What is franchising
Recently, the words of foreign origin are increasingly being heard. Among those – franchising or franchise. This article will help you understand what franchising is.
Franchising is an agreement between business entities, according to which one party (the franchisor) grants the right to do business to the other party (the franchisee) for a fee. In this case, under a franchise agreement, technology, trade secrets, a service mark, or a trademark are transferred. In other words, under the franchise agreement, an established business scheme is transferred: the franchisee, as it were, acts on the market under the guise of the franchisor. In the Civil Code of the Russian Federation, franchising is referred to as a commercial concession agreement. The conclusion of such a contract is a serious matter, so it is subject to state registration.
It is believed that the first franchise agreement was concluded in the middle of the 19th century. Then the owner of the world famous company for the production of sewing machines “Singer” began to enter into agreements that provided for the right to sell and repair these sewing machines.
Note! By the way, MCdonald’s is the most famous franchise in the world. Only 15% of these fast food restaurants belong to MCdonald’s itself. All others work on the franchise. At the same time, the terms of the franchise are regulated very strictly, including the use of certain colors in the uniform of the staff and in the design of the cafe.
Franchising is beneficial for both parties. The franchisor receives: a stable income from such a “lease” of its business model, guaranteed sales, maintaining reputation, and network development. In this case, the franchisor does not deal with the expansion of the network itself, respectively, it does not have the associated costs. He does not have to solve every day many problems arising from the franchisee. Enough benefits and franchisees. Consider them in more detail.
Franchisee – an independent business entity
Among the undoubted advantages of franchising should be noted the economic and legal independence of the franchisee. In general, it is free, for example, in the choice of counterparties, in the placement of a business (except for those moments that are strictly prescribed in the contract).
A small or medium-sized entrepreneur, working on a franchise, significantly minimizes its risks when starting a business: he does not need to “unwind” the brand. Entry into the market will definitely be successful, because the presence of customers is already ensured. At the same time, before concluding a contract, he can study in detail the business of a potential franchiser, in particular, assess its effectiveness and, consequently, the benefit for itself.
A person can dream all his life about his own boutique of fashionable clothes or about a restaurant, but never realize his dream due to the lack of necessary knowledge and skills. Franchising will allow you to open and conduct any kind of business, even if the franchisee does not have the necessary skills.
Getting valuable information
Franchisee becomes the owner of the most valuable: the intellectual component of the business. We are talking about the rules, tips on how best to build and develop a business. All the latest developments of the franchiser, know-how, and so on will become available to the franchisee.
Minimum cash and time costs
Since the franchisee begins to operate under the brand of the franchisor, it does not need to study the clientele, spend money on the initial or current advertising – the franchisor has already done it. Similarly, the situation is with the design of packaging, premises, uniforms of workers: no need to hire designers, because everything has already been invented. As a rule, the franchisor provides its franchisees with all the necessary resources, including the supply of the necessary raw materials. Therefore, franchisees do not have to spend time searching for suitable suppliers.
The franchise business, however, has its drawbacks. They mainly concern franchisee risks.
The remuneration under the contract (it is called royalty) can be set as a percentage of deductions from the proceeds. If, for any reason, the franchisee will work more efficiently than the franchisor, the royalties may be prohibitively high.
If the franchisor is not a global business owner, then the franchisee may be transferred to a not-too-established business scheme, which may result in losses.
The franchisee is still a weaker party to the contract than the franchisor. Taking advantage of this, the latter is likely to dictate many terms of the contract. This is especially true of the grounds for unilateral refusal to execute the contract (beneficial, of course, only for the franchisor)
The owner of the business, which is transferred by franchise, may decide to liquidate or reorganize the company. Such a risk always exists, and it is impossible to predict it. As a rule, this leads to the termination of the franchise agreement, unless otherwise provided by the agreement itself.