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Through The Franchising Lens

Miriam is a freelance developer who enjoys writing articles.

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Franchise Viewpoint

Did you know that franchises in the US provide employment to more than 8 million people? [2021 Franchise Facts & Stats: Everything You Wanted to Know (smallbizgenius.net)]

Our previous article enabled us to decide on whether to venture into a franchise or a startup. So what next after settling on franchising? Let us take a moment to understand the origin of the franchising construct. According to the American Heritage Dictionary of the English Language, the term franchise traces from the French word franche which means free or exempt.

Franchising Origin

Dating back to the medieval era, a franchise generally referred to a special privilege granted by a sovereign body to an individual or group to perform a said activity, for example building roads, organizing markets, collecting taxes, etc. The individual or group given those rights then had the monopoly over the activity they were allocated over a given duration. This privilege was granted in exchange for royalty which was a share of either the profit or the product.

What's in it for the franchisor and the franchisee?

Okay, so how do the parties benefit? Have we really understood how this model operates? Let's simplify it further. Assume that you are running well performing business which has an established tested model of operation. You either identify a gap in the market or recognizes a potential market in a certain locale but due to reasons best known to yourself, you are not in a position to open a branch of your business in that area. Losing this deal is not among your options. As a result, the thought of task delegation, creeps in. Well, how about seeking a potential entrepreneur and allowing them to run the business at the said location at a small fee? Both parties will benefit as the entrepreneur gets a well established business model, trademark and constant support thus is assured of the success of the business while you, the initial owner benefit from the initial fee paid and subsequent dividends afterwards. Aha, that is how franchising works.

Proceeds of the contract

So what next after signing the contract? Is that it? After signing the contract and commencing operation, a franchisee is privy to assistance from the franchisor
whenever they are in need. In addition, further training may be availed to the franchisee in order to ensure that they are up to date with the techniques and technologies employed by the firm. The brand creates a bond between the franchisor and the franchisee. They both work towards building the brand which already signals a price-value relationship in the minds of the customers. The franchisor avails the brand, the franchisee lays out the entrepreneurial instinct required to manage the day to day running of the franchise. Truly, it takes two to tangle. To achieve success, which in this case is brand growth, both parties must work hand in hand.

Types of franchises

Time to delve deeper into the topic. Franchising can be classified into two groups, namely, traditional franchising and business-format franchising. In the former, the
parent company, the franchisor manufactures the goods and distributes them to the franchisees for sale. The goods are sold in either their finished or partly finished
state to the franchisee and in turn the franchisees either resell the products to the consumer or other firms in the distribution chain. These logistics can be somewhat
compared to the middle man association where the middle man acts as the medium between the consumer and the producer. In these relation, the franchisor benefits from its dealer network flow , from the profits earned from the products. In these type of franchise, royalty does not apply as the franchisees source their products from the franchisor.

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Business-format franchising constitutes of a franchisor selling a business format(a method of doing business) to the franchisee. This field encompasses the product, trademark, service, marketing strategy and plan, quality control, operating manuals and standards and lastly, continuing two-way communication. The franchisee pays an initial lumpsum fixed fee and subsequent royalties which are a percentage of the franchisee's sales revenues. The fees accrued are fixed and clearly stated in the contract.

Franchising in depth

Having traced the origin of the association, we can proceed to get a grasp of what franchising means to the modern man. A franchise is a contractual agreement between two independent entities, a firm(franchisor) and an individual or a group of individuals(franchisee). The franchisor is the company which allows a franchisee
to sell the company's product[s] or service and access training, support and operational assistance with regards to running a branch of the company's business.
Rights are sold to the individual based on terms specified in the contract. Being the proprietor of the brand and all the systems at play, the franchisor stipulates the
terms and conditions by which a franchise is ran by.

On the other hand, the franchisee is the individual who acquires rights to use the proprietor's brand by signing a contract which pledges allegiance to terms outlined in the contract. Once the contract is signed, the franchisee can freely use the franchisor's business model which basically means the trademark, training and support and established business systems are at the franchisee's disposal. Sounds like a good deal, huh?

Franchisor to franchisee handshake

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© 2022 Miriam Monyonko

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