Starting a business from scratch is no easy feat. There’s a lot of work and preparation involved. Some people take the “shortcut” of buying a franchise.
The reason is that, in addition to having a strong reputation, franchises also provide the necessary support. So, to help you understand what a franchise is, its types, and its advantages and disadvantages, check out the following article!
What is a Franchise?
According to the International Franchise Association, franchising is a method of distributing products or services that involves the franchise owner (franchisor) and the franchisee (franchisee).
Technically, as the trademark owner, the franchisor will grant the franchisee the right to use the trademark in running his business after paying an initial fee and a certain amount of royalty fees at certain time periods.
Terms Used in Franchising
Dalam dunia waralaba ada sejumlah istilah yang sering digunakan. Supaya kamu nggak bingung membedakannya, yuk simak definisinya berikut ini.
- A franchisor or franchise owner is a person or business entity that sells its business rights to another party to expand and distribute the business.
- A franchisee or franchise recipient is a person or business entity that purchases and receives business rights from a franchisor.
- A franchise agreement is an agreement or work contract between the franchisor and franchisee, the contents of which contain the rights and obligations of each party in running a franchise business.
- A Franchise Offering Circular (FOC) is a disclosure document provided by a franchisor to prospective franchisees to review before they sign a franchise agreement.
This document contains comprehensive information about the franchisor and its system. The FOC must be studied over a specific period of time, and during this period, the franchisor is not permitted to “influence” the franchisee into signing the franchise agreement.
- A franchise fee is an initial fee a franchisee must pay to the franchisor to operate the franchise. This fee can be considered the cost of purchasing the franchise rights.
- Royalty fees are fees paid by the franchisee to the franchisor as a form of profit sharing during the period of the franchise agreement.
- A transfer fee is a fee incurred when a franchisee sells their franchise rights to a third party. In this case, the third party does not have to pay the full franchise fee.
Types of Franchises
After knowing what a franchise is and the terms often used in the business, you also need to know the types when viewed from several categories.
For example, the types of franchises according to business model, agreement, and ownership are as follows:
Types of Franchises According to Their Business Model
- Job franchise A franchise is a small-scale, usually home-based franchise. In this context, the franchisee essentially buys a job or business role from the franchisor. Examples: cleaning services, event planning, and on-call gardening.
- A product distribution franchise is a type of franchise where the franchisor grants the franchisee the right to sell its products. This allows the franchisor to expand its distribution network without incurring the costs of adding outlets. Meanwhile, the franchisee can leverage the brand’s established reputation. Examples include gas stations, water refill stations, and motorcycle dealerships.
- A business format franchise is a type of franchise where the franchisor sells not only its products, services, and trademark to the franchisee, but also the entire system for running the business. Examples include fast food restaurants, fitness centers, and retail stores.
- Investment franchises are similar to business-format franchises, but require more capital to start. In this type of franchise, the franchisee’s role is similar to that of an investor, and they may not be involved in day-to-day operations, as the franchisor already employs a management team. Examples include hotels and resorts, theme parks, and business consultants.
- A conversion franchise refers to a franchise model in which an existing, independently owned business joins a larger franchise network. They then rebrand and operate as the franchisor’s. Examples include real estate agencies, convenience stores, and hair salons.
- A management franchise is a franchise model in which the franchisee provides management and operational expertise in providing a product or service, while the franchisor provides the business framework, brand, and operational support so both parties can achieve mutual success. Examples include hotels, large retail chains, and restaurant chains.
- A manufacturer franchise is a type of franchise where the franchisee is licensed to manufacture and distribute a product under the franchisor’s brand name. Examples include food and beverage companies, electronics, and clothing businesses.
Types of Franchises According to the Agreement
- Single unit franchise A franchise is a type of franchise where the franchisee is only given the right to operate one business unit. The franchisor, meanwhile, provides the support, training, and marketing necessary to ensure its success. Examples include hotels and retail.
- A multi-unit franchise is a type of franchise where the franchisee is granted the right to operate multiple business units. This model aims to ensure that customers experience the same level of consistency wherever they visit. For example, a fast food restaurant.
- Area development is a type of franchise where the franchisee is granted the right to develop a specific geographic area. This is achieved by opening a specific number of franchise units over a specific period. However, during this process, the franchisee does not have the right to appoint sub-franchisees; they must handle the area development and operation of each unit themselves.
- A master franchise is a type of franchise in which the franchisee is given the right to develop a business unit by recruiting, training, and supporting sub-franchisees. In this context, the master franchisee acts on behalf of the franchisor and is responsible for developing the business within a specific territory.
Types of Franchises According to Ownership
- Company-Owned, Company-Operated (COCO) is a franchise model in which the franchisor directly owns and operates its outlets. Technically, there are no independent franchisees involved.
- Company-Owned, Franchise-Operated (COFO) is a more collaborative franchise model where the franchisor retains ownership of the franchise unit but delegates operational activities to the franchisee.
- Franchise-Owned, Franchise-Operated (FOFO) adalah model waralaba di mana franchisor memiliki dan mengoperasikan unit waralaba di bawah merek dagang miliki franchisor.
- Franchise-Owned, Company-Operated (FOCO) is a franchise model where the franchisee owns the unit but the operational activities are carried out by the franchisor.
Advantages and Disadvantages of Franchises
Like any other business model, franchising has its advantages and disadvantages. Here are some of them:
Franchise Advantages
- The business model used has been tested and is guaranteed to be successful.
- Gaining brand recognition, reputation, and established work systems.
- Mendapatkan pelatihan dan dukungan operasional.
- Provides the benefits of a wider business network.
- Have a greater chance of success and business growth faster.
Disadvantages of Franchising
- Pay a large initial fee (franchise fee) as well as ongoing royalty fees.
- Franchisees have no control over territory or creativity in their business.
- Poor performance of other franchisees can lower the reputation of other franchise businesses.
- There is no guarantee of success even if you take advantage of an established reputation.
That concludes our information on what a franchise is and everything you need to know. Whatever business you choose, always bring Labamu to your every step.
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