Contents
- Definition of Franchise
- History of Franchise
- Main Principles of Franchise Operation
- Pros and Cons of Franchise for the Franchisor
- Pros and Cons of Franchise for the Franchisee
- Types of Franchises with Examples
- How to Choose a Franchise
Definition of Franchise
A franchise is a legal right that allows entrepreneurs to open their own business under a well-known brand. This includes the use of proven business technologies and receiving partner support for a certain fee. Every day, the average urban resident encounters franchises without noticing it. Many popular establishments in the areas of food service, retail, and services operate as franchises. For example, restaurants, supermarkets, gas stations, coffee shops, and beauty salons are widely spread due to franchising models. Even simple things, such as the ability to rent a power bank for a phone, are available thanks to franchises.
For entrepreneurs who do not want to risk their startup capital or develop a business idea from scratch, a franchise can be a great option. It allows them to avoid many risks associated with starting a business, thanks to already tested ideas and support from experienced market players. However, a franchise also imposes certain restrictions and conditions that must be taken into account.
History of Franchise
The origins of franchising trace back to the late 19th century, when enterprising merchants realized that a successful business model could be replicated. The first franchising system was created by the Singer Sewing Machine Company. Isaac Singer, the founder of the company, managed to elevate his business to a new level of mass production, but faced the problem of servicing his products in different states. To solve this issue, he began entering into agreements with other entrepreneurs who became exclusive sellers of Singer products in their regions and received support from the company.
Main Principles of Franchise Operation
To understand how a franchise works, it is necessary to examine the classic system of interaction between the franchisor and the franchisee. An entrepreneur who has successfully implemented their business idea decides to scale their business and invites other entrepreneurs to join them. Usually, along with their trademark, the franchisor provides a ready-made business plan, assistance in training, access to suppliers, and a marketing strategy.
In return, the franchisor receives a lump-sum payment and periodic royalties for the use of their brand and business support. These royalties can be a fixed amount or a percentage of the franchisee's profits. The average royalty rate is around 6.5%, but this figure can vary depending on the industry.
Pros and Cons of Franchise for the Franchisor
Pros
- Rapid Business Growth: The franchising model allows for network expansion without significant capital investment.
- Increased Brand Recognition: The success of franchisees directly contributes to the growth of brand popularity.
- Direct Income: Receiving lump-sum payments and royalties increases the franchisor's revenue.
Cons
- Reputation Risks: The quality of services provided by franchisees can negatively impact the brand's reputation.
- Development Limitations: Exclusive rights granted to franchisees can become problematic for the franchisor.
- Risk of Disclosure: Unethical franchisees may use knowledge to create competitors.
Pros and Cons of Franchise for the Franchisee
Pros
- Risk Reduction: A successful business model lowers the risk of failure.
- Franchisor Support: Training and consultations assist in the successful launch of the business.
- Reduced Marketing Costs: A well-known brand requires less advertising to attract customers.
Cons
- Franchise Fees: Royalties and lump-sum payments can significantly increase expenses.
- Franchisor Control: The need to adhere to standards may limit the flexibility of business operations.
Types of Franchises with Examples
There are several common types of franchises:
Manufacturing Franchise
The franchisor grants the right to manufacture goods using their technology. An example is Coca-Cola bottling plants.
Product Franchise
This allows opening stores and selling products under the franchisor's brand. Examples: Zara and H&M.
Service Franchise
This provides services under the franchisor's brand, such as beauty salons and fitness clubs.
Business Franchise
The franchisee bears greater responsibility for the development of the enterprise, as seen with Starbucks.
How to Choose a Franchise
To choose the right franchise, follow these recommendations:
- Determine the industry in which you are interested in working.
- Set a budget for initial investments.
- Conduct a search for franchises through online catalogs and specialized exhibitions.
- Select a few options and start negotiations with franchisors.
- Review the contract with a lawyer before signing it.