What is a Franchise Business: Definition and How It Works

What is franchise business

Franchising has emerged as a popular business model that offers aspiring entrepreneurs an opportunity to venture into the business world with a proven concept and established brand. In Indonesia, franchising has become an attractive option for entrepreneurs looking to start a business with a more measured investment and the benefits of an established experience and brand.

In this article, we will delve further into the topic of “what is a franchise?”, the examples, and understand franchises as the steps to open a franchise in Indonesia.

Also read: Exploring the Various Types of Business for Success

What is Franchise Business Definition?

What is a franchise business (source: pexels)
What is a franchise business (source: pexels)

Franchise definition is when one person or company (called the franchisor) permits another person or company (called the franchisee) to run a business using their brand and way of doing things. The franchisor provides support and guidance to the franchisee, who pays them a fee or a percentage of their earnings in return. Franchises are found in many industries like fast food, retail, and hotels.

Franchises are popular because they give people a better chance of success than starting a business from scratch. Franchise businesses already have a well-known brand, loyal customers, and a proven system for running the business. This lowers the risks of starting a new business. Franchisees also get help from the franchisor with things like finding a location, advertising, and training. This support makes it easier for franchisees to make money.

In summary, a franchise lets people start a business with the support of a well-known brand. By using the franchisor’s systems and getting help, franchisees can reduce risks and increase their chances of success. Franchising is a good way for people to start their own businesses while still having support and guidance.

Also read: The Importance of Location in Business (7 Key Reasons)

Types of Franchise

What is a franchise business (source: pexels)
What is a franchise business (source: pexels)

After knowing about the meaning and simple definition of franchise business, now we’ll talk about the types. Franchising is a diverse business model encompassing various types of franchises catering to different industries and sectors. Here are five common types of franchises:

  1. Product Distribution Franchise

    A product distribution franchise involves the franchisor granting the franchisee the rights to distribute or sell their products within a specific territory. This franchise type is prevalent in beverages, consumer goods, automotive parts, and home appliances. The franchisee benefits from the franchisor’s established brand and supply chain, while the franchisor expands its market reach through the franchisee’s distribution network.

  2. Business Format Franchise

    In a business format franchise, the franchisor provides the franchisee with products or services, a complete business system, and an operational blueprint. This includes guidelines on marketing, training, technology, and ongoing support. The franchisee benefits from a proven business model, brand recognition, and ongoing support, enabling them to replicate the success of the franchisor’s business.

    Also read: 25 Cheap Franchise Opportunities: Low Cost yet High Profit

  3. Conversion Franchise

    A conversion franchise involves an existing business converting into a franchise model by adopting the systems and brand of a franchisor. This type of franchise allows independent businesses to benefit from the franchisor’s established brand, marketing, and operational support while maintaining their local identity. Conversion franchises can be found in hotels, restaurants, and fitness centers.

  4. Master Franchise

    A master franchise involves the franchisor granting the master franchisee the rights to develop and sub-franchise within a specific region or territory. The master franchisee takes on the role of finding, teaching, and assisting individual franchisees in their assigned region. Master franchises are often seen in real estate, education, and cleaning services.

  5. Co-Branding Franchise

    A co-branding franchise brings together two or more established brands to operate under one franchise unit. This allows franchisees to offer complementary products or services in a single location, attracting a broader customer base and increasing revenue potential. Examples of co-branding franchises include convenience stores partnering with fast-food chains or automotive service centers combined with retail outlets.

Also read: 25 Potential Business Ideas and Opportunities in Indonesia

Advantages and Disadvantages of Franchising

Franchising has become a popular business model globally, offering advantages and disadvantages for both franchisors and franchisees. Let’s explore the benefits and drawbacks of franchising:

Advantages of Franchising

  1. Established Brand Recognition

    Franchisees benefit from operating under a respectable brand name with recognition and a loyal customer base. This can guide to a faster start and easier market penetration than starting a brand-new business.

  2. Proven Business Model

    Franchisees gain access to a successful business model with standardized processes, operational systems, and marketing strategies. The franchisor has already refined these methods, reducing the need for trial and error and increasing the likelihood of success.

  3. Ongoing Support

    Franchisors provide continuous support to franchisees, including training programs, operational guidance, marketing materials, and assistance with site selection. This support helps franchisees navigate challenges and stay competitive in the market.

  4. Purchasing Power

    Franchisees often benefit from the collective purchasing power of the franchise network. By leveraging the volume of purchases across multiple locations, they can negotiate better deals with suppliers, reducing costs and improving profit margins.

  5. Shared Success and Network Collaboration

    Franchisees become part of a larger network of franchise owners who can share best practices, knowledge, and resources. This collaborative environment can provide valuable insights and support for business growth.

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Also read: The Advantages and Disadvantages of Franchise Business

Disadvantages of Franchising

  1. Initial Investment and Fees

    Franchisees typically need to make an upfront investment to secure a franchise, including franchise fees, equipment costs, and initial inventory. They may also be required to pay the franchisor ongoing royalties or marketing fees.

  2. Lack of Control and Flexibility

    Franchisees must adhere to the franchisor’s established system and guidelines, limiting their ability to make independent business decisions. This lack of flexibility can disadvantage individuals who prefer more autonomy in running their businesses.

  3. Profit Sharing

    Franchisees must share a portion of their profits with the franchisor through royalties or other fees. This reduces the overall profitability of the business compared to owning an independent venture.

  4. Dependency on Franchisor

    Franchisees rely on the ongoing support and viability of the franchisor. If the franchisor faces financial or operational difficulties, it can directly impact the franchisees’ business operations and profitability.

  5. Brand Reputation

    While an established brand can be an advantage, franchisees are also tied to the franchisor’s reputation. If the franchisor faces negative publicity or brand damage, it can affect the franchisees’ business and customer perception.

Also read: 12 Popular and Successful Franchise Examples in the World

To start a franchise in Indonesia, the following steps need to be followed: conducting thorough research and selecting the right franchisor, creating a comprehensive business plan, preparing the necessary legal documents, registering the franchise with BKPM or relevant authorities, preparing for operations and training, and launching and marketing the business. If you want to learn more about Indonesia franchise registration, consult the expert!

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