
Low Risk
Franchisees are largely exempt from liability for employee disputes because they run equipment, vehicle, and physical location leases and are responsible for what happens within the unit itself. You can grow to hundreds or thousands of units with limited investment without spending your capital on unit expansion.
Risks
Badly documented franchise
Franchisor adherence to poorly documented standards can also be a source of conflict with the franchisor. This is because it is very difficult to follow rules that are simply unclear and unprofessional.
Franchise Fraud
There are so many franchise opportunities these days, and they all have very similar publicity, that it’s easy to be misled by a “fake” franchisor. The franchise that doesn’t exist (which is pure fraud) or that is unprofessional and built on untried and unproven business models. The best way to avoid “fake” franchises is to thoroughly analyze all information about the franchise that you may receive from the franchisor, other franchisees, and public sources.
Unrelated Business Model
Some of the franchise’s underlying business models may, under certain circumstances, simply be irrelevant in certain markets. For example, different countries have very different demands for a particular product or service, and a successful franchise in one country may be met with very low demand in another.
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