- Franchising is the method whereby the firms transfer the rights & products to another party, who in turn takes the responsibility for the sale of the product in the local market.
- The firm transferring the right is known as franchisor.
- The firm to whom the right is transferred is known as franchisee.
- The dictionary meaning of franchisee is right to vote, the citizenship & authorization to sell the company’s product.
Merits / Advantages:
- Sells intangible property –
Franchisor sells intangible property (trademark) & insisted franchisee agrees to abide by strict business rules ( location, methods, design, staffing, supply chain ).
- Royalty –
Once the network of franchises is set up, company enjoys regular income in form of royalty without much fresh investment & additional effort.
- Opportunity for expansion –
The franchisor provides the franchisee an opportunity to operate a tested, proven & profitable business & in addition provides his support services & training that increase his chances of success.
- Self Motivation for franchisee –
When a franchisee invests his own money in a franchise, commitment follows. Unlike a salaried manager, a franchise generally prides his ownership & is self motivated in operating a successful business.
- Less Problems –
A franchisee generally requires fewer management personal than a chain organization & therefore, has a lower staff payroll & problems.
- Others –
They can cover more territories.
They get the marketing support from the entrepreneurs.
Big giants through franchising can create entry barriers for competitors. Franchisees act as category killers.