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Module 4
Franchising
A franchise is a system of distribution that enables the supplier (called the
franchiser) to arrange for a dealer (called the franchisee) to handle a specific
product or service under certain mutually agreed upon conditions. The franchiser is
a company which has developed and thoroughly tested its business methods and
has decided to increase the size of its business by offering individuals, the
franchisees, and the right to trade under its business name. The individuals
concerned pay a fee, not only for the right to trade under the name of the
franchiser, but also in order to benefit from its expertise. The franchisee can be a
sole proprietorship, partnership or a private company.
Business Format Franchising
The term “franchising”, which is borrowed from French, originally meant being free
from slavery. Today, business format franchising is the name given to a relationship
in which the owner of a product, process, or service allows a local operator to set up
a business under that name, for a specified period of time. The local operator
(franchisee) pays the parent organisation (franchiser) an Initial fee and, usually,
continuing royalties for the privilege.
The franchiser lays down a blueprint on how the business should be operated: the
content and nature of goods and services being offered, the price and quality of
these goods, and even the location, size and layout of any premises to be used.
The franchiser also provides the franchisee with training and other back-up support,
such as accounting systems, advertising programmes, and personnel recruitment
and selection advice. In essence, franchising thrives because it merges the
incentive of owning a business with the management skills of a big business. And
personal ownership is one of the best incentives yet created to spur hard work.
Franchising may benefit not only the franchisee but also the franchiser. For
example, it may enable the franchiser to grow rapidly by using other people’s (that
is, the franchisee’s) money. That is largely how giant franchisers like McDonald’s
and Baskin-Robbins have mushroomed into billion-dollar businesses in so short a
time.
The idea that franchisees are independent business people is something of a myth.
Franchisees generally are not free to run their business as they see fit. They are
often hamstrung by the franchiser’s policies, standards, and procedures.
People who want their own business to escape taking orders from others frequently
see franchising as the answer. They are subsequently frustrated by lack of
autonomy.
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Definition of Franchisee
• An individual or a company who purchases and runs a franchise.
• Franchisee is the party in franchising agreement that is purchasing the rights
to use business trademarks, associated marks & other proprietary knowledge
in order to open branch.
Definition of Franchisor
• An individual or a company owning rights or license of business.
• Franchisor is a person who grants the license or permission to various
franchisees
Franchisor Franchisee
Site Selection Oversees, may Chooses with
choose approval
Design Provides Prototype Implements design
Design
Menu Set by Franchisor Changed only by
approval
Prices Recommendations Decides actual prices
Types of Franchise
• Business format
• Product or trade name
• Dealership
• Unit Franchise
• Master Franchise
• Regional Franchise
• Multiple Franchise
• Developers
Business Format Franchise
• Business Format Franchise is the most popular form of Franchising.
• Agreements under this Franchisor offer are:
o Use trademark
o Advertising
Product or trade name Franchise
• Product Franchise or Trade Franchise0nly involves product.
• Agreements under this Franchisor offer are:
o Allows Using trademark
o The manufacture grants a Franchise the authority to distribute goods
Dealership or Distributorship, Licenses, Agencies
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• Dealership and distribution ship Format Franchise is the also most popular
form of Franchising.
• Allow to sell Franchiser product under their own trademark.
• Agencies Format Franchise Own the rights to sell products on behalf of a
supplier.
Manufacturing & Unit Franchise
• Manufacturing Franchise provide an organization with the right to
manufacture
• Examples include Coca Cola.
• Unit Franchise is granted the right to operate one unit.
Master Franchisee
A Master Franchisee is granted the rights to a substantial territory, usually a whole
country.
• This a structure adopted by many Franchisee.
Franchisor
Master
Unit Franchise Unit Franchise
Regional Franchisee
In a Geographically large area Master Franchisee may decide to appoint Regional
Franchisee
Franchisor
Regional Regional
Unit Franchise Unit Franchise Unit Franchise Unit Franchise
Multiple Franchisee
Some Franchisees operates not just one unit but several.
Franchisor
Unit Franchise
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Developers
Large corporations sometimes prefer to exploit their territory by opening outlets
themselves.
Franchisor
Advantage of Franchise
• Developers
Increase number of outlet with minimum capital
• Name recognition
• Running small business under Franchise name is very beneficial
• Big Business help in corporate marketing.
• Proper & effective marketing tactic.
• Training & Management facilities
Disadvantage of Franchise
• It has to control and coordinate a network of semi-independent businessmen.
• Indulgence of big business into small business.
• Safe guarding the interest of both the parties are complex.
• Much time is required while selecting a Franchise
• Complex procedure
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Major Factors Influencing Franchising
According to experts, major factors will influence the growth and expansion of
franchising.
A leveling off of sales growth among franchise outlets in the traditional fields
such as fast food, hotels, bakeries, greeting cards, and gift shops.
Continuing rapid growth and expansion of service type businesses, for
example, childcare, business aids, and services.
Conversion of independent businesses to franchises - like shirt bands.
Globalization of franchising-franchise companies in USA will continue to
expand overseas, for example, McDonald’s, Pizza Hut, and Kentucky Fried
Chicken in India.
An increasingly mature and diversified franchise company.
Franchise: Pros and Cons
The advantages and disadvantages of taking up a franchise depend to some extent
on the content of the agreement, but there is a core of balancing factors, which are
largely common because they relate to the kind of activity which franchising
involves.
The Franchiser
Advantages
From the franchiser’s point of view, the advantages are that he does not have any
direct investment in an outlet bearing his name. The inventory and equipment are
owned by the franchisee. Because of the shortage of prime sites, there is a growing
trend for franchisers to acquire leases on behalf of franchisees or, at any rate, to
stand as guarantors. Nevertheless, the effect on the liquidity of the franchiser, in
contrast to expansion by opening branches, is enormous. Though if the franchiser
does his job properly, then there are heavy start-up costs in piloting the franchise
and in such aspects as training. Thereafter there are further costs in providing a
continuing service to franchisees in such matters as research and development,
promotion, administrative backup and feedback, and communication within the
network. The expectation is that these costs will be offset by the fact that the
franchisee, as the owner of the business, is more likely to be highly motivated than
an employee and more responsive to local market needs and conditions: that the
franchiser receives an income from the franchise; and that, without direct financial
involvement, he may derive some of the benefits of expansion, in as much as
franchising provides economies of scale from centralized purchasing and, where
feasible, some degree of centralized administrative facilities.
Disadvantages
The disadvantages are that, although the failure of an individual franchise may
reflect badly on the franchise operation as a whole, all the franchiser can control is
the format itself. He can only influence the running of individual operations by
pulling the reins on this or that clause in the agreement, the broad terms of which
we shall discuss shortly. In extreme cases, the franchiser may terminate the
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agreement or at any rate not renew it, but he cannot throw the franchisee out as if
he were an employee. The franchiser is therefore dependent on the willingness of
the franchisee to observe the rules and play the game. Failure to do so can be
damaging to the franchiser and the franchisee as a whole.
Another disadvantage sometimes turns out to be in the curious mixture of
dependence and independence that franchising produces. The franchisee is
encouraged to think of him as an independent business entity, and to a large extent
this is indeed the situation. Nevertheless, he is operating the franchiser’s business
concept under a license for which a fee is payable. There are cases where
franchisees identify so closely with the particular business they are running that
they ultimately resent the payment of the fee. The success is felt to be due to the
franchisee’s own effort, not to the franchise concept or to the franchiser. This is apt
to be particularly so if the franchiser adopts a lower profile than he should, either in
terms of direct help or in matters such as national advertising. Clearly, of course,
the franchisee would be obliged to pay under the terms of agreement, but a sour
relationship is not good for either party. So it is up to the franchiser to maintain his
part of the bargain both in letter and spirit. Franchises arc a matter of mutual
interest and obligations.
The Franchisee
From the point of view of the franchisee also there are certain advantages and
disadvantages.
Advantages
• A business format or product which has already been market tested and,
presumably, been found to work. As a consequence, major problems can be
avoided in the start-up period.
• A recognized name of which the public is already aware and which has
credibility with the suppliers.
• Publicity both direct, in that the franchiser advertises his product or services,
and indirect promotion through signage and other corporate image
promotion, in all the franchiser’s outlets.
• Although taking up a franchise is not cheaper than starting on you own, it is
considered that the percentage of expensive errors made by individuals
starting on their own is substantially reduced by the adoption of a tested
• Direct and close assistance during the start-up period.
• A period of training on production and management aspects.
• A set of standard management, accounting, sales and stock control
procedures incorporated in an operating manual.
• Better terms for centralized bulk purchase negotiated through the franchiser,
though he may be looking for mark-ups in this area as a source of revenue
from the franchise.
• The benefit of the franchiser’s research and development in improving the
product.
• Feedback throughout the network on operating procedures and the facility to
compare notes with other franchisees.
• Design of the premises to an established scheme saves on interior design
fees and may eliminate these altogether where the franchiser has a set of
specializations.
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• The benefit of the franchiser’s advice on equipment selection and initial
inventory levels, though this may be partial where the franchiser is also the
supplier.
• Help with site selection, negotiating with planning officers and developers.
• Possibly, though not universally, access to the franchiser’s legal and financial
advisers.
• The protected or privileged rights to the franchise within a given area.
• Improved prospects of obtaining loan facilities from the bank.
• The backing of a known trading name when negotiating for good sites with
letting agents or building owners.
Disadvantages
• Business format franchising is, of necessity, something of a cloning exercise.
There is virtually no scope for individual initiative in matter of product,
service or design. The franchiser will demand uniformly high standards of
maintenance, appearance and packaging in whatever the franchise entails.
These are usually monitored by regular inspection.
• The royalty (sometimes called a management fee) paid to the franchiser. This
is usually based on gross turnover or on profit. The problem here is that if the
franchiser is not pulling his weight, or if the franchisee is not pulling his
weight, or if the franchisee does not feel this to be the case, the royalty can
be subject to bitter dispute. The franchisee may than feel justified in
withholding all or part of the royalty on the grounds of non-performance by
the franchiser, but this is always a difficult matter to prove in the courts.
Furthermore, the franchiser’s resources to conduct a long-drawn-out
proceeding will usually be greater than the franchisee’s.
• A further problem is that a high turnover does not necessarily imply a highly
profitable operation. If the franchiser’s income is wholly or partially based on
turnover, he or she may try to push for this at the expense of profitability.
• The franchisee is not absolutely at liberty to sell the franchise even though he
is in many respects operating the business independently. The sale has to be
approved by the franchiser, who is also entitled to vet the vendor and charge
the cost of any investigations made to the existing franchise. Furthermore,
although the business would be valued as a going concern in trading terms,
the goodwill remains the property of the franchiser. Again, the franchisee
may feel that, at least to some extent, the goodwill has been built up by his
or her own efforts. The resale of a franchise, in other words, is a process rich
in those grey areas which can lead to expensive litigation.
• Territory agreements may be difficult to enforce in practice. For instance, a
hypothetical firm called Calorie Countdown may have the exclusive rights in
the suburb in which it is located, but there is nothing to prevent the citizens
of that suburb from buying their slimmer’s meals in some other neighboring
Calorie Countdown outlet.
• The franchisee, as well as paying a royalty to the franchiser, may be obliged
to buy goods and services from him as well possibly at disadvantageous
rates.
• Though the franchiser imposes all sorts of control and obligations on the
franchisee to maintain the quality of his image, the scope for doing the
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reverse is more limited. If the franchiser’s products or service gets bad
publicity, this is bound to affect the franchisee adversely, and there is very
little he can do about it. Equally, the franchiser may engage in promotional
activities (and involve the franchisee in them as well), which, though
perfectly harmless, may, from the point of view of a particular outlet, be a
waste of time.
• The failure of a franchiser may leave the franchisee with a business which is
not viable in isolation.
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Family business
Family business from every trade imaginable have been around for centuries - from
shoemakers to confectioners to farmers.
1. Over 75 percent of all registered companies in the industrialized world are
family businesses.
2. One-third of Fortune 500 has families at their helm.
3. Seventy percent of firms in the United Kingdom are family owned.
4. Italy’s 100 top companies 43 are family owned.
5. Family companies employ about 50-60 percent of the workforce in the
industrialized world.
6. Companies with founding family participation performed better than non-
family businesses (Study of Standard & Poor’s 500)
Family-owned businesses play a crucial role in the economy of most countries. Much
of the retail trade, the small-scale industry, and the service sector are run by family
businesses. Worldwide, family-managed businesses employ half the world’s
workforce and generate well over half the world’s GDP. In the United States, 24
million family businesses employ 62 per cent of the workforce and account for 64
per cent of the GDP. In India, it is estimated that 95 per cent of the registered firms
are family businesses.
In India, family-owned businesses have played and will continue to play a central
role in the growth and development of the country. Indian family businesses have
been and will continue to be key drivers of the economy, and what changes these
businesses need to undertake to continue to succeed.
Some of the Largest Family Firms Worldwide
Wal-Mart (USA, Sam Walton family)
Samsung Group (South Korea, Lee family)
Fiat Group (Italy, Agnelli family)
The Gap (USA, Fisher Family)
L’Oreal (France, Benencourt family)
IKEA (Sweden, Kamprad family)
Tata Group (India, Tata family)
Grupo Modelo (Mexico, Dlez Fernandez family)
McCain Foods (Canada, McCain family)
VARIOUS TYPES OF FAMILY BUSINESSES
1. A family owned business is a for-profit enterprise in which a controlling number
of voting shares (or other form of ownership), typically but not necessarily a
majority of the shares, are owned by members of a single extended family, or
are owned by one family member but significantly influenced by other members
of the family.
2. A family owned and managed business is a for-profit enterprise in which a
controlling number of voting shares (or other form of ownership), typically but
not necessarily a majority of the shares, are owned by members of a single
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extended family, or are owned by one family member but significantly
influenced by other members of the family. The authority conferred by this
controlling interest permits the family to determine objectives, methods for
achieving them, and policies for implementing such methods. And this business
has the active participation by at least one family member in the top
management of the company so that one or more family members have ultimate
management control.
3. A family owned and led company is a for-profit enterprise in which a controlling
number of voting shares (or other form of ownership), typically but not
necessarily a majority of the shares, are owned by members of a single
extended family, or are owned by one family member but significantly
influenced by other members of the family. The authority conferred by this
controlling interest permits the family to determine objectives, methods for
achieving them, and policies for implementing such methods. And. this business
has the active participation by at least one family member in the board of
directors of the company so that one or more family members have at least a
high level of influence over the company’s direction, culture, and strategies.
3 – Circle model of family business system
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WOMEN ENTREPRENEURSHIP
Factors Influencing Woman to become an Entrepreneur
There are different factors influencing woman to become an entrepreneur. Such factors can be divided
into two – (1) the push and (2) the pull factors.
The push factor is allied with negative environment and the pull factor is attributed to the push factor
may result from low income, low job satisfaction or lack of job opportunities and strict working hours.
The pull factor, however, may result from the need of fulfilling the desire to help others and self-
accomplishment.
Dhaliwal (1998) found the push factor to be evident in the developing countries. Empirical evidence on
the push and pull factors revealed that women entrepreneurs in the developed countries were
influenced by the need for achievement, while women entrepreneurs in the developing countries were
influenced by a combination of push and pull factors.
Women are influenced by socio-cultural complexities to become an entrepreneur in developing
countries. Because of such complexities in the factors influencing women entrepreneurship
development in developing countries, many international organizations adopted strategies to overcome
such complexities.
A study conducted by International Labour Organization (ILO) (2006) has found four personal and four
external factors that influence women entrepreneurs’ success.
Personal factors comprise –
(1) motivation and commitment;
(2) abilities and skills;
(3) ideas and markets; and
(4) resources.
While external factors consist of –
(1) business development organizations;
(2) broader enabling environment;
(3) economic/market environment; and
(4) socio-cultural context.
The business development organizations factor considers the roles of government, NGOs, private sector,
membership organizations and donors.
The broader enabling environment factor mulls over regulations, policies, institutions and processes.
The economic/market environment factor ponders opportunities and threats (e.g., inflation, interest
rates, economic trends etc.).
The socio-cultural context factor considers attitudes, aspirations, confidence etc. Ulrich (2006) has
examined five factors and found that all of them influence youth entrepreneurship development.
The five factors include –
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(1) entrepreneurship education and training,
(2) socio-cultural, legitimacy and acceptance,
(3) access to finance,
DIMENSIONS OF VENTURE CAPITAL
Venture capital in India is available in four forms:
1. Equity participation: The venture capital finances up to 49% of the equity
capital and the ownership remains with the entrepreneur.
2. Conventional loan: Under this, a lower fixed rate of interest is charged to
the unit till its commercial operation. After normal rate of interest is paid,
loan is to be repaid as per the agreement.
3. Conditional loan: A conditional loan is repayable in the form of royalty
ranging between 2 and 15% after the venture is able to generate sales and
no interest is paid on such loans.
4. Income notes: The income note combines the features of conventional and
conditional loans in a way that the entrepreneur has to pay both interest and
royalty on sales at low rates.
A distinct and peculiar practice adopted by venture capitalist is stage financing.
Venture capitalist needs adequate financing of the four successive stages of
establishment of his business, namely, development of an idea, start-up, fledging
and establishment to exploit the economies of scale and achieving stability.
Through stage financing, venture capitalist minimizes his risk.
There are four successive stages for developing a project:
1. Seed capital: In this first stage of project development, a small amount of
capital is provided to the entrepreneurs for concept testing or translating an
idea into business.
2. Start-up finance: The second stage sees the provision of start-up finance to
the unit by the venture capitalists to manufacture a product.
3. Additional finance: In the third stage when the firm is not able to generate
adequate funds to meet working capital needs, additional fund is needed to
meet initial expenses.
4. Establishment finance: Funds arc provided for major growth plans,
generally used for capacity expansion, marketing and working capital.
VENTURE CAPITAL FINANCE IN INDIA
In the Indian context the objective of venture capital assistance is to:
a) Encourage the indigenous technology and its commercial applications.
b) Adopt and modify the applications of imported technology in such a manner
that it will be appropriate to the Indian environment.
c) Setting up of pilot projects.
d) Technological innovations and modernization.
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e) Developing appropriate technology.
f) Meeting the cost of market Surveys and market promotion programmes.
Advantages of Venture Capital
The advantages of venture capital can be listed as follows:
a) Helps in the industrialization of the country.
b) Helps in the technological development of the country.
c) Generates employment.
d) Helps in developing entrepreneurial skills.
e) Benefits to the investor is that they are invited to invest only after the
company starts earning profit. So the risk is less and healthy growth of
capital market is entrusted.
f) Profit to venture capital funds.
g) Helps small and medium first generation entrepreneurs to translate their
ideas into a reality.
h) Promotes entrepreneurship and fosters entrepreneurism in the country.
REGULATORY STRUCTURE
The Securities Exchange Regulation Board of India by Act 1992, SEBI inter alia
regulated venture capital industry. It announced the regulations for the venture
capital funds in 1996 with the primary objective of protecting the interest of
investors and providing enough flexibility to the fund managers to make suitable
investment decisions. Venture capital funds appoint an asset management
company to manage the portfolio of the fund. Any company proposing to undertake
venture capital investments is required to obtain certificate of registration from
SEBI. Venture capital fund can invest up to 40% of the paid-up capital of the
invested company or up to 20% of the corpus of the fund in one undertaking. At
least 80% of funds raised by VCF shall be invested in equity shares or equity related
securities issued by company whose shares are not listed on recognized stock
exchange. Venture capital investments are required to be restricted to domestic
companies engaged in business of software, information technology, biotechnology,
agriculture, and allied sectors.
Risk Capital and Technology Finance Corporation Limited
IDBI Venture Capital Fund
Technology Development and Information Company of India Limited (TDICI)
Indus Venture Capital Fund
Small Industrial Development Bank of India (SIDBI)
Gujarat Venture Finance Limited
Credit Capital Venture Fund
Andhra Pradesh industrial Development Corporation (APIDC)
20th Century Venture Capital Fund
State Bank, Canara Bank, and Grindlays Bank Venture Capital Funds
SEBI (Venture Capital Funds) (Amendment) Regulations, 2000 and the SEBI
(Foreign Venture Capital Investors) Regulations, 2000.
