Analyzing the “Franchising” Definition

One of the more appealing contemporary business models is that of franchising. The reason for the success of this business model is encapsulated in the “franchising” definition given in the online Business Dictionary: “Arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications.”

The “franchising” definition above establishes an important point: Because the “trademark or trade-name” is already in use, and because the franchiser has already established certain “business systems and processes,” the franchisee can skip over the preliminary steps that are typically involved in starting a business. In doing so, the franchisee saves a lot of money and time. The franchisee has, at his or her fingertips, a formula that has already succeeded for others before. It is even possible to do research on other franchisees and see what worked for them and what did not. Franchisee networking is greatly beneficial to them.

Other advantages of franchising follow: any advertising done by the franchisor benefits the franchisee. There is also the fact that franchisees have exclusive rights within a specified territory. So there is no risk that they will have to compete with other franchisees for customers in that area. Another advantage of franchising has to do with financing. Individuals starting businesses often experience difficulty borrowing money from banks because there is no guarantee that they will succeed. Sometimes getting into the franchising business opens the doors for them: Some banks are willing to lend money to franchisees if the franchise in question is reputable.

 

The “Franchising” Definition and the Implied Limitations of the Business Model

 

The “franchising” definition highlighted at the beginning of this article emphasizes the benefits of franchising arrangements. However, there are certain limitations that come with franchising. These are also implied in the “franchising” definition. One such disadvantage is the fact that the franchisee is restricted to following the formula established by the franchisor. Any significant deviations from it would dilute the franchisor’s trademark. Hence individual creativity is somewhat restricted.

Another characteristic of franchising is the fact that the financial aspect of the franchiser-franchisee relationship endures for as long as the franchisee operates the business. Consequently, the franchisee has to share part of the profits with the franchisor. This is only fair. After all, the franchisee continues to benefit from the franchisor’s advertising, training and other franchise-related efforts. Hence, this is not necessarily a disadvantage. Put simply, it is a business expense like any other.

Franchising a Small Business

Franchising a small business is one way for an ambitious business person to trigger the growth of his or her business. It requires a smaller amount of upfront capital than would expansion under a sole proprietor. Thus, it is easier to achieve.

This is not to say that franchising is an easy process. Taken on its own terms, it is in fact a complicated process involving huge sums of money, much research, detailed planning and paper work, and attention to the details of franchise law. Anybody who is serious about franchising a small business will ultimately have to seek the assistance of a franchise lawyer and a franchise consultant if he or she is to make meaningful headway in franchising.

These two professionals help to streamline the process involved in franchising a small business. They ensure that the business owner meets all the requirements of the process and does not waste any time or resources carrying out unnecessary steps. The franchise lawyer and consultant make particularly valuable additions to a franchising team because, having previously guided others through franchising, they are sure to have reliable “road-maps” of the process in their minds.

 

Franchising a Small Business: The Roles of Franchisors and Franchisees

 

Some business people view their small businesses as family legacies that must be transmitted to the younger generations with all the traditions intact. They are likely to respond negatively to any suggestions that they innovate some aspects of their business practices to make their small businesses more conducive to franchising. They may consider unacceptable the expectation that they cede some control over the “final products” that have come to be associated with their respective trademarks.

This is hardly surprising. When people put as much of themselves into their businesses as small business owners typically do, it is hard to separate their business achievements from their personal lives and, sometimes, from their families. Some people are able to make a smooth transition from being small business owners to being franchisors.  Others are not. This latter group of people makes poor candidates for franchising. It would be better for them to pull back from their efforts to franchise. After all, franchising a business is not for everybody. Other business ideas are likely to work better for them.

Prospective franchisors are not the only ones whose suitability for franchising should be examined closely. Prospective franchisees should be subjected to similar scrutiny. After all, they also play an important role in determining the outcome of the franchising process. Their capacity to meet the requirements of the franchisee role could ultimately decide whether their franchise units succeed or fail.

Franchising a Business

Franchising a business is a long, drawn out process, and it can cost a good deal of money. A business owner who wants to succeed at franchising has to be able to think strategically. In the earliest stages of franchising a business, many decisions have to be made based on what is likely to happen in the future. If the business owner does a good job of anticipating what lies ahead, he or she will be amply prepared for future challenges and the franchise will have a high chance of succeeding.

In order to anticipate what lies ahead, business owners have to engage in research to help them determine whether there is regional or nationwide demand for the goods and services that they plan on offering through their proposed franchises. Those who fail to engage in this important step and then go on to franchise their businesses could end up failing to sell any franchise units. This would obviously be a disaster for them as they would already have invested good money and time into making the transition.

Business owners also need to anticipate the roles that they will play in the future, once they have succeeded in franchising their businesses. There is a significant distinction between playing a hands-on role in the operation of a family-owned business and being the CEO of a national franchise. The latter job involves a lot of outreach work. The franchisor has to market the business idea to prospective franchisees and to guide and teach the new franchisees. If business owners do not have the foresight to understand that their new roles will make different demands on them, then they may be in for a rude awakening when the transition finally happens.

 

The Logistics of Franchising a Business

 

Business owners who are wise enough to recognize that new roles as franchisors might not suit them should take their apprehension as a sign that franchising might not work for them. Franchising a business is not an everyday business decision. It has huge implications for the shape that a business will take and the role that those involved in it will play. Hence business owners should give any concerns or worries due consideration.

A very important step for business owners who are laying the groundwork for franchising a business to take is to look into the legal requirements for franchising. Any national and regional laws to do with registering and operating a franchise must be followed to the letter. Failure to do so could lead to harsh legal penalties and financial consequences for the franchise down the road.

Franchise Regulations

The regulations that govern franchising at the national and regional levels are referred to as franchise regulations. These regulations vary from nation to nation.

Some nations, such as the United States, have well-developed franchise regulations. In others like India, government regulation of franchising is still in its early days. In various nations, there is a self-regulatory aspect to franchising, with franchisors taking the initiative to formulate and follow specific standards. In these contexts, the franchisors are not necessarily subject to any penalties should they fail to comply with these standards.

If you are looking to become a franchisor, you should find out which regulations govern franchising in your location. Remember that, if there are franchise regulations, they are likely to exist at both the national and regional levels. Violating these regulations will earn you penalties, a terrible risk to take when your credibility is essential to successfully marketing your franchise to prospective franchisees. Hence you must make the effort to find out what the regulations pertaining to your business are and to comply with them. You could do this the hard way: this entails doing all the research and completing all the forms. You could also do it the easy way: by hiring a franchise lawyer.

 

Why Do Franchise Regulations Exist?

 

Franchise regulations primarily exist to protect franchisees. If franchisors were allowed free rein, it is likely that some individuals would take advantage of the opportunity to commit fraud. They might franchise a business that they were aware had no capacity to succeed, and sell unsuspecting men and women the franchise. It would probably be too late for these men and women to seek redress by the time they realized that they were on a sinking ship.

Having regulations in place minimizes the likelihood of such an outcome. With regulations to contend with, franchisors have to disclose all the relevant information pertaining to their businesses before they enlist a single franchisee. This is typically information about the franchisors’ and businesses’ financial histories. Such information would make it possible to determine the legitimacy of the franchisors and their businesses.

Examples of this kind of information include previous earnings and projected earnings, along with documentation supporting those details. Information about trademarks associated with the business should be made available, as should any aliases by which the franchisor has gone. The franchisor’s prior entanglements in fraud, if any, should be indicated.

Note that franchise law sometimes overlaps with other areas of law, including commercial law and intellectual property law. This can make things complicated for the franchisor. As a prospective franchisor, you should make a point of consulting a franchise lawyer to deal with all such legal matters.