How to Start a Veterinary Franchise Business in India
What is a Franchise Business ?
A Franchise Business is one which you’d buy from somebody who has an established success formula that gets you to churn out profit by using their brand name and systems. This somebody is called a Franchisor who helps you build the business from the ground up by providing you with a well defined business process, the product or service that you will be selling, training, recruitment, marketing, and various other kinds of support needed to ensure smooth running and sustainability of the franchise business.
In exchange, the franchisor asks you for an initial franchise fee and an ongoing royalty (profit sharing) while running the business apart from the capital investment you put in to start the business which can vary depending upon the brand, the location, and most importantly, the products/services being offered by the brand.
How Different is A Franchise From A Distributorship, Agency, Dealership?
They are all similar in the sense that they all involve channel partners who perform functions as intermediaries between the producer and the consumer. Franchising however is the most advanced form of this distribution as it has pretty much everything defined and is not limited just to selling or transfer of the product or service from the producer to the consumer.
Let’s understand Franchising better by looking at an example :
If you decide to explore a food franchise in India and a Subway franchise in India, matches your interests and investment level, then Subway becomes the franchisor who will provide you with the necessary documents and manuals to define the business process, to help you recruit and train your employees, and will take care of marketing in your area to get you hungry customers craving for some delicious subs and sandwiches!
In exchange, the total cost of subway franchise in India will involve a sum of capital required to set up the Subway franchise outlet, an initial franchise fee set by the Subway management and a recurring royalty fee as you run the operations.
Running a franchise business might look lucrative at the outset but a lot goes into it to make it a successful one. In general, franchising involves a business owner or the franchisor licensing to a third party or the franchise, the right of operating a business or distributing the goods or services using franchisor’s brand for an agreed time period in return for a fee.
The Franchise Models in India
Franchise Models are nothing but a certain way in which a business is operated in the industry. It is away for brand owners to define the stakeholders and their involvement in operating the business. Let’s get to know them a little better :
FOCO – Franchise Owned Company Operated, where you invest in the business while the company takes care of the operations while giving you a fixed percentage/share of return. The ROI from this model could be as good as keeping your money in the bank with slightly higher returns.
FOFO – Franchise Owned Franchise Operated. This is the go to franchise business model for brand owners who are taking the franchise route for their expansion. FOFO is where you own and operate the franchise business as per the directions set by the franchisor and the returns are slightly higher than the FOCO model.
COFO – Company Owned, Franchise operated. This is where the company invests in the franchise business but you operate it as per the directions set by the brand. The returns for this can lie somewhere between the FOCO and FOFO model. This is rare and not very prevalent in the industry because most companies investing in the expansion of their business operations would prefer to run it on their own.
The next model is the COCO model – Company Owned and Company Operated, where the company owns and operates the business and does not have to do anything with franchising.
Even though so many different franchise models exist in the world of franchising, you don’t have to get confused at all as most of the franchise businesses that you see around you, work only on the FOFO model where you get to own and operate the franchise business you’ve invested in while getting the necessary support from the franchisor.
Steps to Start a Franchise Business
Step 1: Reaching out to the chosen Franchisor – You should bear in mind that every franchisor has different requirements in terms of documentation, fees, and business arrangements. Even if details are provided on their website, there might be other information which isn’t disclosed and talking to the franchisor directly would help you to keep yourself informed.
Step 2: Preparing and arranging the requirements – This is a crucial step. The requirements which you would be asked to provide could dictate whether or not the franchisor would approve the franchise application, so you must give proper heed to this step. Most of the franchisors have defined a set of requirements. However, below are some of the documents which are most common:
- Franchise application form completed in full, which you can find on the franchising company’s website. In case the form isn’t available, one could contact the company and get the same.
- Letter of Intent (LOI), which states the reasons for applying for the said franchise.
- Map of your proposed site of business. You could do it with the help of maps and you should also attach the pictures of the actual site too.
- Your updated resume/profile.
- At least two valid government ID proofs.
- If you would be renting the space for the business site, the lease contract or the written agreement with the lessor also needs to be provided.
- Latest bank statements.
- Taxpayer’s Identification Number (TIN).
Step 3: Meeting your Franchisor – This is yet another important step. Meeting the franchisor is the step where they assess your application and confirm if it’s good to go. Franchisors would assess whether you’re a good fit as their business partner.
Step 4: Signing the Franchise Agreement – Finally, if you have passed all the steps, you’re on the way to become a franchise. Don’t be too excited. Here, you should heed much-needed attention and review your Franchise Agreement before signing the agreement. You should pay attention to the key details as mentioned below:
- The franchise term, including the renewal term and costs for the same.
- Costs and fees such as the franchise fee and royalty fee.
- Grounds which might lead to termination of Franchise Agreement.
- Inclusions and exclusions in the franchise package.
- List of franchisor-approved products and suppliers.
How Quickly Can Your Franchise Business Become Profitable?
This is a question which crosses every franchise owners’ mind and it’s a crucial question too. After all, you have invested in your franchise and you are waiting to reap rewards. There are many factors at play when it comes to profitability. Some of the key factors are:
- The type of industry you’re inThere are several different industries where you could get into a franchise business, and within those, there are various subsets. Some types of franchises such as the home-based ones don’t require much overhead and could be profitable much faster than the retail businesses. The retail stores which require you to have a good amount of inventory at all times would require heavy investment for starting the business.
- Financing your franchise businessThere are various franchise financing options available to individuals looking to buy a franchise. When you go for finance, you are bringing in extra costs to your mix. The principal amount along with the interest (in case of loans) might make it longer for you to break even and start profiting.
- Who would run the franchise?There is a big difference between the owner-run franchises and a manager-run franchise. Both of them have their own pros and cons. While you are calculating when you would become profitable, you should also consider the financial burden which comes with a manager/human resource and also the opportunity cost in case you decide to oversee the franchise business yourself.
- Understand the bottom lineMost of the franchise owners who are new to franchise ownership believe that profits which are made from their franchise business are turned into personal income instantly. This is far from the truth. There are also taxes on business profits, loan repayments, and also frequent capital expenditures, which needs be paid before the owner could pay himself. Once all this is paid for than the franchise owner has his own income generated by his franchise business.
- Knowing your business goalsA quick profit is not always the right business goal to go after. Your equity grows over time in a franchise. In case your goal is to sell your franchise, looking at the profits may not be as rewarding as you may think. Looking at a net worth of your franchise in your market would be a better indicator of how soon and how much you’ll profit. With several variables, it is not possible to ascertain when you would turn profitable after getting into a franchise business. Still, keeping aforesaid in mind could help you in having a better idea of when you would get into the green zone from red.
Legal aspects
The franchise sector in the Indian context is at an emerging stage and there’s no specific law relating to the franchise business in India, and as such, it touches various industry-specific and business laws within the country. Franchising is governed by several statues and rules and regulations. Some of the key ones as described below:
- The Contract ActThe Indian Contract Act, 1872, governs the contractual relationship between the franchisor and the franchise.
- The Consumer Protection Act The Consumer Protection Act, 1986 provide remedies to the consumers in case of any defects in products or services and holding the producer/service providers liable.
- The Monopolies & Restrictive Trade Practices Act, 1969The MRTP Act prohibits the imposition of restrictions with respect to the pricing of products and sources of supply. It should be ensured that the franchising terms of agreement monopolistic or restrictive. The MRTP Act also requires registration of the agreements which could include restrictive trade practices. The ones relevant in the context of the franchising setup include exclusivity in product dealing; exclusive supply provisions; resale price-fixing conditions and restrictions on methods used.
- Competition Act, 2002Following the globalisation of the Indian economy, the competition law has shifted the focus from restricting monopolies to encouraging healthy competition. Some of the provisions aren’t effective yet. However, provisions relating to anti-competitive agreements as well as abuse of dominant position have come into force.
- The Trademarks Act, 1999The Trademarks Act provides the rules and regulations with respect to the registration of trademarks as well as service marks.
- The Foreign Exchange Management Act, 1999FEMA and relevant rules and regulations oversee the payments in foreign exchange. Franchising arrangements usually include payments such as a franchise fee, royalty payments for use of system and trademarks, advertisement contributions, and training expenses, which could be remitted to a foreign franchisor.
Taxation
Where a franchisor receives royalties, franchise, or service fees, tax needs to be paid under the Income Tax Act, irrespective of the fact whether the franchisor is an Indian or a foreigner. According to Section 9 of the Income Tax Act, certain income such as interest and royalty are deemed to arise and to accrue in India under specified circumstances.
Business profits under the franchise business are taxed up to 30%. There’s a withholding tax on fees for technical services and the prevailing rate is 10%. However, it’s subject to the relief provided under a tax treaty, if any.
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