The essence of franchising is that a company (franchisor) transfers to an individual or another company (franchisee) the rights to sell its services or product.
In this case, the latter assumes the obligation in the sale process to be guided by the laws and rules described in the contract. For this, the franchisee receives permission to use the name of the company, as well as its reputation. In addition, he has access to marketing technologies and support mechanisms.
The franchise agreement stipulates that the franchisor is paid a down payment. In the future, the franchisee makes certain payments every month according to the agreement. This is a kind of lease, where the lessee is not the full owner of the trademark. He can simply use it as long as the rent is paid.
Examples of world-class franchising
A prime example of franchising is McDonald’s. Thanks to this system, she managed to achieve great financial success and reach a leading position in global business. In the United States, about 80% of the restaurants included in this chain belonged to a franchise, while in Europe this figure is 50%.
The founder of the modern franchising system is Isaac Singer, who founded the world-famous Singer Sewing machine company.
Advantages and disadvantages of franchising
Like every way of doing business, franchising has its pros and cons.
- The entrepreneur who purchases a franchise is given all sorts of assistance. These include useful advice and supplies of raw materials and consumables. But all this is only an addition to the fact that it is possible to use a brand that is already promoted on the market. This means that there is no need to use marketing programs necessary at the start.
- The organization of franchising implies the holding by the franchise owner of thematic consultations on doing business. It helps to establish relationships with regular suppliers. Gives advice on marketing organization, service tricks and much more. This means that the entrepreneur will not have to re-invent the wheel.
- The procedure for obtaining loans is simplified. The role of the franchise owner as a guarantor for PR and brand promotion significantly strengthens the position of the loan recipient.
- It is enough for an entrepreneur to have certain work experience and knowledge in the field of management. True, it will not be possible to do without investing money here, but they will be spent on developing their business.
- High level of confidence in financial forecasts. Entrepreneurs who start their business from scratch can hardly predict the level of income with confidence. And the advantages of franchising are that there is a huge amount of information about an established business, which allows you to accurately predict prospects.
- There is no need to spend a lot of time studying the market. After all, it is provided by the owner of the franchise in an assembled and systematized form. It remains only to use it.
Now let’s move on to the disadvantages of franchising:
- The main disadvantage of the franchise is the need for initial capital. Costs include a lump sum, royalties, finance to start a business. “Young” franchises most often do not require a lump-sum fee, only the initial capital of a certain amount to start a business. This is what scares many entrepreneurs, forcing them to engage in individual activities. So, for example, at MTS, the minimum investment amount was about 760,000 rubles to open one service and sales point.
- Complete dependence on the brand. This means that in the event that the franchisor incurs losses, the franchisee will also suffer losses. And this is very unpleasant.
- The need to fulfill the obligations assumed. This refers to the nuance that the entrepreneur will have to share personal income with the franchise owner. Most often, this rate is less than 10% of revenue, which is quite acceptable.
How does a franchise open
After deciding to purchase a franchise, specific steps must be taken to create a business:
- Choosing the legal form and registering the business with government agencies.
- Choose the optimal form for taxation.
- Order a print and open a current account.
- Create a commercial concession agreement with the franchisor.
- Study the franchise package, get advice on starting a business.
- Start a business according to the franchisor’s recommendations.
Learn more about the franchise agreement
The franchise agreement is one of the most complex in the commercial environment. A properly drawn up document takes into account the interests of both parties, giving them certain advantages. When drawing up, a large number of factors must be taken into account.
The right holder (franchisor) and the user (franchisee) participate in the conclusion of the contract. A trademark, technology, brand, as well as many other things that fall under the concept of franchising, can become the subject of a contract.
Rights of the copyright holder and his obligations:
- Presence of a registered trademark.
- Ensuring that the franchisee receives documentation, both technical and commercial, as well as any other information that he may find useful.
- Conducting detailed briefings for both the franchisee and the entire staff of its employees on any issues related to the observance of their rights.
- Registration of a commercial concession agreement with state authorities.
- Providing ongoing assistance to franchisees in both technical and advisory terms. Here we are talking about the training of employees and the creation of appropriate conditions for improving their skills.
- Control over the quality of work to start and run a business.
Rights and obligations of the user:
- Use the trademark, service mark or other means of individualization of the franchisor in the course of the activities indicated in the contract.
- To guarantee the proper quality of the work carried out, the goods produced. It should be similar to that provided by the copyright holder.
- Strictly follow the instructions, as well as instructions aimed at ensuring that the activities of the franchisee are in line with the business model of the right holder.
- Ensure that all additional services provided by the copyright holder are provided to buyers or customers.
- To refrain from disclosing trade secrets and any other confidential commercial information obtained from the trademark owner.
- Strictly comply with the clause of the agreement regarding subconcessions.
- If necessary, inform buyers or customers that the use of a trademark, commercial designation, service mark is in full compliance with the agreed terms in the commercial concession agreement.
After the contract is drawn up, it is signed by both parties.
Franchise Selection Rules
First you need to get the maximum amount of information about the time the selected company has been on the market, the dynamics of its business development. It is also necessary to learn about what is being done to combat seasonal downtime, which affects almost any business. If the company is very young, then it is worth considering the expediency of cooperation with it.
It is well known that serious companies start trading in franchises not earlier than 1 year has passed from the day the business was launched. You can request information about entrepreneurs already cooperating with the franchisor and communicate with them. It will also help to make a decision on the expediency of cooperation.
It is mandatory to ask for all legal documents confirming the franchisor’s authority to own the trademark. It is also recommended to familiarize yourself with all licenses that give the right to carry out a particular type of activity.
The cost of a franchise – what does it depend on
For anyone who decides to buy a franchise, it is of great importance to find out how justified its cost is. To understand how the named price is adequate, it is necessary to find out on the basis of what it is formed.
The value of the franchise is influenced by 3 main aspects:
- The amount of the lump sum. This name is given to a one-time payment for obtaining a license that allows you to operate under the brand.
- The amount of royalty. This indicator is fixed as a percentage. Charged on total turnover or margin. In fact, this is a periodic tax collected by the franchisor for using the brand.
- Costs that are incidental to the process of working with a trademark. These are the investments of the franchisee, which are necessary for business development, capital and operating costs.
The amount of royalties can vary from 1% to 10%. It depends on how widespread the brand is. Accordingly, promoted brands take a larger percentage. The main question to be answered is how commensurate are the interest paid to the franchisor with the assistance provided to them.
The cost of a franchise may depend on the following factors:
- From the type (form) of franchising, there are golden, rental, licensed, banking types, and so on.
- The level of socio-economic indicators of the region where it is planned to be implemented.
- Presence of partners who carry out activities under the brand name of the same franchisor.
It can be concluded that it is impossible to name a specific scheme that allows you to calculate the cost of a franchise. Since the evaluation criteria can vary significantly. One thing is certain: a more well-known brand will have a more expensive franchise.
What are franchises
This type of business activity is used in a wide variety of areas. Specialists have about 70 business areas in which franchising is possible.
Examples of franchising where it is more profitable to develop:
- In networks that include retail supermarkets, as well as retail outlets (business retail).
- Public catering. This section includes restaurants, cafes and other food outlets operating under well-known brands.
- Manufacturing that specializes in the production of products. It can be a bakery, an ice cream shop, lines for the production of crackers, chips, beer and other popular products.
- Everything that has to do with the beauty of a person and his health. You can open fitness rooms, spas, points selling sports attributes.
- Registration of microfinance organizations and pawnshops under a well-known brand.
- Opening, organizing and launching a construction business.
- On the Internet: opening branches of popular online stores in the regions.
This, of course, is not a complete list of areas in the franchising market that are considered promising. Of course, there are a huge number of other niches where the development of franchising can bring significant profits.