What is a franchise? Written By Rajeev Mathur

What is a franchise?
During the Great Depression, Colonel Harland Sanders started selling fried chicken in the little town of Corbin, Kentucky, on the road to Florida. He is said to have used 11 herbs and spices in a secret recipe that gave the chicken its distinctive taste. Sanders' fare gained fame and Corbin was a routine stop en route to Florida till a new highway bypassed it. That's when the colonel shut shop and tried selling his chicken to restaurant owners.
In 1952, Pete Harman of South Salt Lake, Utah, signed an agreement to sell Sanders' chicken and pay him five cents for each piece sold. The eatery was called Kentucky Fried Chicken. It was the world's first franchise. While Sanders was sharing proprietory knowledge and reputation with Harman for a fee, the latter was running the business on Sanders' behalf. And that is the essence of a franchise even today.
Why a franchise?
The simple answer is to mitigate risk. "The franchiser can expand its reach by investing almost no money and capital, while the franchisee is almost sure of success as he is working in a tested area," says C Y Pal, president, Franchising Association of India, an industry body.
MONEY RETURNS:
A US Department of Commerce study conducted during 1971 to 1997 showed that less than five per cent of franchises closed down each year. In contrast, a study by the US Small Business Administration found that from 1978 to 1998, 62 per cent of non-franchised businesses could not make it past the sixth year.
But remember that a franchise will never give the returns that a successful own business will.
Some franchises could give you annual returns of 70 per cent, but most will be in the 20-40 per cent range.
FREE BACKUP:
On 27 November 2006, retail giant Wal-Mart, with a turnover of $316 billion, announced that it would franchise its Indian operations to Sunil Mittal's Bharti Enterprises. The latter would own and run Wal-Mart retail stores in India. Wal-Mart would also set up a joint venture with Bharti for the supply chain. Thus, systems honed over 46 years would be Bharti's from Day One.
SCOPE FOR BUSSINESS:
India is now the world's largest franchise market after North America and is growing at about 30 per cent a year, says Tony White, managing director, White Connections, which advises franchise companies.
A cheaper option is a service franchise. Instead of the local guy, more people are getting specialists to, say, find a match, or clean a water tank. For a money-spinner education franchise, "in most cases all you need is a room and the course material", Marya adds.
Which franchise?
While buying a franchise, you have to consider several issues.

Abilities. This is the time for brutal self-assessment. Rule of thumb: stay off what does not interest you. If you are indifferent to food, stay off restaurants. If kids exasperate you, avoid play schools. But don't lose heart. Your passion for travelling may make you one of the best equipped to plan holidays. Go for that. "I had already done a few beauty courses," says Jaya Patodia, 34, who runs a Lakme Beauty Salon in Delhi.

More likely than not, a good franchiser will check out whether you fit the bill. Shahnaz Hussain, for instance, looks for people who are "passionate about beauty care". Most franchisers will look for specific skills apart from "entrepreneurial attitude and open mind".
Institute of Computer & Finance Executives asks for no less then a chartered accountant, and Spykar Jeans wants a year's experience in franchising.
Since this will be a new business, it will need a lot of hard work to get it running. "The initial one year is very important as this is when you build up a customer base," says Hema Malini, 36, who, along with Ambika Viswanath, 24, run a Ferns 'N' Petals franchise in Chennai.
Most franchisers want the franchisee to be involved personally. Ratan Jalan, CEO, The Apollo Clinic, says: "We need a person who is himself going to run the franchise." But some may let you hire a manager and work at the franchise part-time. Remember, the monthly expense estimate franchisers give you assume that you will work full time.
Costs & finances. The big question is: how much can you invest in a franchise? Some service franchises could cost as little as Rs 20,000. You would need just a room, a table, a couple of chairs and a telephone connection. At the other end are beauty parlours, fine dining restaurants, or retail jewellery outlets. Here, investments could go to a crore or higher.

Now add on recurring costs - royalty (usually a percentage of sales to be paid every week or month). In some cases, Ferns 'N' Petals and Angeos Academy, it is the higher of percentage of net sales or a lumpsum.

There would also be working capital, which would include salary of staff, power bills, rent, and some fixed overheads like ad fees. When a franchiser talks about working capital needs, ask whether it includes rent. If not, this could be a chunky add-on. Check how much you can borrow from banks and at what rate and decide whether you want to do so (see Money Matters).

The amount of capital you can raise will partly determine how long you can wait for the business to pay back. Some franchisers will say that you can start making profits from the first month itself, but it is always wise to give yourself a cushion of at least a few months.

Your reserves or savings will decide how critical immediate cash flow is. Also, ask yourself how much money you can afford to lose. It would be smart to have a contingency fund.

Goals. What do you want your franchise to do for you? Will it be the primary or a supplementary source of income? Are you looking to make any specific amount every year? What is the return you want on your investment? Develop a three-tier strategy for investing, a long-term strategy and an exit strategy.

Ask where you see yourself five to 10 years down the line. Do you intend to make money and shut shop, or do you want to set up more outlets later? Remember, buying a very successful franchise for a high fee makes no sense until your outlet gives returns.

After you apply these filters, your list should get down to at most four or five franchises. But you still need to zero in on one.

SUCCESS STORY OF A VERY SIMPLE CONCEPT.

CASE STUDY:


http://tanclean.com/index.php


History: Established in 2001 By Mr Sunil Uplap.Has more than 150 Franchisees spread across 10 states of India. Amazing thing is they have three franchise in the city of Guwahati,Assam

Concept: Scientific cleaning and disinfection of drinking water tanks promoted as brand.

USP: Complete technical and marketing training provided along with tailor made software to manage the total business.

Franchising Facts:

 Investment Required: Rs. 250,000/-
 Area Required: 5 X 5 Sq. Ft. (Only storage space)
 ROI: 76% (minimum)
 Target Cities: Any City/Town/Village across India
 Location Specification: Any Place having drinking water storage tanks
Franchisor Support
 Total technical training
 Total Marketing Training
 Corporate Marketing and Advertising.
 Marketing kit.
 Advertisement worth Rs. 50,000/- to be done by the company in the franchisee area.
 Website support
Benefits of Joining
 A business opportunity that pays every day from day one.
 Service Industry- the current trend.
 Strong Brand Identity
 Additional Business Opportunities for promoting other drinking water related products
 Brand recognition and Brand image.
 Various certifications from reputed Govt and Private Institutions
 Credibility of a reputed Brand.
 National presence.