If the term franchising has ever confused you, or you were wondering if it were an appropriate business strategy for you, please read on. Following is a factual perspective on the essence of franchising that might result in full (or partial) disclosure on the matter.
In the simplest of terms, franchising is a business relationship based on the franchisor, an operating business, providing a franchisee, the selected business partner, the rights to market and sell products or services in a specified territory. Legally bound by a franchise contract, the franchisor provides the franchisee a comprehensive guide on the business operations, inclusive of quality control standards, training requirements, and communications guidelines. The franchisor is also expected to provide ongoing support and aid to the franchisee to absorb the concept to be able to effectively market and sell it to their local market. In return, and for a specified term (commonly franchise agreements could be for 5- or 10-year terms with extension options embedded), the franchisee pays the franchisor a specified fee or percentage in the form of royalty or franchise fees. Franchise agreements oblige owners of franchised units to deliver a homogenous and consistent experience of the franchised brands to customers.
Ultimately, the franchising business model allows the franchisor to expand to a new territory without facing the barriers to entry, taking minimized financial or business risks, and providing an additional income channel. Internationalizing SME reduce the cost of monitoring activities in physically and psychically distance countries by engaging local franchisees. From a transaction cost theory, elaborating on subcontracting activities to external agents able to provide activities at lower than in-house cost, franchising allows the franchisor the agility that would entail lower investments leading to faster expansion. The franchisee also acquires an established brand that leads to operational success hence minimizing the financial and business startup risk.
Offering master international franchise rights, most commonly used in countries that are psychically distant, is becoming the fastest growing internationalization strategy. Master franchise agreements, offering a franchisee rights over a specified territory with a preset number of outlets over a specified duration, result in minimum risk and a quick entry mode for SME. In countries with expansive territories, more than one franchisee could be assigned to the same area, making the agreements area- or territory-specific and no longer ‘master’ in nature. SME could also prefer franchising to countries with a sustainable economy and considerable market potential due to the resulting larger pool of possible franchisees with access to resources. Researchers have recognized franchising, a form of contractual agreements, as generating faster growth rates for internationalizing SME due to the dependency on experiential knowledge.
To sum it up, franchising is a reliable internationalization strategy for SME, provided that the SME already has an established brand in the home market, an effective SOP manual, and a defined concept that could be replicated and transferred across borders without diluting the SME’s vision and mission nor losing the essence of the brand.
I will follow up with a few more articles: Franchising 201, 301, and 401 for further insights on the topic.