The security of a big brand and the freedom of an entrepreneur are the two factors which make franchising an exciting business.
Added to this is the potential of an over Rs 10,000 crore (Rs 100 billion) market in the country.
Lack of awareness before signing on the dotted line has, however, spoiled the entrepreneurial dreams of many.
"Unlike the US, in India there are no disclosure norms for the franchise business. One has to be well informed and careful before signing an agreement with a franchisor company," says C Y Pal, president, Franchising Association of India.
Planning one's funds is another important area, since banks in India are yet to recognise the opportunity the industry offers.
"Unfortunately Indian banks are extremely choosy while funding a franchise business. The main reason for this is lack of awareness about the fact that a franchise business is far safer than a small business set up by a single entrepreneur," says Pal. Here are a few tips for prospective franchisees.
The feel-good factors
As a franchisee, you will hold the rights to trade and operate a business under a licence, using the format and the service mark owned by the franchisor.
As you will be taking on an already established business or one with great potential, there is every chance that your business could succeed.
The pitfalls
In this business, the franchisor usually has an upper hand as the rules to run the business will be drafted by him.
As any other venture, a franchise business has its own set of risks. Lack of planning, resource crunch, or wrong selection of locality are the most common factors which hamper a franchise venture.
In the initial stages, it is essential for a franchisee to get supply services from the franchisor. Make sure that this clause is included in the agreement.
Credibility factor
Check the company's performance before signing an agreement. Enquire more about the losses made by the company, which will help you to measure the financial stability of the firm.
In case of a small (or new) company, one can ask for the following information: at least last three years' company account; a copy of the trade mark application or registration certificate; written background on the directors/key management team; any references; written summary of the franchise proposition; the cost expected from you to start the business.
Find out the margins for each product/service the franchisor is going to give. Do consult other suppliers, franchises and franchisees to ensure the company is quoting the right margins.
This will also help you to calculate the money required in the initial stages.
Ask for a copy of the franchise agreement which will help you to know about the franchisor's controls. Always clarify your doubts over the agreement.
Here you can also compare the agreements the company has entered into with other franchisees. Some franchises may ask you to complete a preliminary application, and provide the franchisor with information about yourself.
If you are asked to provide an initial deposit, make sure that you are happy with the contract you are going to sign.
This should confirm that there is no commitment (on either side) to take up a franchise at this state, and that the deposit is refundable without conditions if, after preliminary evaluation, either you or the franchisor decides not to proceed.
Cost and contract
As a franchisee, you need to pay an initial amount to get the rights to operate a business. You are also bound to maintain the outlet as per the franchise's demand. Always try to calculate a break-up of funds needed for the business over different stages.
Be clear about the payments you are supposed to make initially and regularly to the franchisor. This include the initial franchise fee, on-going royalty and franchise fee.
Find out whether you are tied to buy products from the franchisor or a limited number of specified suppliers. You should also have an idea about the franchisor's pricing policy.
The duration of the contract will be always decided by the franchise. The agreement may also state the terms to renew the contract. A franchisee will have to pay an extra amount to renew a contract. These factors change from franchise to franchise.
A franchisee has to pay an initial fee to the franchisor to get the rights to operate the business for a notified period. Enquire about the services the franchisor will offer to you during the contract period. Be clear about the mode of royalty payment.
This can avoid many debates in the future. Also make sure the territory where your are bound to operate.
A franchise business needs steady money flows in the initial years. So always keep aside some money to tide over a crisis situation.
Termination points
A franchisor can terminate a contract if a franchisee fails to keep the brand value. A franchise can terminate a contract before the expiry of the agreement if a franchisee breaches the listed terms. In some cases the franchisee also chooses to get out of the agreement.
Extra innings
Do review the agreement by a lawyer who is familiar with franchising. You can also seek the advice of industry bodies and people who are already into the business.
At the end of the day, be ready to turn down a franchise proposal which may prove risky in the future. If a franchisee has given up his franchise, it would be worth checking out the reasons for relinquishing his business.
Last but not the least, don't get hooked by the charisma of a brand or a company. After all it's your money and life.
