About half of them are franchises, from pharmacies like Apollo and Sanjivani to fast food joints like Domino’s and Amul Ice Cream. A franchise is a business where the owner of an established brand gives the licence of its operations, along with branding, products, support and training, to someone else in exchange of an upfront franchise fee. The owner or franchisor will also charge a regular royalty fee from the franchisee for the continued use of the brand name and its products.
The trepidation of starting his own venture had 28-year-old Shrey Anjaria choose this path. “I was working for a top IT firm but was neither satisfied with my job profile nor able to fully utilise the skills I learnt from my MBA course. But starting a business required a lot of effort to push an idea, build a team, and create a brand name.
It made more sense to start with someone who could guide me on how to run a business,” says Anjaria who took up the franchise of Tumbledry, a laundry and dry cleaning company, in October 2022. The franchising business has been on a strong growth path in the past two decades. According to Franchise India, the segment has registered an annual growth of about 30% over the past five years and is expected to reach Rs.7,000 crore by 2025. Franchise businesses account for nearly 4% of the Indian GDP and employ over 15 lakh people.
Is it the right fit for you?
You can find a franchise business for everything, from food and jewellery to automobile and education. There are also ample choices to fit your budget in each category. For instance, you can buy the franchise of a small food company that requires you to only have a kiosk for Rs.5-10 lakh while a big restaurant with an international brand can cost you over a crore. Once you figure out which type of business interests you, check the companies that are present in the segment and the amount of investment they require as it has to fit your budget. Once you zero in on the exact brand, you can simply log on to their website and either fill out their franchisee form or contact them to request the same.
Alternatively, you can check out some popular dedicated franchising websites for more information, such as franchiseindia. com, franchisemart.in, franchisebazar. com, businessbazaar.co, etc. The advantage of starting a franchising business over your own venture is that you have a ready-made business formula that has proven to be successful, market-tested products and services, an established brand recognition, and a certain amount of handholding in the first few months. Another benefit is the help that a franchisor will provide in scouting for a location, acquiring staff, and training the personnel who will work in your store. But be prepared that the company will also analyse you thoroughly. “Companies are selective because it is a long-term partnership.
They will evaluate you on four fitments— strategic, operational, market and financial. So, you’ll have to be clear about what you’re bringing to the table beyond capital, such as experience, great location, and skills,” says Sonya Chowdhry, MD, Franchise India. To become a franchisee, you need to pay an upfront franchise fee and sign the franchise agreement, which will give you the right to use the brand name, the system of doing business, products or service to sell, marketing materials and any other necessary aid to get your business going.
Along with these, you may be given an exclusive geographical territory to cover. This and the duration of your franchise will be clearly spelled out in the agreement. The contract is usually for 5 to 10 years, with the option to renew it. Acquiring a franchise is actually the easy part. The tough job comes to run the day-to-day operations, handling clients and customers, resolving staff issues and learning the nitty-gritty of your business. While the franchisor takes care of brand marketing, it’s your responsibility to publicise your store and ensure you get enough customers to generate ample revenue.
“You have to remember that you are buying yourself a job and working in your own company. So, you have to focus on three ROIs: return on investment, return on involvement and return on intelligence, which is what value are you bringing to the business. A hundred people will start the same business with the same capital but all will have different results depending on these factors. You also have to understand your own micro-market,” says Gaurav Marya, Chairman & Founder, Franchise India Group.
While there is a certain amount of independence in being your own boss, you have to remember that you are answerable to a higher authority. Franchising comes with strict protocols you need to follow, from decisions about what products you can use or sell, the layout of your store, or even advertising guidelines. “Compliance is a very big part of your relationship with the franchisor.
You may start a franchise because you love the business, but you also need to understand the nuances to become a successful entrepreneur,” says Dr. Sam Paul, Director, Paulsons Beauty and Fashion. Paul started his franchising career by buying a franchise of Toni & Guy, a salon business, in 2010. Within three years, he had opened three outlets in Chennai and within a decade, he had acquired the franchising rights for various territories in South India, including Tamil Nadu, Karnataka and Goa.
A plethora of options under Rs.50 lakh
Here’s a list of some popular franchise businesses and what you will need to buy one. For most of these, the break-even period is 3 months to a year, while the return on investment will vary from 1-3 years.
How to manage the capital
If you want to buy a franchise, you should have at least 50% of the initial investment, while 70% is even better. The franchisor will ask you to show proof that you can pay the full amount as well as have enough working capital for the first six months. This is because the company will only put in effort after it is sure that you are going to be on board. Otherwise, there’s no point if your funding doesn’t come in and the deal falls through.
It’s best if you have your own capital rather than getting a loan, especially if your investment is below Rs.40 lakh. This is because the cost of capital becomes too high to pay off in the initial years when you need working capital. “We advise people to have at least six months of working capital ready when they start the business. On an average, a business takes 3-4 months to pay for its operating expenses and 6-12 months to reach peak level,” says Chowdhry.
Palash Agrawal, 32
Brand: Giani Ice Cream
Industry: Food & Beverages
Franchise owner since: February 2020, but full-time operations started in July 2021 due to the pandemic
Previous occupation: Quit his job in an MNC in 2017 and started his own consultancy firm
Switched to franchising because:Wanted a second, stable stream of income
Return on investment:15 months
Success story: Opened second franchise in December 2021
However, if you still need some funds, your franchisor can help you get in touch with a bank or lender as they often have tie-ups with these. Most banks will offer you funds under ‘small business loans’ while some NBFCs like Poonawalla Fincorp and Bajaj Finserv have special franchising options.
However, such loans can be expensive and range from 15% to 25% with a processing fee of 2-3%. Due to heavy initial investment and operational costs in the first couple of years, it could take a long time for your business to break-even and become profitable. So, opt for a loan that not only offers competitive interest rates but also allows you to pay as per your convenience and cash flow patterns.
Along with the initial expenditure, you must also take into account the royalty or annual brand fee. This is usually a percentage of your revenue and ranges from 4% to 10%, or it can be a fixed amount, and has to be paid every year to continue using the brand’s name.
Nishaad Anantani, 43
Brand: Permagard India
Industry: Automotive Franchise owner since: July 2018
Previous occupation:Worked with a Mercedes dealership Switched to
Franchising because:Realised the growth potential of the business idea
Investment:Rs.30 lakh(with three other friends)
Break-even period:About a year
Success story: Is now a master franchisee, who helps and trains other franchisees for a fee of Rs.3 lakh
Be prepared for challenges
Many proponents of the franchise business will contend that the success rate of franchises is more than double of start-ups which are more prone to failure in the first five years of their lives. However, while a franchise businesses may have a flourishing formula and a thriving track record, success is never guaranteed.
All franchisees do not succeed at the same rate because a lot depends on your locality, the demand of the product, any new competition or trend, and the amount of effort you put in. There is no guarantee that your business will be a success simply because someone else with the same franchise outfit is doing well.
Shrey Anjaria, 28
Industry: Laundry & Dry Cleaning
Franchise owner since: October 2022
Previous occupation: Worked with MNCs for over three years
Switched to franchising because: Didn’t enjoy his job profile and wanted to utilise his MBA degree
Return on investment:Expects to recuperate his investment by 2025
Success story: Wants to buy another franchisee, preferably in the F&B business within a year
“We had an investor who wanted to start a Permagard franchise in Ahmedabad, but we already had three in the city. So, he compromised by opening one in Vadodara. But since he didn’t live there, he couldn’t oversee the operations and the business was struggling. We are now helping him exit the business,” says Nishaad Anantani, who started a franchisee of the Australia-based company in 2018 and is now a master franchisee.
He credits his venture’s success to the fact that he and his co-founders also tweaked the original business model which catered only to luxury cars. “We adapted to the need in India and started servicing all models of cars by offering products and services that range from Rs.1,500 – Rs.2 lakh.”
Also, don’t be impressed about quick returns. Running a business is a long-term game and you have to be prepared that it will take you 2-3 years to get a return on your initial investment. Of course, the time period goes up if your investment is quite large, your rentals are high, or you need to employ a large number of people.
You also carry the risk of the parent company shutting shop due to any reason. “Kodak had popular film processing franchisees in the 1990s and early 2000s but when the business became irrelevant, all of them had to shut down. But sometimes, even if a company closes, the ecosystem remains viable, like in the case of Nokia franchisees that simply switched to Samsung,” says Marya.
Egambaram Ravichandran, 36
Brand: Toni & Guy
Industry: Beauty & Wellness
Franchise owner since: September 2015
Previous occupation: Worked with an MNC for four years and then started a steel cold rolling business with a relative
Switched to franchising because:Sold off the business after three years because of scalability issue, and realised that he needed a better business model and mentoring
Investment:Rs.60 lakh – Rs.70 lakh
Return on investment:Over two years
Success story: Has opened five more franchisees in the past year, with investments ranging from Rs.50 lakh – Rs.1 crore
Understanding the terminology
Here’s a glossary to get you started on your franchising journey.
Cash Flow: This measures how much cash is coming into and leaving your business each month. This will help you calculate how long it will take for your investment to be redeemed.
This legal document outlines the relationship between the franchisor and the franchisee. It specifies the terms of the contract, such as rights and responsibilities, fees, payments, territory, and duration of agreement.
Franchise Fee: The amount of money you will have to pay a company for the right to use their trademarks, trade secrets, and business model.
Initial Investment: The minimum amount of money that is needed to open and operate the franchise.
Master Franchisee: An individual who negotiates for the franchise rights for a defined territory, like a city or a state. He or she then assumes the rights and obligations of the franchisor in that particular territory.
Non-compete (or anticompetitive agreement):The agreement restricts you from starting your own business similar to the franchisor’s or joining a competitive business in the same line, even after you leave the company.
Royalty: It is a percentage of the gross sales paid by the franchisee to the franchisor on a regular basis for the continued use of the brand name. It could also be a fixed amount.
Return on Investment(ROI): This measures how profitable an investment is in relation to how much money was invested. The higher the ROI, the more profitable the investment is.
Standard operating procedure (SOP):A manual for daily operations that covers standard protocols and procedures, safety measures, customer interaction guidelines, etc, in line with the work and ethos of the company.
Before you buy a franchise
Go through this checklist before you decide on which business you want to join.
Understand the market: Study the demand for the product and service you want to sell and evaluate whether the need will still exist 20 years or more. The business should not only be sustainable for the long term, it should also offer the opportunity to expand in future. Assess your strengths: Ideally, you should choose a business that aligns with your key skills. If you are good at sales, pick retail; if you prefer chatting with people, choose a beauty or food business; if you are good at planning, opt for logistics, and so on.
Research the company: The reputation of a brand matters as that is what will attract your customers. You should analyse all the brands in the segment you are interested in to see which one you prefer the most. Also, go through the history of the company, its finances and funding, how it has expanded over the years, and how long have its franchisees been running. A high closure rate should ring alarm bells.
Check your finances: Just having the initial investment amount isn’t enough. You will need to figure in additional costs like paying the architect and interior designer, buying products in bulk at the start, and having enough working capital for six months. You may also have to pay for advertising locally in the first few months of setting up.
Trawl your territory: The locality where you want to set up shop is extremely important. Figure out the footfall in the area and competing businesses. While malls have high footfalls, rentals are also high there. So, if you want a more reasonable set-up, you might want to open a standalone shop. However, you might end up paying more for signages and advertising to get your store noticed.
Talk to other franchisees: The best way to figure out if the business is right for you is to speak to other franchisees associated with the brand. Their first-hand account of challenges and issues will give you a clearer and more realistic picture of what you can earn within a few years, how much support you can get from HQ, how difficult is it to hire good staff, etc.
Get legal and financial advice: Businesses can be tough to understand, especially if you’re a rookie in this field wanting to work with a large company. This makes legal agreements even more complicated, so get the help of a lawyer who can go through documents with a fine tooth comb and sort out any issues in the beginning itself. A
financial adviser will help you figure out how you can support the business in the initial months till you start generating enough revenue to cover operational expenses.
Consider training and support: The biggest benefit of becoming a franchisee is the guidance you get from the mothership, so check what kind of initial training is provided by the company to the staff you will hire and how much support you will get if you want to scale up after some time.
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