Franchising : A Smart way to get started!!

Taking the franchise route is a smart way to get started

"As a business model, franchising gives an entrepreneur a system to follow. You get the support of an experienced hand and your learning will be faster."

Do you want to live the dream of being your own boss? Then, may be, you should buy the franchise of a good brand. Franchising is the smart way to get started as an entrepreneur, says Mr Gaurav Marya, President, Franchise India.

Heading this integrated franchise and retail solutions company, Gaurav Marya has helped many budding entrepreneurs meet the challenges of being in business and growing with it.

He has serviced several large and medium businesses including, that of Videocon, the Landmark Group, Tata Steel, Unilever India and Levis.

Excerpts from the interview:

Can you explain the concept of franchising and how it has clicked in India over the last few years?

• Franchise literally means rights or privileges granted to someone. If you have a successful business model or a brand and you transfer it to someone in another geographical location for a fee or royalty, that becomes franchising.
• The franchising industry is growing by 30 per cent every year. Prominent industries here are education and retail. F&B and Wellness is also a fast growing segment.
• There are two types of franchising — 
• one is distribution-based franchise, where, typically, the company would give the product/service to a distributor who will sell it under his own name.
• The second is business format franchising, which is the growing phenomenon now. Here, the products are sold under the franchisor's brand. And, yes, they use the same signage and give the same kind of experience to customers.

So how does a franchise business work? Is it on a profit share basis?

• Typically, when you take up a franchise, you would be required to pay an upfront fee towards the brand. Product companies charge a relatively small fee compared to service businesses, as margins are made on the supply of the product.
• If you take a Koutons franchise, for instance, you need not pay royalty because the company will supply shirts and trousers and make margins on that.
• But if it is a service franchise like that of a food business, a royalty will be charged on a monthly basis — which is a share on the gross sales. Your profit will depend on how you run the business.

In a franchise business model, what are the areas where the entrepreneur has restrictions?

• In franchising, there is something called the ‘firm and flexible' rule. The franchisee (one who takes the franchise) can't change the brand name or the product features.

For example, he cannot add a new product to the company's product line. Flexible are areas where one wants to expand the business. A franchisee for McDonald or Pizza Hut in India, for instance, has more vegetarian than non-vegetarian options. Generally, a franchise business model is suited to entrepreneurs who believe in working in a system.

How should one select a franchisor?

• There is a three-stage approach which we advise for the franchisees. 
• Stage one is called "Information stage", the potential franchisee needs to go and collect information from the market on the brands available, the sector options and on what can give the best return on the time he is to invest.
• Then comes the ‘evaluation' stage. In this stage, one should speak to the specific brand's past franchisees and look into how those franchise outlets have performed. While valuing the franchisor, some self-evaluation is also needed. One needs to know his financial and operational capability. Many people assume franchise business to be an easy affair; not really, it can take all your weekends and all your evenings. So, once you are done with evaluation.
• you go to the next stage, which is, ‘negotiation'. This is where you go and negotiate on the fee structure and clauses in the agreement. One can take the advice of a professional consultant or a law firm or even a chartered accountant for this.

What are your thoughts on taking up franchise business for a career?

• It is a smart way to get started. As a business model, franchising gives an entrepreneur a system to follow, which has been proved successful.
• You get the support of an experienced hand and your learning will be faster. But again presuming that you will be successful just because you bought the franchise of a number one brand is wrong.

Can you name some brands that are doing successful franchise business which young entrepreneurs can look at?

• There are lot of good brands. Well, to name few — Motilal Oswal, Gitanjali, Videocon, Euro kids, NIIT and Archies. For someone looking at low-cost franchise business, there are several good play schools which are open to franchise offers now.

What is the exit option in a franchise business? Is there any lock-in period?

• Franchising is normally a term-based agreement which is renewed if the franchisee continues to pay and fulfil his obligations.
• But in the middle of the term, the franchisor can terminate the agreement for non-performance on the part of the franchisee or on an act that is breach of contract.
• A franchisee should be very careful while putting down the exit clause in a franchise agreement. He must be careful about how he wants to define an exit.