Starting Franchise in India and opportunity – Govt Rules,benefits,profitability – Complete Guide
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The term itself has its origins in an old French word for ‘liberty’ – the freedom or ability to do something. A Franchise service gives right to an individual or group to market a company’s goods or services within a particular location. A franchisor is a person or organization who grants a franchise. A franchisee is a person or organization that purchases a franchise.
In other words, franchising is relationship between two parties whose main goal to capture markets for a particular products and services. It is a license to operate and individually owned business as if it were part of a chain outlet or stores. Franchising started in England and was successful in USA. Franchising is common way to explore a company,it is widely spread in every free market economy across the globe. The main reason for this is that your chances of success as a Franchise are much higher than as a business that is operated by a lone entrepreneur in isolation.
ORIGIN OF FRANCHISING
Have you ever thought about how the whole concept of franchising began? The origin of franchising goes back. Franchising, it began in the US and it was originally introduced by large firms. Franchising has its roots in the feudal world, where lords of the manor would grant rights to hold markets or draw water in return for fees The first recognizable name associated with franchising is Albert Singer. In the early 1850’s as he was looking for an efficient method,how to market his sewing machines across the USA, he began to grant others the right to sell his sewing machines. In the late 1800s and early 1900s, franchising took many other forms. At the end of the 19th century, national brands and suppliers of national renown were born and reworked the American economic landscape. There was an great demand for all types of products and services. Franchising was the perfect business model for the rapid expansion of the hotel restaurant and fast food industries.
Around the 60’s and 70’s there were many problems and some abuses in franchising. Some companies faced trouble difficulty due to poor management or lack of capital.
TYPES OF FRANCHISING/ DIFFERENT FRANCHISING FORMATS
Franchising extends beyond the right to use a well-branded business name and sell a franchisor’s services or products. There are three main types of franchising:
PRODUCT/TRADE NAME FRANCHISING:
A franchisor owns the right to the brand name,trademark and logo.They sells it right to a Franchisee. This type of franchising arrangement is one of the oldest approaches.
BUSINESS FORMAT FRANCHISING:
Franchisors provide a full range of services, training, product supply,including site selection, marketing plans, and even assistance in obtaining financing.
A parent company grants the right to a Franchisee to sell their products. This approach to franchising is the most typical today. The term is commonly used to describe a wide variety of business.
RELEVANCE OF FRANCHISING TO INDIA
“Indian states have great potential for the untapped market, which presents attractive opportunities for franchisors as well as aspiring franchisees.” Franchising is a means by which a business can take advantage of the vast Indian market with a degree of control that other traditional forms of distribution cannot match. More and more people working in the corporate sector are leaving their jobs to become entrepreneurs. Many become franchisees and gain both wealth and reputation. There have been many success stories and many are being written everyday.
Being geographically vast and culturally diverse, India offers the most favorable franchise environment. While businesses benefit from many for-profit outlets in different parts of the country, franchisees in India benefit from the opportunity to generate good returns with little investment and risk involved. Franchising in India has very bright future. This industry has captured growth rate of 25-30%, the second fastest growing industry.
Key attractions are:
- Law and order situation is peaceful.
- Attractive incentives for investors under the New Industrial Policy 20. 05
- Amicable relations between industrialists and the labour segment.
- Pro-active, alert and responsive administration.
- Easy availability of skilled manpower.Franchising, a dynamic and ever changing industry, will firmly establish itself in a couple of years. It is not difficult to spot malls. Organized retailing though only at 2% of the retailing, will take off in a very big way. The Indian middle class has grown slowly; he now buys consumer devices, thanks to economic growth of more than 8, the stock market crossing 6,000, FOREX reserves exceeding 100 billion USD, and the increase in disposable income. Today, more than 33 million Indians can afford the best services and products, and more than 310 million Indians buy consumer appliances.
FRANCHISING LAW IN INDIA/ PERMISSION REQUIRED BY FOREIGN FRANCHISOR
In India, the term “Franchise” is defined under the Finance Act as an agreement which grants the Franchisee representational right to sell or manufacture goods or provide services. There is no specific legislation regulating Franchise arrangement in India, reason being the complexity of the relationship and the vast areas of law which such relationship involve.
The FEMA and RBI regulate the terms of payment under Franchise Agreements where one party is a non-Indian entity including the amount to be paid and procedure for remittance of these payments outside India. The RBI prescribes certain requirements such as furnishing of tax clearances and chartered accountant certificate at the time of remittance of royalty payments by the Franchisee to franchisor outside India. Indian regulations permit foreign franchisors to charge royalties up to 2 per cent on use of trademarks and names without technology collaboration. In case of higher payments, prior permission of SIA is required.
Franchises which involve transfer of technology can pay royalty up to 8 per cent on exports proceeds and 5 per cent on domestic sales under the automatic route, and prior permission on higher outflows. Amounts in excess of these can also be received but with the permission of the Indian Government. These rules allow a foreign franchisor to conduct its business structure in India in such a way as to ensure that it can repay the maximum amount from India. The Government has specified formula for calculation of royalties which must be adhered to before the foreign company can remit funds out of India. If the Franchise agreement proposes royalties or lump sum fees beyond the specified limits, the approval of the Foreign Investment Promotion Board is required.
Taxation is another issue which deserves due consideration.It is important to know the local sales tax, property tax, and with holdings tax applicable in certain area. In addition, the structure of the franchise system and the existence of treaties in the countries involved can have a significant impact on the structure adopted.
Where the franchisor receives royalties, service or Franchise fees, tax has to be paid under the income tax Act (as income arising and accruing in India), whether the franchisor is an Indian or foreign. In case where the foreign franchise or sends training personnel and supervisors to India, the salaries payable to these persons may be subject to personal income tax, whether an arrangement is made to deduct the tax at source or they are taxed as self-employed persons (professionals).
In calculating the amount of tax payable by the franchisor or the Franchisee company, the deduction available in tax laws of India can be important for tax planning purposes. Sometimes of these relate to rent, repairs and insurance in respect to premises used for business; depreciation and expenditure on research; and, expenditure of capital nature on acquisition of patent rights or copyrights. However, the availability of tax benefits depends many factors.These are like the product of the franchise,type of franchise and the location of the unit.
START-UP GUIDE FRANCHISE YOUR BUSINESS
If you want to expand your business, but don’t know how to, Franchising could be the best option. It takes a lot of effort to be Franchise ready. There are a lot of legal and business related hurdles that need to be crossed in order for a Franchise to stand a change of succeeding the basic concept must be the sound one, the franchisor must have sufficient resources to support the chain, and the Franchisee must be properly managed. This should be a step-by-step sequential process.
FIRST: Decide whether your business is franchisable or not ? The type of business you have now selected can be franchised.
SECOND: Thoroughly investigate the industry you are considering. Chalk out sound plan for expansion. This plan must take into account the many challenges facing a new franchisor speed of growth, territorial development, support services, staffing and pricing structure, to name a few of the most important issues to conclude if this is really a business to which you can make a commitment.
THIRD: Proper legal documentation is required after final planning. Attend industry meetings, talk to existing business owners, spend time at typical businesses and visit competitive locations to determine if those who are already in the indus try share your conclusions. As a Franchise, you’ll have to prepare legal documents (such as the Uniform Franchise Offering Circular or UFOC) for perusal by potential Franchisees, and for state and federal government entities.
HOW FRANCHISE CAN BE DEVELOPED ?
The major difference between a business plan for a traditional start-up and a business plan for a Franchise is that the latter must join essential items together from both sides; the franchisor and the Franchisee. In franchising it generally refers to the marketing and sales of Franchises Ideally it should refer to the development of the strategic growth plan of the company including formal goals and objectives, and an analysis of the human capital required to achieve these goals. The development part is the people and strategy part, the marketing and sales implementation and execution of the plan.
PREPARE A PLAN:
For a perfect business plan you need a cover sheet which contains the name and contact information for the particular business. Also, in the beginning portion of the business plan, prepare a statement of purpose which highlights the reason for the plan. Following this statement should be a table of contents listing all other portions of the business plan.
The next step is to prepare a full description of the business, or business summary. This properly starts with an analysis of your capabilities and constraints and would cover the kinds of Franchises to offer (start-ups, conversions, area development, sub Franchises, etc.), target markets (both geographic and Franchisee prospect profiles), speed of expansion, broad supply-chain and division-of-labor issues, financial hurdle rates, company-owned units, mergers and acquisitions, and exit strategies, etc. and/or website.A good deal of information is most likely available from the franchisor via the company’s brochure.
Next, provide an account of all the key players and their roles within the business. Their qualifications should also be included. It is best to include resumes and explanations of how their experience is relevant to the business.
The Franchise business plan also needs to include details on how you plan to obtain customers for the business. List any competitive advantages you foresee the new business having. Be sure to highlight marketing and advertising strategies you plan to employ. Again, you may be able to reference the franchising company’s website or brochure to obtain some of this information.
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You should use both secondary and primary research to obtain necessary information. Secondary research involves using the Freedom of Information Act as well as industry publications and pertinent web sites. Based on this secondary research, interview guides are prepared for conducting primary research. Primary research involves interviews with industry insiders, publications, associations, competitors, Franchisees, common suppliers, etc. Some of these sources may be more willing to talk to our interviewers than to organizations perceived of as competitors. When the final analysis of this research is married with the results of an internal audit (see below) and company goals and objectives, plans may be validated or more appropriate strategies and tactics developed and implemented.
An estimate of the Franchisee’s initial investment is a required disclosure in franchising: it is usually expressed as a range.
We would also like a typical pro forma cash flow, to determine the parameters necessary for an attractive offer.
We would use this model to test various hypotheses when structuring the franchise.
You will need to prepare an income statement, cash flow statement, and balance sheet in order to demonstrate future performance projections. When compiling these statements, it is important to take into consideration any possible delays or challenges that may lie ahead.
You will also need a section on financing needs even if you are financing the business entirely on your own. This will be a good indicator as to whether or not all operating costs can be covered until profit is realized.
STRUCTURE ALL RELATIONSHIPS
It is advantageous not to have too many kinds of relationships requiring different treatment, to avoid confusion and dissent. It is also a regulatory rule to treat similar kinds of Franchises the same, as well as not to discriminate against protected classes.
Issues to cover include pre-opening & opening .
- On-going training.
- assistance, and support.
- Site selection assistance,
- build-out assistance and territory.
- performance requirements
- additional investment requirements use of trademarks and other intellectual property.
- opening and participation requirements.
- term, renewal and transfer.
- buy-back and right-of-first-refusal provisions,
- local, regional, co-op, and brand marketing requirements contributions.
- use of proprietary products, purchase from designated or approved suppliers.
- anticipated size and use of product margins or rebates.
- unit or territory options and development requirements,
- use of an earnings claim, on-going fee structures.
- reporting requirements etc
PLAN THE FRANCHISOR ORGANIZATION.
In order to recruit Franchisees, leads must be generated and followed up and serious candidates must be carefully selected. These functions are highly specialized, and their execution largely determines the success of failure of the Franchise program. The initial cost of this is part of your investment in the program, as it takes time for Franchise fees to cover all recruitment and Franchisee set-up costs. Generally, a franchisor organization needs both headquarters and field staff. Training and support may be a combined function to start. In intial stage A general manager (GM) may have to perform all management functions. adding specialists in real estate, chain marketing, finance, etc. Over time, and as needed. Overhead should be kept to a minimum, but it is important to establish an efficient and effective communications and management information system immediately.
MODEL DEVELOPMENT SCHEDULES AND FRANCHISOR ECONOMICS.
Each Franchise contributes to the chain economics at different rates,it depends on when it opens. Similarly, when multiple unit developments granted , each Franchise within that zone will contribute at different rates. In addition, various kinds of Franchises may be subject to different fees, royalty rates, product margins, and rebates. Many franchisor expenses are proportional to the number of new or cumulative Franchisees, but economies of scale must also be taken into consideration. In order to gain an understanding of the value of the Franchise program, a terminal value may be projected, and the internal rate of return or net present value may be calculated. When this model is tied into the unit model, many assumptions may be tested simultaneously.
DOCUMENT YOUR FRANCHISE STRUCTURE
Structural decisions should be documented in sufficient detail to allow all decision makers to sign off on it. This document could be amended in several directions: it could be augmented as a feasibility study or it could be summarized as part of a business plan This document used as a blueprint for creating other Franchise documents, such as disclosures, contracts, manuals, brochures, etc.
PLAN TRAINING MODULES
Basic training would include any headquarters training, training at designated locations, field training, and unit start-up assistance. Most Franchisees need both classroom and on-the-job training. A typical day may include classroom instructions in the morning, on the-job training in the afternoon, and homework in the evening, and testing the following morning before new instruction takes place. Gradually, the on-the-job part takes over, and the Franchisees assume full management responsibilities of the training facility, with the trainers acting more as coaches.
Because all training in any unit is expensive, every effort should be made to prepare for that training. Such preparation could take many forms, from studying the operations manual, to taking a part time job with an existing operator, to studying other forms of training materials: CDs, web site, etc. Franchisees may even be required to pass a test after such self-study programs before they welcome to join the regular training program.
We hope this article will help you to understand the basic franchise model and how to start a franchise business.There are many other aspects of franchise company,each company has different rules and regulations.We request you to learn all about those details before starting franchise with any company.