How does a franchise work: concept, conditions for purchase and features

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Beginning entrepreneurs who decide to start their own business have to face many problems and difficulties. Often they lead a seemingly promising idea to collapse. A good option in this case may be to work on a franchise, which is a collaboration with a successful company. This type of business is in high demand in developed countries, where more than 30% of trade and service establishments operate using such a system.

Definition of concept

What is a franchise in simple terms? Such a business scheme means maintaining a special kind of business relationship of an entrepreneur with a company that is successful in the market and has its own brand. That is, a franchise is a long-term lease of a business project. It provides for acceptance of the terms and conditions of the firm that owns the trademark.

You can work under a franchise only if you draw up a special contract. This document provides for the provision of a whole range of services that greatly facilitate the start of an entrepreneur who, after signing a deal, has the opportunity to use the working style of a well-known brand, its name and attributes, branded compositions and recipes, service and work technology.

There are franchise firms in Russia too. Moreover, such a system of business vision in the domestic market of services and goods is currently developing at a fairly rapid pace. Based on statistics, franchising allows an entrepreneur to make a good profit not years later, but already a few months after the start of activity.

Basic concepts

What does it mean to run a franchise? An entrepreneur who has chosen just such a scheme to conduct his business should understand that after signing the contract, he becomes part of a large trading network. For example, McDonald's. And in his future work he will be the representative of this business.

In this type of cooperation, all relations are built between two parties, which are:

1. Franchiser. This is the direct owner of the brand. He implements a license that allows him to work on his behalf and under certain conditions, and also dictates to the entrepreneur the style of behavior, business model, consults on emerging issues.
2. Franchisee. This is the buyer who gets the righttrademark use. The franchisee conducts all his affairs only on behalf of the seller, using his model of behavior, commercial designations, taking into account certain guidelines from the owner of the trademark. In addition, the buyer pays the company a certain fee for using its brand.

What are the basics of running a franchise? The buyer is required to successfully conduct business on behalf of the trademark owner, follow his instructions and maintain sales. Such a business in most cases is the most profitable.

Franchise and franchising

A novice entrepreneur should understand that there are some differences between these two terms. And this is despite the fact that both of them are actively used in such transactions. Nevertheless, the principle of the franchise is based on the acquisition of rights, equipment, recipes, etc. on a long-term lease. Franchising is a different concept. It denotes the process of buying a long-term lease. That is, this is a way of doing business in which a production technology or a trademark is acquired, a branch of a well-known brand is created with appropriate staff training. You can often come across such a concept: “franchising package”. It refers to the materials, manuals and documentation that belong to the company.

Types of franchises

Doing business with a well-known brand name can be done in a variety of ways.

That is why several types are consideredfranchises, which have some differences from each other based on the terms of the transaction, as well as the interest rate for using the brand. Among them:

1. Free. Such business schemes are the most popular option. What does it mean to operate a freelance franchise? The conditions of such transactions allow the entrepreneur to introduce his own innovations in project management. A free franchise is characterized by a relatively small monthly percentage of income deductions, the possibility of using a trademark, free interesting master classes and other privileges. The conditions of this franchise are more than any other reminiscent of a dealership.
2. Classic. How does this type of franchise work? The transaction with its use provides for making an initial contribution, compliance with the rules of the trademark, as well as the provision of periodic reports on its activities to the head office of the company. When acquiring this franchise, clear conditions are dictated to the entrepreneur, and all his work must not go beyond the strict limits set by the franchisor.
3. Business for rent. What does it mean to operate under this type of franchise? In this case, the entrepreneur receives a business project in his own management for the period specified in the contract. Throughout this period, the income received must be distributed based on a preliminary agreement.
4. Gold. How does this type of franchise work? This option is suitable for experienced businessmen. When concluding such a deal, the entrepreneur becomes the sole representative of the brand in a certain region. In cases where the down paymenthigh enough, the franchisee gets great opportunities and broad rights to manage the project. This includes the possibility of selling franchises to other entrepreneurs.
5. Silver. This type of franchise is the most convenient. In this case, the selling company creates a new project. She also finds a room for rent, looks for staff, and also solves all the necessary organizational issues. The business is transferred to the buyer on a turnkey basis by concluding an agreement with him, which indicates the amount of monthly payments. The company itself is removed from the leadership.
6. Corporate. With such a franchise, almost all the actions of the franchisee are controlled and regulated by the company. She in this case manages all the work.
7. Import-substituting. How does this type of franchise work? When acquiring it, the entrepreneur will have to produce high-quality products that are analogous to branded ones. In this case, you should use your name. The seller in such cases provides all the necessary instructions and descriptions of technological processes.

How does it work?

A franchise is nothing more than a completely finished model or plan for running a business project. Thanks to its acquisition, the entrepreneur will not have to waste time solving various organizational issues. This option benefits both parties. Acquiring a franchise allows a new owner to receive support and support. At the same time, he can start working without an impressive start-up capital, leaving up to 90% of the profit in the first month.

Such a deal is beneficial for the brand as well. After all, a company that sells a franchise receives a stable income in the form of:

1. Initial one-time lump-sum fee payable after the conclusion of the contract. Payment of this amount gives the entrepreneur the right to open a business project using a well-known trademark. The lump-sum fee includes the costs necessary to start, set up a new enterprise and equip it with equipment.
2. Roy alties. This income represents a certain percentage of the total turnover. As a rule, the entrepreneur pays such a payment to the franchisor's account on a monthly basis. Its size is within 5-10% of the profit received. Roy alty is a kind of replacement for rent. For example, when opening a clothing store, how can an entrepreneur work as a franchise? This line of business involves the regular purchase of goods from the franchisor for a certain amount. Such actions replace roy alties.

How does a franchise work? When drawing up the contract, it indicates one of the payment options (roy alties), which for many franchisors providing services or engaged in trade, are the main source of income. Among them:

• percentage of product sales;
• set amount of payments to be made either annually or quarterly;
• trading margin that increases the cost of branded goods sold by franchisees.

As a rule, the amount of mandatory payments is quite acceptable for a beginnerentrepreneur. At the same time, the popularity of the brand helps to attract customers, which allows you to recoup the invested capital with minimal risk.

For the Franchiser, such a transaction is beneficial not only by obtaining a stable profit. It helps to expand its niche in the market, while receiving high income at the same time.

Types of franchise business systems

Currently present on the market:

1. Franchising goods. This system provides for the creation of a network of stores selling food or industrial products. It is not uncommon for the company itself to be the supplier for the entrepreneur with whom it has entered into a deal.
2. Franchising services. This direction represents the development of a network of training centers. They train specialists for work in new branches. In addition, franchising services involves the provision of equipment and control over the work of the entrepreneur.

Current destinations

To date, economists have identified about seven dozen interesting areas in which the scheme of such a business is most in demand.

Among them:

• production of popular drinks and products (chips, snacks);
• opening supermarkets selling building materials, food or gardening supplies;
• he alth centers and gyms, massage and beauty salons;
• catering (wholerange of destinations from established restaurants to fast food eateries);
• sale of oxygen cocktails and sports nutrition;
• repair and construction services;
• provision of quick microloans and pawnshops;
• departments of decor and household appliances stores;
• representation of popular online stores.

The most promising direction among all available franchise schemes are those areas that provide various services to the population. It is here that the highest sales figures are shown, which allows the franchisor to consistently and without delay receive significant roy alties.

The implementation of the plan

What are the main stages that an entrepreneur must go through when he decides to start his work under a franchise? To do this, he needs:

1. Monitoring the market. This is the first step in acquiring a franchise. An entrepreneur needs to study the market not only in his region, but throughout Russia. Carefully done work will allow him to find a good franchisor. Directions in this case can be chosen very different. For example, the sale of electronics, gadgets, children's goods, etc. Unusual trading directions may also be chosen.
2. Franchise monitoring. At the next stage, the entrepreneur will need to study the offers that are available in this market niche. When deciding on a particular franchisor, it is recommended to pay attention to such criteria as its duration of work (you should not contact one-day firms), the success of franchise sales, popularitybrand.
3. Exit to a specific seller. An entrepreneur should contact several companies and clarify with them the terms of cooperation, the specifics of work, the price of goods, the percentage of sales, as well as the amount of roy alties that he will need to pay regularly. From all the information received, it is necessary to find the company that will provide the most optimal conditions for work.
4. Conclusion of the contract. After making a final decision on cooperation and considering all the proposed conditions, you will need to sign an appropriate agreement. It should be borne in mind that for this it is necessary to have registration as an LLC or IP. Such transactions are not concluded with individuals. If you plan to purchase a franchise of an online store, how it works and what are the conditions for the activity, the franchisor will also tell. A novice businessman will need to find an office, buy a computer, all the necessary equipment and hire at least a manager and a courier.

At all stages of acquiring a franchise, experienced entrepreneurs recommend consulting with lawyers and analyzing each step.

Franchise Benefits

Entrepreneurs operating under a foreign brand have already appreciated the positive aspects of this business scheme. They are as follows:

1. Low risk. Entrepreneurs who do not have impressive experience in doing business, from the first minute of their work, begin to receive advice and support from the company. Often, franchisors accompany their partners throughout the entire term of the contract, teaching them newtechnologies and techniques.
2. Recognizable trademark. It is easier for someone who starts his own business to conquer a niche in the market if he is under the wing of a company that has good recommendations. After all, a service or product that is already known to customers will certainly be in high demand and will soon begin to bring the first income.
3. The minimum amount of time to promote the project. It takes at least two years for businesses to build their brand. Franchise work can pay off after 5-6 months.
4. Professional support. When concluding a deal with a large company, you can count on serious preparation for work. For their franchisees, such firms conduct training courses that cover the topics of customer service, doing business and setting up production. The training of personnel who will work on franchising technologies is also carried out free of charge. Almost all brands also provide legal assistance. It is provided at any stage of doing business. Opens for franchisees and access to information useful for business.
5. Minimum advertising spend. Companies with a recognizable brand constantly allocate significant amounts to promote their trademark. Thanks to this, the franchisee can limit himself to low-cost advertising on social networks or in the media in his region.

Flaws

In any transaction, you can find not only positive, but also negative points. The same applies to franchise work. This approach has some drawbacks,which a budding entrepreneur should know. Among them:

1. Strict framework. How does a franchise work? An online store or a stationary point that sells goods or provides services under a well-known brand must adhere to the rules established by the franchisor. The entrepreneur is not given the right to change the technology for the provision of services or the production of goods. Restrictions may also cover such areas as the location and design of the premises, its area, as well as the number of personnel involved.
2. Inability to choose raw materials or equipment. In addition to roy alties, the franchise agreement specifies the conditions and volumes for the purchase of materials. In this case, only the franchisor is the supplier. Such a framework limits the entrepreneur in improving the business and its technical development.
3. The high cost of profitable franchises. As a rule, the lump-sum contribution of many projects cannot be overpowered by an ordinary entrepreneur. Franchises can cost upwards of $50,000 with small regular payments. This tactic is common among many foreign firms that invest heavily in advertising and technology development.
4. Constant control. Aspiring entrepreneurs run the risk of experiencing some discomfort due to the brand's close attention to its activities, as well as the need to draw up regular reports. All terms and options for providing documentation are negotiated at the conclusion of the contract. That is why, before signing it, it is worth weighing the pros and cons of such a densecooperation.

In addition to the above minuses, experienced managers also point to a high pace of work. The franchise company provides a 2-3 year work plan, the execution of which does not allow the entrepreneur to relax.

Any violation of the regulations will lead to termination of cooperation.

Examples of franchising

Many companies operate in Russia, expanding the number of their outlets through the implementation of franchises. These are retail chains such as Fix Price, Pyaterochka, Tele2, 33 Penguins and many others.

Famous franchise brands - McDonald's, Sportmaster, Orange Elephant, Subway, etc.