About us

Indian Franchise Association (IFA) is India's premier, non-political, not-for-

profit body representing Indian Franchise Sector. IFA's endeavor is to
promote, promulgate and popularize the concept of franchising as a mode
of doing business across the industry verticals and to nurture the
entrepreneurial skill of every Indian.

IFA catalyses change by working closely with stakeholders and

policymakers on policy issues, enhancing efficiency, competitiveness and
expanding business opportunities for franchise sector through a range of
specialized services and global linkages. IFA also provides a platform for
Franchise sector consensus building and networking.

Partnership with counterpart chambers across the world carry forward our
initiatives of inclusive development in franchise business, which
encompasses entrepreneurship, training, governance, skill development,
etc. IFA serves as the first port of call for Indian franchise sector and the
international franchise business community.

5
 Acknowledgement
An extensive survey of over 1500 franchisees across the country helped us
to identify the opportunities and challenges of an entrepreneur owning a
franchisee. This report is an important piece of information on the current
trends of franchising in India. We wish to express deep sense of gratitude
to the franchisees of esteemed brands like Aditya Birla Retail Ltd., Subway,
IMS, Reliance Money and many others for their views, experiences and
useful suggestions, which helped us in accomplishing this task with
perfection.
We would like to acknowledge the honest efforts by Ms Suman Verma and
Mr. T Ginvanglian, from Indian Institute of Management, Bangalore (IIMB)
for a systematic survey and compilation of the facts for the report.

Indian Franchise Association

6
Foreword
India, with a thriving consumer population, coupled
with sustained economic growth, is an exciting
destination for the franchising fraternity. Indian
franchise scenario has offered excellent opportunities
to the new international and local brands entering the
market with the prospect of expanding their business.

New age Indian generation has realized the scope of

growth in franchising and in today's race for success,
many of the aspiring entrepreneurs have decided to
join the franchising bandwagon because it is easier,
safer and more profitable than struggling for brand
identity while running a small enterprise of their own.

I would like to congratulate Indian Franchise

Association (IFA) for the “Franchisee report”. This is a
maiden attempt involving an exhaustive survey of
Indian franchisees and identifies their challenges,
opportunities and profiles of the entrepreneurs
running franchise outlets.

I wish all the success to the endeavour and hope that

this report becomes a benchmark for the industry and
unveils new facets of franchising in India.

UDAY MATHUR
Managing Director
Euro Kids International

7
Contents
PROLOGUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

LIST OF FIGURES AND TABLES . . . . . . . . . . . . . . . . . . . . . . . . .15

CHAPTER 1
THE ENTREPRENEUR'S SPUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

CHAPTER 2
IDENTIFYING FRANCHISEE ATTRIBUTES: AN ANALYSIS . . . . . . . . . . . . .21

CHAPTER 3
FRANCHISEE PROFILING: A STATISTICAL MODEL . . . . . . . . . . . . . . . . .25
Franchisee profiling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

CHAPTER 4
FRANCHISEE LIFE CYCLE: Key to franchisor-franchisee relationship . . . .29
Search phase: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Joining phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Growth phase: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Maturity phase: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Declining phase: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Franchisor -Franchisee relationship: . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

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CHAPTER 5
FRANCHISEE MOTIVATION-Understanding challenges . . . . . . . . . . . . . . .36
1. Inadequate Communication by franchisor . . . . . . . . . . . . . . . . . . . . . . .37
2. The Royalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
3. Staff Training & Attrition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
4. Shrinkage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
5. Cannibalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
6. Irresponsible franchisees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

CHAPTER 6
THE INDIAN FRANCHISEE SURVEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
1.Ideal age of a successful franchisee . . . . . . . . . . . . . . . . . . . . . . . . . . .42
2.Ideal educational background for a Franchisee . . . . . . . . . . . . . . . . . . .43
3.Franchisee Royalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
4.Ideal time for contract terms review . . . . . . . . . . . . . . . . . . . . . . . . . . .45
5.Franchisor- Investor relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47
6.Salaried vs. self employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

CHAPTER 7
TRENDS, OPPORTUNITIES AND FUTURE PROSPECTS . . . . . . . . . . . . . . .48

APPENDIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
A typical Franchise Policy in India (Courtesy Sagar Ratna) . . . . . . . . . . . .49

9
 PROLOGUE
Unanswered questions in the franchise world
"If you're in a comfort zone, afraid to venture out, Remember that all
winners were at one time filled with doubt. A step or two and words of
praise can make your dreams come true.
Reach for your future with a smile; success is there for you"
Seems to be an encroaching speech by a politician - Isn't it? No way.
These are simple words uttered by a successful franchisee - one who
owns a franchise business. This speech portrays the confidence and
charisma of the speaker. An entrepreneur who is a franchisor, always
searches for a trusty and efficient Partner or franchisees like - a bride's
father looking out for a bridegroom. The comparison is indeed authentic
because the franchisor and franchisee relationship is similar to a marriage
- long term and symbiotic and trustworthy. Imagine that you have got a
brain reading gadget which would display the ongoing thoughts of a
human brain, if you use it to read the mind of a franchisor you will observe
following thought universally in his/her mind:-

How should I choose a franchisee for my brand? What qualities and

attributes I should look for? What would be an ideal franchisee profile for
my business? How to manage my already running franchisees?
On the other hand, success of a franchisee is also not a cake walk.

"Making your mark on the world is hard. If it were easy, everybody would
do it. But it's not. It takes patience, it takes commitment, and it comes with
plenty of failure along the way"
—Barrack Obama

Let's use the brain reader again for a franchisee and you will hear:
Am I the only one facing issues/challenges in my industry? Is there any one
to suggest me with solutions for the issues faced by me? Does franchisor
understand that I have certain unique challenges for my region? I am
performing extraordinary, but franchisor is not acknowledging the same,
so can I leave him at point of time? I have learned all the business; can I
go ahead with my own brand?
The questions which the brain reader has given us are the true reflections
of both the franchisor and franchisee in the franchise world. Are there any
answers to these questions? The franchise mode of business expansion in
India is into its growth phase and is catching fast. These questions need
solutions to make the growth of this business mode healthy. This Study
aims to answer these questions and many other queries based on a wide
survey and discussion with seasoned franchisees & franchisors.

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THE ENDEAVOUR
It all started on Indian Franchise Association's platform with intellectual
inputs by Indian Institute of Management, Bangalore's management
students.

It was never easy to provoke thoughts of a franchisee and gather intellect

output from them, they were busy in their business & overcoming
challenges.

An online survey was the starting point to establish the role of this study,
a well drafted online questionnaire to capture all the primary issues first
hand; this was circulated to a database of 1500 franchisees across the
country. Scope of this study was unlimited so its area of research was
limited to the sectors with maximum pie size in franchising - Education,
Food and Retail. A carefully chosen sample of 70 franchisees spread
across the country from these sectors was interviewed by the team. The
insights from the in-depth interviews were used to analyze the philosophy
of Indian franchisee.

Numbers speak the truth! - The data collected from the survey was fed to
statistical tools like factor analysis and regression to yield meaningful
results. The results were used to find out a model which facilitates a
franchisor to optimize their franchisee search, manage superior
relationship with its existing franchisees and increase franchisee retention.

11
 INTRODUCTION

E
xperts claim that franchising is the fastest growing retailing
format in the world. The International Franchising Association
(IFA) predicts that future growth in franchising is likely to
come from developing markets such as China, India,
Pakistan and Russia. This trend is expected to accompany the rapid
shifts toward market driven economic reforms.

12
 India's liberalization begun in 1991, has brought about far-reaching
changes in its economy, the Foreign Direct Investment (FDI) has
increased sharply boosting business opportunities and leading to
exciting entrepreneurial endeavours . Franchising is in the midst of a
market revolution in India and the prospects of the growth in
franchising are boosted by an ample supply of energetic, homegrown
entrepreneurs making India an exciting market place.

Have you ever wondered how so many IMS institutes are located in
every part of India and provide the exact same kind of faculty and
material throughout the country? How management of this huge
chain of institutes is executed? And how the systems and human
resource are maintained? The answer is in just one word-
"Franchising".

It is through a well managed chain of franchisees operating across

the country. IMS acts as the franchisor and provides supervision,
training, content and brand name to the franchisees for a fixed fee
and royalty. IMS carry a trust of quality education for the students
preparing for management institutes and as a franchisor their
endeavour is to make sure that same quality of education shall be
imparted in all the IMS centers across the country. But challenges are
there in managing this arrangement.

Franchising in India is still in its nascent stage. Only 10% of the

businesses in India are franchised as compared to 70% in the United
States. Education sector which accounts for the maximum portion of
the total franchised business in India is only 38% franchised as a
sector as a whole. Other sectors like like retail, food, healthcare etc.
go on similar lines.

Indian franchising story has just started and it has a long way to go,
India would be able to do so with its huge population, the growing
aspirations and prosperity of the middle class, changing lifestyles,
growing entrepreneurial culture, and the shifting of gears to small
cities and towns. All these factors will lead to the growth of a WIN-
WIN partnership between the brand and franchisee.

13
 In an emerging market like India, the trend of business expansion
through franchising is gaining popularity and it has now become
crucial to identify various economic aspects of this business model. A
successful franchise business depends on the understanding
between franchisor & franchisee. For example in education sector we
have seen that various professional course coaching (MBA, Medical,
Engineering etc.) franchisees are paying about 35-40% royalty while
a pre-school franchisee and similar franchisees are paying about 15-
18% but still the former is more contented as compared to the latter.

What are the factors that decide satisfaction level of a franchisee?

What steps do they follow before taking the big decision of buying a
brand? What are the current trends in the franchising business in
India? How many franchisees are planning to continue this business
for a long term and what percentage of them are planning to start up
their own businesses since they have gained enough expertise and
exposure through this opportunity? Who could be an ideal franchisee?
These are some of the important questions with which every
franchisor is struggling. This report has tried to answer these
questions by analysis including depth interviews, data analysis tools
and behavioral study of franchisees all over India across the major
franchising sectors Education, Retail, Food and Professional Services
which together constitute 89% of the franchising business in India.

A franchisor has to be observant while selecting an appropriate

partner for his business. On the other hand a franchisee too has
apprehensions and expectations, they want profitability, cooperation,
better communication and understanding from the franchisor.

To achieve this, the report lays out a simple framework which a

franchisor will follow to filter out the incompatible and unfitting
buyers and hence select the most suitable franchisee. Various
categories in franchisees have identified like Loyals, switchers and
leavers through a structured process. Now the franchisor has to fill
few basic information of the investor like age, education, relationship
with the employer and similar parameters of in a formula and he will
be able to find out the suitability of the particular franchisee he is
planning to have a deal with.

14
LIST OF FIGURES AND TABLES
LIST OF TABLES
Table 1: KMO and Barlett's Test
Table 2: Division of Factors into components
Table 3: Rotated component matrix
Table 4: Eigen Values for Factor Analysis

LIST OF FIGURES
Fig 1: Factor Analysis
Fig 2: Age range of switchers
Fig 3: Educational background of switchers
Fig 4: Previous occupation of switchers
Fig 5: Age range of loyals
Fig 6: Educational background of loyals
Fig 7: Previous occupation of loyals
Fig 8: Franchisee Revenue vs. Time (General case)
Fig 9: The Franchisee Lifecycle
Fig 10: Reference Sources for franchisees
Fig 11: Fate of a franchisee after the declining phase
Fig 12: Case of an Extraordinary Franchisee
Fig 13: Motivation curve for a franchisee
Fig 14: Franchisee classification based on Motivation levels
Fig 15: Maximum Royalty across Sectors
Fig 16: Attrition Rate across sectors
Fig 17: Age group of Successful Franchisee
Fig 18: Sector-wise age group
Fig 19: Educational qualification of Franchisees
Fig 20: Streams of Post graduate franchisees
Fig 21: Range of Royalty across sectors
Fig 22: Telescopic franchise royalty rate
Fig 23: Years of Operation and Future Plans
Fig 24: Year-wise break-up of 1-5 years of Operation
Fig 25: Previous Relationship with the franchisor
Fig 26: Relation-wise Future Plans of Franchisees
Fig 26: Previous Work-Experience of franchisees
Fig 27: Estimated growth rates in 2011-15 by franchisee

15
16
 CHAPTER 1
THE ENTREPRENEUR’S SPUR
O
ne of the embodiments of
franchising is "consistency." The
very term "franchising" has come
to be regarded as synonymous
with consistency. There is a change in the
philosophy of the investor and convenience
is his first preference and franchising has
become a very convincing business model for
him to start a business conveniently with all
the primary risks covered.
Why an entrepreneur chooses franchise
business model?
In order to find out what were the underlying
factors that affected their decision as an
entrepreneur to choose franchise business
model, we have asked the respondents to rate
the following factors on a scale of 1 to 5.
V1: Franchising is the safest way to
start a business
V2: Franchising is the best way to
run a business
V3: Franchising is the easiest way to
start a business
V4: I choose franchising because
there is lower risk of failure
V5: I want an established brand than
starting on my own
V6: There is higher growth
opportunity in franchising than
17
own brand
V7: Franchising gives a good
learning experience
V8: I have realized that starting my
own brand would have been
better
V9: I choose a franchise that gives
me the best return [Profit]
V10: I choose a franchise that suits my
personality and experience
V11: I have the same interest with my
franchisor
V12: I choose franchising because I
want to start a brand of my own
later
Based on the responses given by the
franchisees the above mentioned factors
were analyzed using factor analysis. The
KMO and Barlett's test gives us a Sampling
Adequacy value of 0.643 which is greater
than 0.5 which means that factor analysis is
appropriate for analyzing the data.
KMO AND BARTLETT’S TEST
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .643
Bartlett’s Test Approx. Chi-Square 201.545
of Sphericity df 66.000
Sig. .000
Table1. KMO and Barlett's Test
Principal Component Analysis (PCA) is then
used with a Varimax rotation and Kaiser
Normalization. On further analysis the
above variables can be grouped into three
major components.
Factors
Franchising is the safest way to
start a business
Franchising is the best way to
run a business
Franchising is the easiest way to
start a business
I choose franchising because there
is lower risk of failure
I want an established brand than
starting on my own
Franchising gives a good learning experience
I choose a franchise that suits my
personality and experience
I choose franchising because I want
to start a brand of my own later
There is higher growth opportunity in
franchising than own brand
I have realized that starting my own
brand would have been better
I choose a franchise that give me the
best return [Profit]
I have the same interest with my franchisor
Table2. Division of Factors into components
ROTATED COMPONENT MATRIXa
Variables
1 2
Franchising is the safest way to
start a business .813
Franchising is the best way
to run a business .797
Franchising is the easiest way to
start a business .871
I choose franchising because there is
lower risk of failure .679
I want an established brand than
starting on my own .849
There is higher growth opportunity in
franchising than own brand
Franchising gives a good learning experience .824
I have realized that starting my own brand
would have been better
I choose a franchise that give me the
best return [Profit] .729
I choose a franchise that suits my
personality and experience .547
I have the same interest with my franchisor .517
I choose franchising because I want to
start a brand of my own later .763
Extraction Method: Principal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
a. Rotation converged in 6 iterations.
Table3: Rotated component matrix
The 3 components of motivation behind an
entrepreneur's choice of franchising format
found above could be further assigned the
following headings:
Component 1: Lesser risk than a new startup,
Component 2: Expectations of higher return on investment, and
Components
Component 3: The growth opportunity or future prospect
Component 1
A franchisee looks for the growth
opportunity in the business. He is being
attracted by the return that is being offered by
joining the franchise. There can be three sets of
Investors on the basis of what they are looking
for in a franchising business. They are:
■ Business oriented: This is a set of Investors
who choose franchising because it is safe, the
risk of failure is low, and the return is always
assured.
■ Short-sighted Investors: This is the third
set of Investors who are bothered mostly by
Component 3
what is being offered in the business. Their
Component 2 main interest is the return on the investment.
Other set of investors are also interested in the
ROI but this type of investors gives more
importance to the ROI than anything else.
■ Growth Oriented: This set of Investors is
looking for a long-term relationship. They are
more concerned about the growth opportunity
and the future prospects in the business.
Component
3 Therefore a franchisor should
communicate clearly what are the growth
opportunities available for a franchisee.
Monetary gains in terms of profit are
important, but for an Indian franchisee the
growth opportunity is something that keeps
.514
him in the business.
The following are the factors behind an
entrepreneur's preference for a franchising
business format from the franchisor's
.951
perspective:
-.856 ■ Ongoing operational support
.576 Franchisor has dedicated team to providing
ongoing assistance to franchisees. A new
.531 franchisee will receive all kind of operational
.611 .420
support when they're building and running the
franchisor's brand. The support system
includes online access to corporate staff and
national network of other franchisee owners.
This support is extended through meetings,
refresher trainings, annual convention and
18
trade shows etc.
■ Marketing support
Marketing support to a franchisee is very
important and the biggest motivation to join a
franchise network. More the marketing
options a franchisor offer, the more effective a
franchisee will be in maximizing its business.
Most franchisors have the unique ability to
19
launch large-scale marketing campaigns that
are beyond the reach of individual businesses
within the franchise. In addition to the
geographic scope of these campaigns (many
are nationwide), the quality of franchisor ads
is usually top-shelf - a big plus when competing
with smaller, independent businesses whose
ads look substandard in comparison.
■ Bulk buying advantage
A franchisee can take advantage of the bulk
buying capacity of the entire system to
negotiate on the prices for everything they
need at significantly lower levels than they
could achieve as an independent operator. This
applies not only to initial infrastructure and
equipment purchases, but also to the supplies,
inventory, and everything else a franchisee
need on an ongoing basis.
■ Advantage of Brand Identity
Success of each unit in a franchise system, as
well as the overall competitive strength of the
franchise, is due to the presence of strong
brand identification covering both the
products offered and the services. And
assuming that a significant brand recognition
factor can be established and maintained in
the minds of consumers, benefits will flow for
the Franchisees
■ Existing Infrastructure
Existing infrastructure can be leveraged upon
in a franchising option. Distribution,
Buildings, machinery, people, systems,
customers, suppliers, employees are the
benefits which is received in exiting business
and would give a chance to the buyer to
concentrate on running the business smoothly
with an existing set-up.
■ Immediate cash flow:
After starting franchising business positive
cash flows is possible in a relatively shorter
time due to the already established fame of the
existing brand. It usually takes more than a
year to get the buildings constructed and a
proper set-up to be maintained which is
available beforehand in case of an existing
brand.
20
 CHAPTER 2

AN ANALYSIS

IDENTIFYING FRANCHISEE
ATTRIBUTES
C
hoosing the right franchisee is one of the most important
aspects of franchising. It involves a lot of interaction
between the franchisor and the franchisee followed by a
judicious decision by the franchisor. Though there are
various ways one can go about choosing a franchisee but a
franchisor should try and avoid those franchisees that meet only
a few criterion say for instance financial requirements but fail
to meet the other criterion that are equally important. He
should rather have a clear set of guidelines in his mind
detailing the characteristics/ attributes that a franchisee
ought to have. On studying the franchisees in India,
the following are the attributes of an Indian
franchisee taken into consideration:

AGE
Age is a significant factor that
a franchisor looks for in his franchisee. The
reason being it determines the mindset of a person.
The cognitive ability of a young person is very
much different from that of an old person. A young
person would have more of
energy, vigour and risk taking
abilities. While on the other hand, an
old person would be more complacent

21
and subservient in nature. He might also
lack the zeal to achieve more in life.
EDUCATION
Education may not be a determinant in a
business success, but it can be an essential
element in the overall combination of
factors. It is a commonly used selection
criterion to assess the likely future chances
of success of potential franchisees. However,
the franchisee should not be completely
ignored for lacking the education factor. The
educational background of the franchisees
in India is further classified into three levels:
■ Basic education or +2 level of education
■ Graduate level of education
■ Post-graduate level of education
It may be noted that having the level of
education is not just enough; having the
right kind of education is more important
and more desirable.
MANAGEMENT SKILLS
Franchisors tend to look for franchisees that
have developed certain business and
management skills. These skills assist in
dealing with people, leading a team,
communicating with others, managing the
operations etc.
WORK EXPERIENCE
Perhaps one of the basic elements that a
franchisee should have is prior experience. It
may or may not be in the related field,
though. This would give him an opportunity
to make use of his abilities which he had
learned earlier in his previous job. In
addition, it would also let him not commit
the same mistakes which every amateur is
expected to make on starting a new business
(franchise).
FINANCIAL FITNESS
Having adequate capital is necessary to
minimize the financial risk associated with
starting a new business. The franchisee
might be required to source any required
financing prior to and after the final
approval of the contract.
22
NETWORKING ABILITIES
The ability to network and to manage
customer and business relationships
effectively forms an important role of a
franchisee. Loyalty and trust are vital
features when it comes to managing staff
and customers. These need to be maintained
in order for the franchise business to
succeed.
MOTIVATION/FAMILY SUPPORT
A strong family support invariably (always)
acts as a stimulant for a franchisee to run his
business. It not only motivates him but also
helps him ease off his strain. The role which
a family plays in making a business a
successful venture can never be undermined.
RISK TAKING CAPACITY
A person may be a high risk taker but the
difference among the risk takers is that
whether the high risk yielded a return, it
may be a high return or a low return. One
needs to have the ability as well as the skill to
take risk.
ANALYTICAL ABILITY
It is the measure of the concentration and
specificity of the franchisee. If a person is
specific to every minute detail then there are
less chances of making errors or mistakes.
FAMILY BUSINESS
Family business can act as an asset while a
franchisee embarks on his journey as an
entrepreneur. The involvement of their
business ideas and thoughts and
communicating with them in respect to the
business challenges can sometimes do
wonders.
TECHNICAL SKILLS
Technical skills indicate the education of an
individual in specialized field like
Engineering, Law, Accountancy, Finance etc.
PROFIT ORIENTATION
What is the expectation of the franchisee
from the business? It is the return on the
money invested by the franchisee in the family support which he receives from time
business. to time.

A survey was run across on more than 1500 Age

Education Profile /Qualification A
franchisees and they were asked to rate these
Work experience
factors in their order of preference. These 12
variables were further classified or clubbed
Management skills
into 4 broad factors eliminating the Technical skills Skills B
maximum variance among them. These 4 Networking skills
factors will now help us decide which factor
is the most important for a franchisor to Financial fitness
choose his franchisee. Risk taking capacity Business expertise C
Profit orientation
Analytical ability
THE FACTOR ANALYSIS
The research has shown that there are four Family Business Inherent advantages D
broad attributes that are important for Family support/Motivation
becoming a successful franchisee. These Fig1: Factor Analysis
factors are the attributes that differentiate
one franchisee from the other. These four INITIAL EIGEN VALUES
major factors are then used to identify the Component Total % of Variance % of contribution
underlying variables on which to group the A 2.593 23.678 28%
franchisees. B 2.451 21.996 27%
C 2.317 20.284 25%
PROFILE/ QUALIFICATION D 1.784 10.247 20%
This includes age, education background Table4: Eigen Values for Factor Analysis
and the experience of the individual. The
education background is further categorized From the data analysis we have found the
into basic education, graduation and post- above values corresponding to each of the
graduation level. The experience of the component represented by the English
individual, be it in the same field or in other alphabets A, B, C and D. So we can say that out
also forms a part of this factor. of these 4 factors the franchisor will give 28%
importance to the franchisee's background
SKILLS details, 27% focus will be given to franchisee's
These are the attributes that can be regarded skills, 25% to business expertise and the
as the scaffoldings required by the remaining 20% to the inherent advantages.
franchisor for running the franchise. Therefore a franchisor can calculate the
Management skills, how motivated the franchisee's potential by the following formula:
individual is and the emotional as well as
financial support of the individual that he Investor Potential = .28 A +.27 B +.25 C +.2 D
received from family and friends. Key*
A - Profile/Qualification
B - Skills
BUSINESS EXPERTISE
C - Business expertise
This attribute includes the financial status of D - Inherent Advantages
the individual, his analytical skills, his risk
taking ability and his profit expectation from The franchisor's consideration for
the business. background, skills and business expertise is
almost the same. So instead of focusing more
INHERENT ADVANTAGES on any one of the factors the franchisor can
This includes the family business and the focus on all of them equally.

23
24
 CHAPTER 3

FRANCHISEE PROFILING:
A STATISTICAL MODEL

T
here are several ways to project the HOW TO USE THE MODEL?
long-term behavior of the As mentioned earlier, the variables used in
franchisee by using various the formula are to be converted to an ordinal
questions relating to the scale. There are three categories for the
psychological behaviour of the Investor. The previous occupation. The categorized
Model developed here has tried to analyze a occupations of the franchisee are:
franchisee on the basis of the most obvious
factors like age, education and previous Occupation Category
experience of the franchisee. Salaried employee 1
We have come up with the following equation
Self employed 2
from our analysis where y is based on the
future plans of the franchisee Student 3
Y=0.311 x1-0.273 x2+0.01 x3+0.232 x4 +0.084 x5
Similarly for the other variables they are
Where categorized as:
x1 is the previous occupation of the Previous relationship
franchisee
x2 is the relationship that the franchisee
Relationship Category
has with the franchisor
x3 is the years of operation of the No relation 1
business, if the franchisee is an Friend 2
existing one Relative 3
x4 is the present age of the franchisee Employer-employee relation 4
x5 is the educational qualification of the Repeat franchisee 5
Investor or franchisee

From the analysis shown above, the Years of operation of the business: (if it is an
previous occupation is the most important existing one)
factor in a franchisee's profile followed by the
present age of the franchisee. Years of operation Category
All the variables taken above are 0-1 year 1
considered in an ordinal scale. This formula 1-5 years 2
will help to analyze the riskiness of the 5-10 years 3
franchisee. It can be used to analyze a 10 and more 4
prospective as well as an existing franchisee.

25
Present age of the franchisee in the franchisors' business and provides a
potential risk.
Age Category
<20 years 1 ■ Franchisee starting own business: A
20-30 years 2 franchised outlet provides the proper
30-40 years 3 experience and exposure which is needed to
40-50 years 4 establish one's own business. Once you get to
50-60 years 5 know the nitty-gritty of an existing
>60 years 6 successful brand you gain the confidence for
establishing your own business and that's
what a franchisee does and provides risk to
Educational qualification of the franchisee the franchisor.
or the investor
■ Franchisees going into service sector
Qualification Category from franchising: A very rare possibility is
Matriculation 1 that the franchisee leaves the franchising
Graduate 2 business altogether and goes into a salaried
Post Graduate 3 job. It occurs very often with these
franchisees that have jumped from service
sector to franchising. Those who are from the
premier schools like IITs and IIMs are more
Replacing the variables that the franchisee likely to get a job which pays them more than
or the prospective franchisee has with the the franchise and hence move out to the
categories and substituting the values in the service sector.
model provided will give the riskiness score
of the franchisee. A franchisee with a After discussing various options in front of
higher score is always more desirable. the franchisees and analyzing their profile
mathematically, we can now divide the
franchisees into following categories:
FRANCHISEE PROFILING
The survey has shown that there are certain ❖ SWITCHER: A type of franchisee who
issues relating to franchisee retention. From will switch from the existing brand to a
a franchisor's perspective a long lasting franchise of some other brand. The following
relationship with the franchisee is the most are the characteristics of such a franchisee:
desirable aspect. Survey has shown that ◆ This franchisee is not satisfied by
there are a number of franchisees who are the growth opportunities, the
not interested in a long lasting business standards or the return on
relationship with the franchisor. investment provided by the
Based on the interviews and analysis, current franchise.
we came to know that the following are the ◆ They always crave for new ideas,
various options present before a franchisee want to set their own rules, keep
which make their retention by the franchisor looking for other opportunities.
a difficult task:
The major features of such franchisees
■ Franchisee leaving the brand and are:
taking a new brand: There is a trend that ✮ Age: The lowest range, the age
due to stagnancy in sales or the brand value bracket of 20-30 years.
going down, franchisees close their previous ✮ Education qualifications: Highly
brand franchisee and set up a new franchisee educated-Charted Accountants, IIT,
of some other brand. This leads to a decrease IIM graduates.

26
 ✮ Prior experience: In terms of prior brand. The following are the characteristics
experience they are quite at the of such a franchisee.
lower side. ◆ They want a safe business i.e., the
one they are already experienced
in and believe in.
◆ They make the franchising format
successful by reaping a good
amount of profit out of it.

The major features of such franchisees

are:
✮ Age: They are mostly in the late
years of their life, around 40-45
years of age.
Fig2: Age range of switchers ✮ Education qualifications: These
include lower education bracket,
those who work hard and strive to
prove their worth.
✮ Prior experience: They are
operating for a long period in
franchising and have gained the
tricks to become successful in this
business.

Fig3: Educational background of switchers

Fig5: Age range of loyals

Fig4: Previous occupation of switchers

The franchisor can retain him by providing

proper incentives, working environment,
variety in work and some amount of
flexibility.

❖ LOYAL: Those franchisees that will not

leave a franchise and will continue same Fig6: Educational background of loyals
brand and take other franchises for the same

27
 dire necessity like extreme losses.
◆ They want to get out of the system
and are trying to wrap up their
franchises.
◆ The major features of such
franchisees are:
✮ Age: The middle range, the age
bracket of 35-45 years.

✮ Education qualifications:
These include Post graduates
and graduates, who are
Fig7: Previous occupation of loyals qualified enough to take up a
salaried job and have earned
These are the most loyal customers for money and experience to start
franchisors and hence good prospective up their own business.
franchisors. ✮ Prior experience: They have a
fair amount of work-experience
❖ LEAVER: A third category is of leavers in franchising as well as other
who include those franchisees that will leave fields.
franchising altogether to start their own
business or become an employee of some A franchisor can't stop such type of
company. The following are the franchisees who have already made up their
characteristics of such a franchisee: minds to leave. These are categorized as the
◆ They have lost their faith in most risky franchisees.
franchising model or have some

28
 CHAPTER 4
FRANCHISEE LIFE CYCLE:
Key to franchisor-franchisee relationship
F
ranchisees move through
phases of growth,
development, maturity
and decline. This
lifecycle is same for most
businesses, however, in
franchising, the resources
available to a franchise
business network to plan an
inclusive offering is generally
able to ensure the ongoing
significance of the franchise
brand and franchise business
model, effectively extending the
business lifecycle and providing
longevity in the market.
29
An entrepreneur who has opted to
expand through franchise is like head
of the family wherein his
franchisees are his family
members. Unlike a family every
franchisee is different from the
other but share a common brand
and business model. The
franchisor & franchisee
relationship is always a matter
that requires regular attention
from both the ends.
To understand and explore a
franchisee franchisor relationship and
recommend best practices to be adopted
by a franchisor, we have to first
understand the life cycle of a
franchisee, his challenges and
30
apprehensions which depend on that fact that
in which phase of his business cycle he is?

FRANCHISOR SUPPORT
Franchisor's support to the franchisee makes
a big difference to the franchisee's own life
cycle. High levels of support early in the
franchise relationship will accelerate a
franchisee's growth and facilitate their early
maturation. Similarly, support provided by
franchisees to one another adds strength to
the franchise business network and also
assist in the early maturation of each other's
franchise businesses.
Fig9: The Franchisee Lifecycle
Franchisors usually find that the nature
of support provided to a franchisee during the
course of their lifecycle in the franchise SEARCH PHASE
business changes from highly technical and In this phase the unit is an entrepreneur and
operationally focused at the start, to he needs to go through the necessary
management, financial and marketing introductory stage to ascertain whether or
expertise as the franchisee matures. not this is the correct time, product, and/or
service to begin operating a franchised unit.
There are various ways in which an
FRANCHISEE LIFE CYCLE entrepreneur looks out for a suitable
There are five important stages in the life franchise. In India, most of the franchisees
cycle of a franchisee. These are: applied directly for the franchise through
■ Search phase Internet. A franchisee gets to know of the
■ Joining phase franchise through close friends, or close
■ Growth phase business associates. Around 20% of the
■ Maturity phase franchisees get to know of the opportunity
■ Closure phase or extended growth phase / through his brother or family members. A
Critical phase typical Indian entrepreneur rarely consults
an existing franchisee before taking the
decision.

R
E
V
E
N
U
E

TIME

Fig8: Franchisee Revenue vs. Time (General case) Fig10: Reference Sources for franchisees

31
 ■ Strong brand name is the luring
feature which attracts most of the
franchisees-so the first step for
every franchisor or every
businessman for that matter to
follow is brand promotion and all
other things will follow.
■ Websites of various brands are the
topmost resources which the
prospective franchisees use to gain
information about the brand and
franchise information.
■ Brand promotion events are also
ways through which franchisees
come to know about the different
brands.
■ Relatives and friends' advice who are
in the same business is usually
considered to be a reliable source.
Very rarely they contact the existing
franchisees of the brand to know about the
franchisor unless they are their relatives
having franchisees of the same brand.
Generally, this phase lasts from one month to
one year.
JOINING PHASE
In this phase the franchising deal is signed
between the franchisor and the franchisee.
This phase may last from one month to two
years depending upon the type of business,
the agency helping them to strike the deal
and the franchisee.
Generally, this phase is completed
within a short period of time in a
domestic/single-unit franchise and may take
longer in an international/multi-unit/master
franchise. This is the most potential stage
when the franchisee's enthusiasm is at its
peak. To help maintain the level of
enthusiasm, it is therefore advisable to strike
the deal in a short span of time.
GROWTH PHASE
The growth stage occurs from the time of the
grand opening generally through the first
year or two of operations. At this time, the
franchisee works very diligently in order to
32
develop a strong level of business
performance for their unit. The initial
business volume of the unit may be off and it
may require several months of diligent effort
to properly promote and develop. Other
organizations may begin very rapidly and
are forced to struggle to maintain a high
initial business volume. The growth stage
often levels off after a period of several
months or a few years.
MATURITY PHASE
In the S-curve, this phase appear when the
growth stabilizes. The growth has come to a
point when it is steady and the scope of
growth in the franchise is limited. The
franchisee will often meet with the
franchisor to discuss different products or
services which will enhance the volume of
the business.
The franchisee may seek to increase
the sales level through the addition of new
products or expanded services. It is this
phase when the level of franchisee
motivation could be significantly affected;
the volume of the business remains more or
less the same.
DECLINING PHASE
During the declining stage, the franchisee
generally starts to relax their compliance
with the rules, regulations, and standards
which have been established by the
franchisor. Franchisees who have become
dissatisfied with the franchisors often seek
to terminate the franchise. Alternately, the
franchisor may realize the problem and seek
to provide remedies as solutions.
The franchisor may improve the
communication and may be able to provide
greater services and more value to the
franchisee. The franchisor may develop
additional promotional, marketing, and
advertising programs which enhances the
franchisee's opportunity for success.
The franchisor then has the opportunity
to turn around the franchise business and to
instill within the franchisee, once again, the
 phase is very important. A franchisor could
invite them to participate in a bigger role in
the system and thereby satisfying their
entrepreneurial skills.
The franchisor should do everything
to make its star performer franchisee realize
that their role is of prime importance to the
franchisor, and that such an outstanding
performance is acknowledged and
appreciated by the franchisor. Following
Fig11: Fate of a franchisee after the declining phase
could be the possible initiatives
■ Elevating franchisee status to a
desire for mutual success and prosperity. master franchisee: Adding
responsibility of developing the
region and recruit individual
UNIQUE CASE franchisees under its supervision
Franchisee performing extraordinary by providing all training and
well during its lifecycle support they need would be an
Franchisees showing strong entrepreneurial incentive for the outperformer.
tendencies and doing extraordinary business Being a master franchisee is both
are a boon to the franchise but at the same time prestigious and it leads to financial
pose a challenge of retention in the system. independence.
These are franchisees whose performance is ■ Inviting them for policy making
much above the average franchisees and have process: The franchisor can invite
an exponential growth at this stage. The performing franchisees to
following figure depicts the stage in the contribute in the policy making
lifecycle where such a condition occurs. process of the whole system. It
would inculcate a sense of
responsibility; importance and
motivate them to explore their
potential.
■ Acknowledging the
performance & preferential
treatment: Franchisor should
acknowledge the performance of
his franchisees, especially those
who are performing
extraordinarily well. This
acknowledgement should be done
in the meetings in the presence of
all the franchisees. A preferential
treatment to the franchisee's
Fig12: Case of an Extraordinary Franchisee
requirement would be a great
motivation.
Life cycle of an extraordinary ■ Offering Shareholding: This is
performing franchisee is different and they the most important policy decision
become critical much before the declining for a franchisor, making its
phase (as shown in the figure) and require franchisee shareholder in the
special attention from the franchisor. company. If the franchisee
Identifying these players in the early growth becomes indispensible and

33
34
 demonstrates extraordinary
entrepreneurial skills, it becomes
crucial to retain this unit and the
entrepreneur in the system. This
unit later become a leader to other
franchisees in the system and may
soon consider detaching itself
from the system due to the simple
reason of higher aspirations,
lesser freedom and revenues or
better opportunities. At this
juncture offering shareholding in
the company would be an
appropriate solution and a Win-
Win situation for both the players.
Franchisor-Franchisee relationship:
Apart from the above mentioned suggestions
which are for an extraordinary performer
who need extra attention, there are certain
practices which a franchisor can do to
enhance and develop the franchisee/
franchisor relationship.
■ Sharing the Vision: Franchisor should
share the personal vision of opportunity and
success which the franchise system offers. A
franchisee being a family member of the
franchise system, deserve to be a part of the
vision, which will becomes a life-long project
for them. This vision should include a high
desire to receive the rewards of one's work.
This shared vision will become the focal
point of the franchisee/franchisor
relationship as they build to mutually
develop in a harmonious and successful
franchise experience.
■ Active Communication: A regular line of
communication from the franchisor acts as a
guiding light for the franchisee. They often
seek to develop new products or services
which might enhance the growth and
prosperity of the business. This
communication line would facilitate a bi-
lateral flow of information thereby
improving the franchisor -franchisee
relationship. This communication could be
in the form of mails, letters, newsletters,
conference calls, video conferencing etc.
■ Passionate marketing support: A
35
franchisee requires effective market
presence of the brand both on a local and
national basis. A balanced marketing and
brand positioning strategy would help
franchisee to reap the gains. Franchisor's
balanced strategy to address its national and
regional players equally is a fruitful
relationship building exercise.
■ "Total" Training Program: Training is
the fundamental ingredient of a strong
franchisee/franchisor relationship. Almost
all franchisees require initial training to
start the business. In addition, refresher
courses, as well as new training programs
should be provided to help improve the
abilities of the franchisees and the
franchisees' staff. Franchisees often are
desirous of obtaining self-improvement
programs for themselves as well as for their
staff. The franchisor should provide training
and improvement programs which will
enhance the abilities and capacities of the
franchisee.
■ Developing & sharing an aggressive
growth plan: Both the franchisee and the
franchisor desire the company to grow, albeit
some franchisees are ambitious and would
like to become multi-unit franchisees after
opening their first unit. They would like to
open a second or third unit in the same city
or state. Franchisor should be able to offer a
plan for growth so that they can induce the
enthusiasm of a vibrant and growing
organization in the franchisee. Growth is an
elixir to the desires and appetites of people
wishing to become better.
For a franchisor, it is important to
manage franchisee relations in order to align
their expectations and perceptions. Mostly
perceptions play their role in a different way
and higher expectations are not fulfilled
easily but a healthy and ongoing
communication with all other measures
mentioned above would help franchisor to
keep the francisee motivated and ultimately
lead to the overall growth in business.
 CHAPTER 5

FRANCHISEE MOTIVATION-
Understanding challenges 1

But with the passage of time, as the growth

Motivation in franchisee lifecycle of the business reaches the maturity phase,
A human being, at different stages of his life, the motivation level begins to decline again.
has different moods and motivation levels. This motivation level curve is applicable for
Sometimes he feels motivated to do most of the franchisees across all the sectors.
something great in life and achieve success. The reasons for such a changing level of
At other times he feels dejected. The motivation could be manifold and in the next
franchisee, ultimately, has human section we will discuss some of these.
characteristics and so his motivation level
undergoes various ups and downs. For
instance, the motivation level begins to INITIAL PHASE JOINING PHASE GROWTH PHASE MATURITY PHASE

increase during the initial phase when the

franchisee is on the lookout for a new
opportunity. After being in the joining phase
Motivation level

for some time, the motivation level begins to

decline. This is because it takes time for the
Motivation curve
business to breakeven. After crossing the
breakeven, the franchisee now begins to
make profits. This acts as a propeller and
brings him to the zenith of motivation level. Fig13: Motivation curve for a franchisee

1 All issues identified are based on from a primary survey and personal interviews with franchisees based across the country from all industry verticals.

36
❖ INADEQUATE COMMUNICATION ■ The first curve throws light on the most commonly
BY FRANCHISOR witnessed situation when the franchisor's support
As already stated the franchising business is decreases slightly and so does the motivation level.
a relationship between two parties and for Nevertheless, the franchisee is still able to maintain a
the success of franchising a proper certain level of growth.
communication and understanding is ■ The second situation arises when a lot of support is
required from both the sides. But the lack of provided from the franchisor's side and the franchisee is
effective, honest and open communication also motivated enough to keep the level of the sales and
leads to chaos and differences between the profit high enough. Though a slight decrement in the
motivation is observed when the business reaches the
two. For instance, often it is seen that the maturity phase and the sales become saturated.
franchisor doesn't communicate to the
■ The third case shown in the curve is a very avoidable
franchisee his decisions in respect to the
situation. The franchisor becomes complacent after the
contract, policies, royalty etc owing to which agreement and the receipt of a percentage of franchising
the business at the end suffers a setback. fees. He stops paying heed to the various issues of the
Hence, a continuous effort should be made to franchisee. Whereas the franchisee, being at the crucial
fix the communication breakdown, if it stage of his business, has to make arrangements for
exists. It should however be noted that opening the outlet, maintaining enough supply, managing
communication not only involves the passing the staff etc. During this phase he does not get enough
support and assistance from the franchisor
of the decisions but also motivating the
franchisee and exchanging ideas with him. During the launch, if he is unable to get a good business
Let us now be enlightened with the help of a which is quire possible then his motivation level is
decreased further. This acts as a disincentive effect
graph on how a good communication leading to a loss in business and finally in the depths of
channel can help a franchisee flourish. despair the franchisee decides to quit.

INITIAL PHASE JOINING PHASE GROWTH PHASE MATURITY PHASE

The repercussions of a situation shown in
2
part 3 can be fatal for the franchisor as well
as for the franchisee. A successful
Motivation level

franchising business requires the franchisee

1 to be motivated at every stage of the life-
Motivation curve cycle. For this a franchisor has to remain
alert and attentive towards the various
3
psychological needs of the franchisee.
Branding Agreement Launch Negative sales

Fig14: Franchisee classification based on Motivation levels The franchisor should -

■ Manage a line of communication
through various means like conference
In the initial stage of the relationship call, mails, personal visits etc.
between franchisee and franchisor the ■ Identify the stages where the franchisee
response by franchisor is at its maximum. He needs maximum support which
provides him all the required information normally happens to be just before the
and keeps visiting the locations till the launch period and after the maturity
contract is signed. Once the franchisor is phase.
assured of the agreement and royalty fee, the ■ Share success stories and sales data of
level of support provided by him decreases, other franchisees.
which leads to a slight decrease in the ■ Maintain a healthy relationship with
motivation level of the franchisee. So, from the franchisee through:
the point where the agreement is signed the ◆ Regular visits to the franchisee
curve splits into 3 parts. unit.

37
 revenue in coaching institutes to 7% in food
service sector and as low as 3-4% in retail.

Fig15: Maximum Royalty across Sectors

❖ STAFF TRAINING & ATTRITION

Staff attrition or turnover rate is the ratio of
the number of employees who left in the year
to the average number of employees in the
year, multiplied by 100. One of the biggest
issues franchisees face is to identify and
retain good employees. However, it is very
hard to attract new applicants if a company's
high turnover rate is a common knowledge
among people.

◆ Regular interaction with the

management team that takes care
of the individual franchisees.
◆ A consulting firm that will acts as
a facilitator between franchisor
and franchisees.
Fig16: Attrition Rate across sectors
❖ THE ROYALTY2
High royalty can severely affect the profits of He would be demoralized because he
the franchisee, especially during its initial would be compelled to pick up the slack of
years. And it will be the biggest hindering those employees who either left or were
factor during the maturity of a franchisee. terminated. He may also have to deal with
The percentage of royalty varies across the the stress of welcoming the new employees,
sectors from as high as 40% of the gross only to lose them a few weeks later.

2 Please refer the "Franchisee Survey" for details and suggestion for this issue.

38
 High turnover rate, on the other hand,
can be detrimental for a company too. It
interrupts the inner working of any
operation; it makes managing harder, and it
leads to exuberant cost. Restaurant attrition
rate is one of the highest in business, which
is why most dining establishments are
always on a hiring spree. They do not even
have proper training procedures but just
keep on employing new people.
Some restaurants lose up to 40 percent
of their staff within first 2 weeks of hiring.
The reason is that most of them (employees)
do not want to be a part of the unorganized
chaos which is often witnessed in food
industry. In addition, new employees feel that
they are being set up for failure instead of
success. Next to food sector is the retail
franchising where the attrition rate is close
to 30%. Both retail and food sector employs
low quality labor. The salary is also very
meager and almost the same for all the
brands. So there is a tendency to switch even
if a small increment is offered in any other
outlet.
Thus, it is very essential for a company
to leave a good and long lasting impression
on its potential employees because if the
employees do not feel themselves an asset,
then will go to some other better place.
❖ SHRINKAGE
A common problem that bothers the
franchisees the most is the shrinkages and
pilferages. It is the difference in the value of
stocks as per books and the value of actual
stock at the store on any given date. The
average shrinkage in the retail industry is
about 2% of the sales. Here are the four
major sources of inventory shrinkage in
retail.
■ Employee Theft: One of the biggest
sources of shrinkage in a retail
business is internal or employee theft.
Some of the types of employee theft
include discount abuse, refund abuse
and even credit card abuse.
Unfortunately, this is one important loss
prevention area that generally doesn't
receive as much monitoring as
39
customer theft.
■ Shoplifting: The second form of
shrinkage is shoplifting. Customer theft
occurs through concealing goods,
altering the price tags, or transferring
things from one container to another.
While shoplifting remains a smaller
inventory loss source than employee
theft, stealing by shoppers still costs
retailers a large amount of money.
■ Administrative Error: Administrative
and paper work errors make
approximately 15% of shrinkage.
Simple pricing mistakes can cost
retailers quite a bit.
■ Vendor Fraud: The smallest
percentage of shrink is vendor fraud.
Vendor fraud spans a broad range of
abuse - from fraudsters who create
fictitious companies and submit bills
for payment to trusted suppliers who
pad invoices and charge you more than
they are due. Vendors involved in
fraudulent activity may even collude
with your own employees to help them
navigate through your company's
internal controls.
❖ CANNIBALIZATION
Many franchise operations generally face the
issue of ‘cannibalization’, the tendency for
new franchise operations to become
successful, in part or in whole, merely by
‘stealing’ business from existing franchises
in the same market. It's an issue of vital
concern existing franchisees. Some
interviewees mentioned the competition
among franchisees of the same brand
resulting due to concentration of franchisees
in the same area/ region.
■ Case Study: An example showing how
to approach the challenge of
cannibalization is presented by a
Jamshedpur franchisee wherein 5
similar schools were opened by a single
brand in the same city. The school
brand X had only one franchisee owned
by Mr. A. in Jamshedpur in the year
2008. It was a famous brand, the
 franchisee was successful. The problem
started when the area developed
economically the franchisor allotted 4
more franchisees in the same region.
The revenue and profits declined
significantly for A and at one point he
had to face losses in the business too.
■ Solution: Mr. A handled the issue
tactfully and decided to have a meeting
with the other franchisees in the region
and suggested them to share their local
marketing costs and they also divided
their geographical territories.
So from then onwards admissions
were based on the residence of the student, if
the student was not in the defined territory
of one franchisee he was referred to the
franchisee nearer to the student's residence.
This was adopted by the other franchisees
40
and the competition reduced significantly.
Thus the issue of cannibalization can
be addressed decently by the cooperation
among franchisees. The franchisees, instead
of competing with each other could share
their operation costs and territories to make
a Win-Win situation for the brand.
❖ IRRESPONSIBLE FRANCHISEES
There are franchisees that compromise on
the quality of products and services in order
to reduce costs, harming the brand image as
well as other franchisees' business.
Franchisors provide standardized products/
services and detailed guidelines for
operations, but some franchisees do not
implement them thoroughly and
consistently primarily due to improper
training or they want to save on costs and
this leads to inconsistency in the operations.
 CHAPTER 6
THE INDIAN
FRANCHISEE SURVEY
ABOUT THE SURVEY
An extensive survey was conducted to
analyze an average Indian franchisee's
background which includes its age,
education, family background, average
royalty he is paying, his aspirations
regarding the business and loyalty towards
the franchisor.
These franchisees belong to different
sectors and geographical regions in India.
41
Major business verticals were food, retail,
education, real estate, telecom, financial
services etc. and franchisees from Metro
cities like Delhi, Mumbai, Bangalore, Tier-I
like Hyderabad, Ahmedabad Tier-II like
Jaipur, Indore, Goa and Tier III like Jodhpur,
Varanasi, Nasik etc were included for the
survey purpose. Apart from online survey,
personal interviews and telephonic
interviews were conducted to collate the
desired information.
 Some of the important brands who
took part in this survey were Subway,
Koutons, IMS, Kid-Zee, EuroKids,
Aptech, Veta, Sagar Ratna, Puma, Levis,
Raymond's, Bachpan, Liliput, Aditya
Birla Retail, Titan Industries Ltd,
Vodafone, Zee interactive learning
systems, Shaadi.com, Cox & Kings,
Reliance Money, Fab Mall, K Jewellery,
Educare, Aptech,
The following is the qualitative
analysis which provides the key insights
about franchisees in India:
Age Group 30-40 Years
❖ IDEAL AGE OF A SUCCESSFUL
FRANCHISEE
It is interesting to note that 18% of the total
franchisees were owned by investors
belonging to the age group of 20-30 years and
a major chunk of 48% of the franchisees
belong to the age group of 30-40 yrs, 22%
belongs to 40-50 yrs and only 12% were more
than 50 years.

Age Group 40-50 Years

Fig17: Age group of Successful Franchisee

■ An ideal successful franchise owner

belongs to the age group of 30 - 40 years.
■ The young franchisees being aggressive
and speculative in nature often feel
restrained by the rules & regulations
laid down by the franchisor. They desire
to start their own business after gaining
sect oral experience and this trend was
prominent in food service franchisees
as they believe the franchisor's
standards were stringent and acting as
hindrance to their business acumen. Fig18: Sector-wise age group

42
■ Next step of the analysis suggested in
the age group of 30-40 years majority
(40%) of the franchisees were in
education sector and the other
prominent sectors were Food & Retail
(total 40%).
■ The interesting fact about the older
franchisees owners of 40-50 years was
that 73% of this group prefers education
franchisee that too in pre- school and
primary school franchisee. Making
them an ideal target audience/ investor
for pre-school and other education
franchisors.
school/Primary education) franchise
hence should be given preference
among the other investors.
❖ IDEAL EDUCATIONAL
BACKGROUND FOR A FRANCHISEE
According to the survey, 54% of the
franchisees are post graduates followed by
graduates who constitute 31% of the pie.
Educational qualification

Recommendation
■ Ideal franchisee/ investor in franchise
business belong to the age group of 30-
40 years; therefore it is recommended
that a franchisor should prefer
prospective investors belonging to this
age group.
■ Older (40-50 years) investors have more
inclination towards education (pre- Fig19: Educational qualification of Franchisees

43
It is important to note that 58% of the specialization in finance, marketing,
postgraduate franchisee belong to operations retail and food technology.
management studies which includes
MBA/PGDBM or similar degree with Recommendation
■ Post graduate degree in management
creates good Franchisee/Investors. But
we would like add a caveat here; these
are the first to move out of the
franchisee system because they have
more options available. (Please refer
Chapter 3 for more details). A healthy
franchisor- franchisee relationship is
crucial to retain them.
■ Second biggest category is
‘professionals’, who are potential
investors in specific sectors like
pharma, financial services, technology
etc. For a franchisor from any of these
specific categories, it is important to
identify/choose investor from the
professional category.

Post graduate profile
Fig20: Streams of Post graduate franchisees
❖ FRANCHISEE ROYALTY
Royalty is the most important question from
a franchisor's point of view and is crucial for
the sustenance of a franchisee. Royalties are
paid for the continuous use of a piece of
work and it is in addition to any one time
initial fees. The payments are usually lower
than upfront fees since they are a continuous
regular expense. With regard to franchise
royalty payments, the franchisee
experiences daily sales as his or her main
source of revenue. However, the regular
monthly/quarterly income that the
franchisor earns is based on royalty
payments from each franchisee. The
recurrent royalty fees are the essence
contributions to the entire organization. The
payments are used to maintain the system
and ensure that all avenues flow smoothly
between the franchisor and franchisee.
It is difficult to find out the exact
royalties paid by the franchisees in various
sectors but based on the survey findings,
following chart would provide a fair idea
about the range of royalties paid in different
sectors. These royalties are based on the
brand value, location and industry sector.
It is quite evident that royalty range for a

44
Professional Coaching pan industry varies incentive to continue because he has already
maximum from as low as 10% to as high as gained the business expertise and the
48% of the gross revenue. On the other hand aspirations to earn more are higher. A
this fluctuation is less in other industry telescopic franchise royalty rate3 is
verticals. therefore suggested, for giving him a scope to
Recommendation increase the optimal revenue which will also
A business format franchisor's key part of act as an incentive for the franchisee to
revenues comes from franchise royalties, renew the contract. Adopting a telescopic
which are typically a fixed percentage of rate increases franchisor royalty revenues
franchisee gross sales/ revenue. and franchisee profits.
When a fixed royalty rate is used and
the marginal costs of operating the
franchisee system are increasing, the
franchisee does not have an incentive to
increase revenue beyond a certain ‘optimal’
value. Also after a certain time period
(saturation), franchise owner is not
motivated to renew the contract on the same
royalty rates, at this juncture he needs an

Fig22: Telescopic franchise royalty rate

❖ IDEAL TIME FOR CONTRACT

Fig21: Range of Royalty across sectors
TERMS REVIEW 4
The concept of franchising itself is new to
the Indian market. Majority of the
franchisees are within the first decade of
their operation. 52% of the respondents of
the franchisee survey were in their 1-5th year
of operation. This shows that the franchise

3 Gradual decrease in the royalty rate with the time

4 Based on primary survey findings

45
business model is in its nascent stage in the
country.
Years of Operation

Year-wise break-up

Future plans

Fig23: Years of Operation and Future Plans

Fig24: Year-wise break-up of 1-5 years of Operation

The interesting fact that came up in
survey was that out of those respondents who
were in their 1-5th year of operation 48% were
planning to setup their own business or want
to quit from franchise business model because
of the issues/challenges they have faced.5
Further, majority (38%) of the
franchisees who were planning their own
setup are in their 4-5th year of operation.
This shows that the franchisees are
becoming critical in their 4th to 5th year of
operations. This year of operation is hence
important for a franchisor to concentrate of
the relationship with its franchisee. This
could be the ideal time period to review the
contract terms to increase the franchisee
retention.

5 Please refer Chapter 5 "Franchisee Motivation: Understanding the challenges

46
❖ FRANCHISOR- INVESTOR
RELATIONSHIP
The survey came across a unique finding
that says that majority (64%) of the
successful franchisees have no personal or
professional relationship before they have
entered in the contract with franchisor.
It was also noticed during the interviews that
those franchisees that have any personal or
professional relationship with the franchisor
are less successful in business operations.
Previous Relationship
contract with them and franchising
business, deciding about royalty etc. is
all about negotiating.
■ The relatives and friends may not take
the terms of contract seriously and they
would take the business for granted.
■ It may lead to disputes in relationship
which is not good for either party.
❖ SALARIED VS. SELF EMPLOYED
Previous Work Experience

FUTURE PLANS
Relationship Change your Continue with Do not want Set up a new Total
franchisor same franchisor to disclose business
Employer-employee relation 25.00% 10.00% 25.00% 28.60% 20.40%
Friend - - - 9.50% 3.70%
No relation 25.00% 80.00% 50.00% 57.10% 63.00%
Relative - 5.00% 12.50% - 3.70%
Repeat franchisee 50.00% 5.00% 12.50% 4.80% 9.30%
Total 100.00% 100.00% 100.00% 100.00% 100.00%

Out of those who are planning to continue
80% are not related to the franchisor while
only 5% were the employees of the
franchisor. Similarly among those who want
to start their own business 50% were
employees of the franchisor. So, it's not a
surprise that franchisors should be are
giving their franchises to those who are not
in any way related to them.
During the discussion with
respondents we have found that doing
business with relative or friend is never a
good choice because:
■ You will not have a properly negotiated
From the survey, 70% of the franchisees were
salaried employees earlier. So it is quite clear
that salaried employees are more attracted
toward franchising business model as
compared to businessmen or fresher.
The reason is that the salaried employees are
risk-averse and they are comfortable
working in a set up where system is set.
Recommendations: While selecting a
franchisee, the salaried employees should be
given preference over non-salaried ones
because they will not take the risk of
starting their own venture.

47
 CHAPTER 7
TRENDS, OPPORTUNITIES
AND FUTURE PROSPECTS
M
ore than eighty percent of the
respondents interviewed are
looking for an expansion of
their operation. The survey has
shown that a franchisee who owns an outlet
would like to expand the business by taking
another franchise from the same franchisor,
from a different franchisor. Thirty-eight
percent of the interviewees indicated that
they would like to expand mainly through
self-owned outlet while preserving the
existing franchise. Another thirty-four
percent of the franchisees interviewed
would like to continue with the same
franchisor. At the same time they would like
to increase the number of outlets from the
same franchisor. In sum, the growth of the
number of self-owned outlet would be faster
than a franchised outlet in the next few
years.
6 Franchisor acquiring the franchisee
48
The survey also shows that there are
instances where there is forward
integration by the franchisor. Franchisees
6
located in prime locations and in metro cities
are more prone to a being bought back.
Even though majority of the
franchisors provided standardized
procedures and detailed standard operating
procedure, standardization is not
implemented thoroughly across the
franchised outlet. There is need to ensure
that the operating procedure is standardized
irrespective of the type of business the
franchise deals with. In terms of the end
products or the service rendered, it can be
either customized or standardized. In food
and beverages franchise, customized
products are catching up fast. In education
sector where the materials are standardized,
customized material for the student creates a
whole new opportunity of standardized
operation with custom products.
The industry has a strong growth
momentum and most franchisees are quite
confident about their growth prospects.
Therefore, we have reasons to expect that
franchising in India will continue to grow.
 APPENDIX
A typical Franchise Policy in
India (Courtesy Sagar Ratna) 7
A
modest effort that started in 1986
spiraled to a revolutionary style
growth in culinary delights. Sagar
Ratna restaurants have made a
place for themselves due to popular demand of
a "branded" quality and menu. The reputation
carries the revolutionary vision and drive of
the legendry Jayaram Banan whose touch
endorses the Sagar Ratna quality.
Sagar Ratna the flagship outlet at
Defence Colony in the capital of India started
with a 40 seat south Indian restaurant with the
simple philosophy based on honesty. Today the
ever growing demand has translated into 24
outlets in and around Delhi and 29 Franchise
outlets in India and 1 outlet outside India
offering a range of multi cuisine options boast
the Jayaram touch.
Having won every laurel, every
respectable mention in the world of
Gastronomy, the legend proceeded to the finest
chain of fine dining restaurants with
honourable mentions in the media,
newspapers and amongst the highest circles.
BASIC REQUIREMENTS
Space:
Approximately 5000 square feet in popular
commercial zone preferably ground floor and
ample parking space.
Experience:
Basic knowledge of catering and aptitude for
hard work. Transparent business ethics.
Investment:
Largely dependant on city and class but
7 http://www.sagarratna.in/Franchisee.php
49
approximately Rs. 52-60 lac.
OBLIGATION OF SAGAR RATNA
■ Sagar Ratna will allow the use of its
brand name as per usage Manual
■ Give complete know-how for set up of
Restaurant
■ Provides specialty raw materials on
chargeable basis a per rate schedule
OBLIGATION OF FRANCHISOR
■ Entire investment of construction,
interiors, air- conditioning, Kitchen,
Fixtures, gadgets, equipment, appliances,
cutlery, linen in accordance with the
specifications stipulated by Sagar Ratna.
■ Procurement of perishables like milk,
vegetables, Groceries as per
specifications provided.
■ High standards of cleanliness in kitchen,
toilets and restaurant shall be
maintained along with pest control as per
our schedule.
■ Shall observe and comply with all the
rules and regulations of the shops and
establishment Act, Entertainment Act
and regulations that may be applicable by
law from time to time, including
obtaining licenses as may be required in
the state.
■ Manpower/ Management shall be on
Franchisee's roll and all related laws shall
be honoured in respect of payment of
salaries, EPF, ESI, Bonus, Gratuity,
Compensation & minimum wages act as
may be applicable from time to time.
Sagar Ratna will bear no responsibility
 on this behalf.
■ Uniform to be provided to staff as per our
specification and design manual.
■ Shall personally be liable for the quality
and purity of ingredients used for the
preparation of Food and in case any
adulteration or defect found used in the
preparation of the said food, the
Franchisee is personally be liable for civil
and criminal action under prevention of
Food & Adulteration Act 1954.
■ The Franchisee shall nominate one of
representative as per the requirement of
Food & Adulteration Act 1954 for this
purpose
■ The Franchisee shall be responsible for
operational expenses for running the
business, staffing and maintain adequate
manpower.
■ Shall be responsible for collection and
timely deposit of sales Tax/other
applicable taxes.
■ Shall maintain books of Accounts as per
the requirements of Sales Tax/Income
tax and other Government bodies.
■ The Franchisee shall provide bank
Guarantee for Rs. 5 Lakhs at the time of
signing the Franchise agreement.
ROYALTY/MONETARY IMPLICATION
An amount of Rs. 15lacs plus applicable
service tax will be paid as reimbursement for
staff training expenses at the time of signing
the agreement. 15.00% recurring royalty plus
service tax as applicable, will be payable
monthly on total net sales inclusive of outdoor
catering, counter packing, home delivery
(exclusive of sales tax).
GENERAL
■ The duration of Agreement is initially for
a period of 10 years renewable for a
further period on mutually agreed terms.
■ The name of the restaurant "Sagar" or
"Sagar Ratna" is exclusive Property of the
Franchisor, and the Franchisee has no
Lien on it. On Expiry of/ termination of
the Franchise agreement the Franchisee
can not use identical names or their
likeliness their-of what-so-ever.
50
■ The Franchisee or their associates are
restricted to open on their own any other
similar outlets in the same city or other
cities in any part of India.
■ The Menu rates decided by the
Franchisor can not altered by franchisee
without authorization
■ Sagar Ratna has the right to inspect all
books of accounts by its authorized
representative.
■ Sagar Ratna has the right to inspect all
food items and raw materials through its
representatives and point out deficiencies
for correction at all times.
■ The Franchisee cannot ever represent as
the Franchisor to any Government or
other body or individual what so ever for
any business promotion or otherwise
without written authorization.
■ Any amendment to Franchise agreement
has to be in writing with the endorsement
of both parties.
■ Any disputes/or differences arising
between this agreement shall be settled
by arbitration in accordance with the
provisions of the Indian Arbitration Act
1940 as amended from time to time.
■ The agreement can be terminated by the
Franchisor in the event of any violation
of the clauses by issuing one month
notice.
SITE VISIT
If the Franchisee is satisfied with the above
terms & conditions and desires to take up the
Franchise, then he shall arrange for the site
visit of Franchisor or their authorized
representatives for final approval of the site.
Before the site visit the Franchisee shall
arrange to deposit with Franchisor a Demand
Draft for Rs. 30,000.00 drawn in favour of "M/s.
Sagar Ratna Hotels Pvt. Ltd." payable at Delhi
towards travelling/Incidental Expenses on site
visit. It is optional on part of Franchisor either
to approve or disapprove the site depending
upon the requirements of the business. In case
the site is disapproved for any reason the site
visit fee of Rs. 30,000.00 paid is not refundable.