Franchising Is a Cooperative Agreement by Which

Franchising is a cooperative agreement by which one firm (the franchisor) sells the right to market goods and services under its brand name and uses its business practices to a second firm (the franchisee). As an organizational form, franchising is a hybrid between market and hierarchy"(Gomez, Gonzalez and Vazquez, 2010, p.463). The franchisor as well as the franchisee play an important role in making a particular brand name successful. In fact, it is estimated that any typical franchisor would keep 15% of the business within their network and franchise the remaining 85% to other interested firms or individuals. This necessitates a good working relationship between the franchisee and the franchisor for the mutual success of both the concerned parties.

Role of a franchisee

As mentioned earlier, the franchisee is a firm or individual who takes franchise for a particular brand name and promotes it among the local people. The franchisee is an entrepreneur in every sense because the individual or firm makes a certain amount of investment in the business and manages the net profit or loss that arises out of the operations of the particular franchise unit. There are two kinds of franchising units and they are single unit and multi-unit. In the case of single unit, the franchisor offers a new outlet to a new franchisee while in the case of a multi-unit franchising, the franchisor offers a new outlet to an existing franchisee.

The profits earned from the outlet are retained by the franchisee after making two important payments to the franchisor -- royalty for every sale and reimbursement for the training and knowledge passed to the franchisee for the successful operation of the outlet. There is a huge potential to generate vast amounts of money for the franchisee because the brand name is already established and all that the franchisee has to do is to cater it to the local community. Needless to say, the franchisor also makes a large amount of money by way of royalty from the franchisees. This shared profitability is one of the main reasons for the continued success and popularity of the franchising business.

Importance of franchisor-franchisee relationship

Franchising is an important aspect of economic growth and wealth generation and this makes the relationship between a franchisor and franchisee vital for everyone. There should be a good amount of mutual trust and open communication between the franchisee and the franchisor and this is possible only when all the staff members of the franchisor understand the importance of the relationship to the future of their business. It is estimated that forty-five hundred franchise businesses with more than 600,000 outlets are present in the United States today and this accounts for more than one-third of all the sales. (Spinelli, Rosenberg and Birley, 2004). This huge amount of franchising offers immense opportunities for the franchisor, franchisee and the economy at large because of the numerous jobs and revenue that it generates.

A good example is the Subway restaurant that has been consistently named by the Entrepreneur magazine as the number-one franchising opportunity for thirteen years from 1990 to 2005. With more than 24,000 outlets in 23 countries around the world, it is one of the most guaranteed means to generate wealth. In fact, the restaurant became successful only after its owners decided to franchise the brand in 1974 and until then, they were struggling to make ends meet (Sugars, 2005). This clearly explains the vital role played by the franchisees in popularizing the brand and taking it to the local population. Without franchisees, it is impossible for the company to reach out to every single community within the United States and to other countries and this makes the role of the franchisee vital for the success of the franchisor.

However, some people tend to argue that the business model and the concept has been developed by the franchisor and the franchisees plays more of a marketing role and earns the profit from the outlet as a part of their remuneration. They also operate by the rules and regulations laid down by the franchisor and effectively, this makes them a contracted employee of the franchisor rather than an entrepreneur by themselves. So, the staff of the franchisor can treat the franchisee as another employee without any special regard or importance for the relationship. Though this is true to a certain extent, franchisees put in their capital and use their management skills to make the franchising outlet a successful one and through these skills, they contribute in a large way towards popularizing the brand. Franchisees also make it possible for the owner to earn vast amounts of money by way of royalty.