Franchise system – the basics

Introduction:

True business opportunities must be based on objective data.

It is necessary to analyze if there are consumers who are willing to pay for the product or service.

The entrepreneur should have the following qualities: be ambitious, be able to take risks, be flexible, be persistent with the objectives, know how to prioritize, be able to make sacrifices for the project, be willing to fail, have a clear commercial orientation, be optimistic and  strive toward self-improvement, have self-confidence, be focused on achievements, assume responsibilities, and take initiatives.

Becoming an entrepreneur can be much easier if you opt for a franchise formula because, although you must have many of the characteristics of the entrepreneur, the system will allow you to become an entrepreneur while avoiding having to carry out many studies and a lot of research because they have already been developed and compared by the franchisor.

The main sectors in which franchise opportunities are present are the following:

Travel agencies, Leisure-Pre-school Education, Real-estate agencies, Office-Recycling-Consumables, Food, Health, Beauty, Aesthetics, Services to companies (such as translation), Hospitality-Restoration, Services to individuals, Computing-Telephony, Specialized Stores, Telecommunications, Dry Cleaners, Furniture-Accessories, Clothing Arrangements, Fashion and accessories, Transportation and Messaging, Car related Business and Vending machines.

History and the basics:

The first antecedents of the franchise, as a model of business collaboration, dates back to the 19th century, when a lot of taverns and bars were owned by the brewing factories. What they did was to rent out their premises to third parties and thus sell their production.

The franchise is a system used to commercialize products, services or technology, based on the close and continuous collaboration between legally and financially different and independent companies – the franchisor and its individual franchisees.

The know-how in the franchise is vital and must meet three conditions: secret, substantial and identifiable.

There are different types of franchises: production, industrial, distribution, services, corner, associative, financial, multi-franchise, regional and master.

The franchisor is an entrepreneur who, as a natural or legal person, owns the global business concept that he has decided to concede, and who, after having successfully experienced it, uses it to distribute his products or services, giving up his industrial or intellectual property rights, its know-how, corporate image, work systems, technology and commercial techniques.

The franchisee is an entrepreneur who, as a natural or legal person, has decided to join a network of franchises, and who accepts the concept of global business that his franchisor has transmitted to him, maintaining a close collaboration with him and committing himself to a common project.

The entrance fee is the amount that each of the franchisees is obliged to pay to the franchisor in order to belong to the franchise in which the franchisee will be integrated.

The advertising fee is the amount that the franchisees will invest in promotions and marketing for their own benefit and the entire network. The operating fee or royalty is the periodic payment made by the franchisee to the franchisor in consideration of the continuous support the franchisor provides to its network and which constitute its main source of income.

The success factors of the franchisee are:

• Integrate with passion and enthusiasm.
• Auto-analyze yourself before you start.
• Before deciding, think and do not get carried away by enthusiasm.
• Get all necessary information about the franchise.
• From theory to practice there is a gap that must be considered.
• Choose the profile of the franchise and the correct activity sector.
• Do not turn yourself into a one-man band.
• Do not make mistakes when choosing the premises.
• Consider the effect of the big city and the small city.
• Choose the right personnel.
• Give a soul to your franchise and convey optimism.
• If you can work alone, do not have partners.
• Do not let your franchise make you a prisoner and force you to change your lifestyle.
• The business should not be too seasonal.
• The owner must participate in the franchise so that it does not fail.
• If it fails, be realistic and close in time.

In order to function successfully and be able to create the franchise, a series of conditions must be met, such as conducting market research and planning to open the pilot centers to give them an authentic treatment as franchising points.

The franchisor must “sell” his franchise and capture all the experience acquired in a franchise manual.

The franchise system is one of the most interesting formulas to develop the expansion of a company. To carry out this expansion it is necessary to find the franchisees that want to “buy” the corresponding franchising points. As a basic requirement to be able to talk about franchising, there must always be technical and commercial assistance.

Advantages and disadvantages:

The franchise is not a magic formula to obtain good business results. Like all formulas, has its advantages and disadvantages.

The advantages for the franchisor are:

It is a formula that allows the development of the activity quickly with external infrastructure and minimal economic investment, it needs less personnel expenses and control systems than other formulas, it allows expansion and opening to new markets with lower costs.

The disadvantages for the franchisor are:

The creation and start-up of the franchise requires an important first disbursement, complexity in the communication with the different points of sale, risk that the franchisee’s mistakes can damage the brand image of the franchise, also harming the franchisor, difficulty to influence the business behavior of the franchisees, transfer of know-how to the franchisees, possible loss of direct contact with the market and limitations when making certain decisions.

The advantages for the franchisee are:

Access to any sector and commercial activity without knowledge of it or with little experience in it, a guarantee of independence and integration in a proven commercial network, greater facility to obtain financial resources, you can take advantage of the knowledge, experience, and clients from the franchisor. In addition, the franchisee benefits of the positioning of the franchisor in the market.

The disadvantages for the franchisee are:

Partial lack of freedom when organizing your own business, since it is subject to the instructions of the franchisor, it is subject to supervision and surveillance, there is less benefit per unit since this is shared with the franchisor and sometimes, the price to be able to integrate is very high.

Legal regime:

In Spain:

The law 7/96 of January 15, 1996, gives legal support and begins to define the concept of franchising. In addition, a registry of franchising companies is created, and a minimum is set in the pre-contractual relationship among the franchisor and the franchisees.

For the franchisor, the franchise agreement is very important because it is where all the pacts that protect and provide confidentiality will be introduced for the exploitation of the franchises, in such a way that confidential information does not reach the competition of the sector.

For the franchisee, the contract is a vital document because through it he will know perfectly what his obligations, rights, and limits are.

In Europe:

There is The European Code of Ethics for Franchising, being a base of ethical values that have been established for those who operate in the franchise system.

Financing:

Financing is one of the most important pillars for the creation of any company.

Before thinking about what kind of financing to look for, you must make the necessary calculations to know the total amount of the investment.

The main expenses to consider are:

• Reform and refurbishment of the premises.
• Hiring of suppliers.
• Rental costs.
• Provisioning expenses that depend on the activity.
• Website maintenance.
• Data Protection (GDPR).
• Need for stock or resources.
• The staff.
• The entrance fee.
• The monthly royalty.
• The advertising fee.
• Those related to legal expenses.

The costs of undertaking in franchising are:

• Entrance fee.
• Monthly royalty.
• Advertising fee.

The entrepreneur, future franchisee, must be the first to invest in their franchise project with their own resources.

The other sources of funding include:

• Known as 3 “F”: family, friends, and fools.
• Capitalization of unemployment help (Available in some EU countries).
• Financial products (There are specific products for franchises).
• Government, regional and local aid.
• ICO financing lines (In Spain).
• Investors or Crowdfunding.

At Jensen Localization, we hope that you found this article useful to help you succeed in your franchising plans. If you have suggestions or questions about this article contact us!