Finances

What is a franchise in simple words - a description of the term + examples of franchising

January 12, 2020

Hi, Dear readers of the business magazine "RichPro.ru"! In this article we will tell in detail, what is a franchise and how it works, and explain the essence of franchising in simple words.

Many, daring to start their own business, face this form, as a franchise (franchise business). But entrepreneurs have little knowledge and a vague idea of ​​how to organize their business.

It will be known from the article:

  • What is a franchise and franchising in business - what are their differences;
  • What types and types of franchises exist;
  • What are the advantages and disadvantages of franchise business;
  • What are examples of very successful and profitable franchises.

Information, set out in this article, will be useful to both people, who are just thinking about starting their own business, and so on, who wants to expand the business.

So let's get started!

Franchise and franchising: what it is, what is the difference, what are the pros and cons of starting a franchise business - we will talk about all this in this issue in simple and clear words

1. Franchise - what is it: definition + a clear example

The word "franchise" comes from the French "franchise", which means "privilege" and "privilege".

term "Franchise" used to denote a license agreement, by which one party is transferred, and the other - the rights to use technology and trademarks.

This term is also synonymous with - commercial concession, however, it is used less frequently.

1.1. What is a franchise in simple words - a description of the term + the principle of working on a real example

If we reformulate this definition as follows, to make it even clearer, then a franchise is a purchase of rights to open a business under the brand of any well-known brand. Not only the trademark is used, but also technology - as production, and sales, - as well as the concept of doing business.

So, actually bought business is bought, payback and profitability of which have already been tested in practice.

The franchisor and the franchisees are who they are?

That side, which buys the right to sell goods and services under a particular brand, called franchisees. Side, which sells such a right, called franchisor.

How it works in practice?

Example, someone Andrew would like to start working for himself and start a business. To do this, he registers a sole proprietor or opens a limited liability company.

Having collected some amount of money, Andrew decides to buy a franchise for a fast food restaurant. So he acquired the status of a franchisee.

Having organized such a restaurant in his city, Andrew soon began to receive income, which he did not have while working for other entrepreneurs.

Now he can open a whole network of such fast food restaurants in his city.

1.2. Accompanying terms, relating to franchising

In order to better understand this issue, you need to know other terms, which are directly related to franchising and franchising.

Though, that in our country the first franchise agreements began to be concluded rather recently, this is a common practice in the world - and there is a common terminology, which makes such agreements and the relationship between the franchisee and the franchisor as clear and transparent.

First of all, because the franchise is understood as the transfer of a license, you need to know, what is it.

In this case license Is the transfer of rights, owned by the franchisor (know-how, technologies, software, etc.).

In this case, the know-how is any information (relating to production, product sales, business organizations, etc.), which have commercial value, because they are known only to their owners.

That is, under know-how understand the secrets of doing business or production, on which this or that business is built.

Documents, by means of which the right to use this or that trademark is transferred and purchased, can be called differently, while having one meaning:

  • franchise agreement;
  • license agreement;
  • commercial concession agreement.

When such a right is purchased, buyer (or franchisees) makes the so-called lump sum payment is a payment for the purchase of a deductible. When it comes to product franchising, then instead of making a contribution, the contract may provide for the purchase of a certain inventory.

Often the contract is concluded in this way, to periodically require its continuation. Then the lump sum is paid each time the contract is renewed.

In addition to the lump sum, the franchisee must pay royalties.

What is a royalty in a franchise - a description of the term

under royalties understand those payments, which are periodic and are paid throughout the term of the franchise agreement. This can be a fixed amount or a percentage of business profits.

In commodity franchising, the periodic purchase of goods acts as a royalty.

When the contract is signed, franchisee receives franchise package. It can be in print, and in electronic. This package includes all documents and materials, with which franchisees can easily and quickly start a business.

The franchise package must be included:

  • franchising policy;
  • business management guide;
  • corporate identity standard passport;
  • all necessary legal documents.

Guides can also be added, necessary for the proper functioning of staff, software, etc..

The franchisor is no less interested in the franchisee, that the set of documents was as complete as possible - because the reputation and popularity of the whole business depends on the correctness of the organization of the business under its trademark.

Appreciating their business reputation, franchisors are very responsible in forming a franchise package.

Take note!

Man, who wants to become a franchisee and is looking for the most interesting offer, can get acquainted with companies, offering to enter into a franchise agreement, on relevant resources from full catalog of franchises.

You can always find information about the companies themselves, and the cost of concluding the contract, lump sums and periodic contributions, the amount of investment required to start, as well as contacts, who can be contacted by company representatives to discuss the details of the agreement.

A businessman can easily buy a franchise and start a business on it, and the master franchise, according to which he will become the sole owner of the right to conduct his chosen business in a particular area (example, in the city, area, district, etc.).

"Franchise" and "franchising" - what is the difference between these concepts?

2. Franchising and franchising are one or the same?

Very often people, who have no economic education, confuse the concepts of "franchise" and "franchising". But it is necessary to be able to distinguish between these two concepts - especially those, who wants to sign a franchise agreement.

under term "Franchise" it means the acquisition of the right to sell goods or services under a particular brand.

Often the word "franchise" is replaced by "franchise package". Although, actually, the franchise agreement is signed first, followed by obtaining a franchise package of the company. The composition of the franchise package is strictly stipulated in the contract and can be discussed during its signing.

Franchising: what it is - an overview of the concept in simple words

word "Franchising" has another meaning - it means the very process of creation, building and running a business under a franchise agreement.

So, the franchise acts as the subject of the relationship between the franchisor and the franchisee, and franchising means doing business on the terms of the franchisor.

What are the franchises - the main types and types

3. Types and types of franchises - 7 main varieties

Because doing business under a franchise agreement has been used for quite some time, there are several different types of franchises. They may differ in the degree of involvement of the franchisor in business management, by form of payment of the franchise agreement, at the place of manufacture, which is sold by franchisees, etc..

So, each, who would like to work under a franchise agreement, can choose the most acceptable option.

View 1. Classic, or a standard franchise

This is a franchise, which is resorted to most often in the world. Usually, such an agreement implies the payment of a lump sum, as well as the availability of periodic deductions in favor of the franchisor.

In this case, the franchisor has the right to control the process of doing business with the franchisee and make adjustments. He can also check the compliance of the business, built by the franchisee under a license agreement, requirements, trademark rules and codes.

View 2. Free franchise

This form of commercial concession is the most widely used in the Russian Federation.

A distinctive feature of the free franchise- this is the low amount of royalties and great freedom of action for the franchisee.

So, the entrepreneur is practically not controlled by the franchisor and has the opportunity to run his business and develop it independently.

View 3. import-substituting franchise

In recent years, through the imposition of economic sanctions on Russia, is becoming increasingly popular purchase of import-substituting franchises. The demand for them is explained very simply - consumers in our country are accustomed to goods and products of European production, which are of high quality.

Because the import to our country and the sale of some such goods and products are now prohibited, Russian entrepreneurs seek to enter this market and offer consumers similar products, but made in the Russian Federation.

So, when buying a franchise, the technology of production of certain goods and services is purchased, namely, the production takes place in our country. This is very profitable and allows not only to provide our citizens with the things and products they need, but also to make a good profit from it.

View 4. Silver franchise (turnkey business)

In this case, we are talking about buying a really ready-made business, in the creation and promotion of which you do not need to invest time and money. The owner of a brand independently opens a branch of his company in a city, and then sells the business to a franchisee. Usually, in this case there are monthly payments - interest on the profits of the branch.

This is a very convenient way to start your own business for those, who does not have much business experience. First of all, as there is no probability of making a mistake at the stage of opening a business, and the possibility of non-compliance of the established business with the standards of the trademark is excluded.

When buying a silver franchise, you can immediately start working and earning income.

View 5. Business for rent

Some franchisors prefer rent a business. In this case, the benefit of the franchisee is, that he does not need to create and build a business on his own, and the franchisor's benefit is the opportunity to receive a monthly income, without spending time on business management. By the way, about where to invest money to get a monthly income, we have already written in one of our publications.

In this case, the franchise agreement stipulates, what percentage of the income the franchisor receives, and which - goes to the franchisee. This is a mutually beneficial cooperation and option, which is suitable for start-up entrepreneurs.

View 6. Gold franchise (master franchise)

Those people, who already have experience in doing business and who want to work "big", can buy the so-called "Master Franchise".

Concluding such an agreement, franchisee receives monopoly rights for business in a particular region or city.

Of course, the cost of such a license is very high, however, in the future these costs will definitely pay off - because the entrepreneur will be able to open a network of companies in the region and remain the only representative of the brand in the territory specified in the contract.

View 7. Corporate franchise

This commercial concession agreement is ideal for inexperienced businessmen. He predicts, that the trademark owner will control the development of the business and will be able to conduct it on his own terms.

Opportunities to make any changes for the franchisee are small. However, it will be easier for a beginner to learn to do business under the guidance of an experienced team of professionals.

When choosing a franchise, you need to evaluate your financial capabilities, ambitions and experience in doing business. In any case, with such a variety of types of franchises, there is always a way out - even for those, who have small start-up capital and experience.

Franchise business - the main pros and cons

4. Advantages and disadvantages of franchise business

People, who would like to become entrepreneurs by buying a franchise, often ask themselves the same questions:

  • how cost-effective it is?
  • whether it makes sense to invest money, effort and time in franchising?
  • what are the advantages and disadvantages of such a business?

To answer these questions, need to think about pluses and cons opening a franchise business.

Pros (+) starting a business with a franchise

There are five major benefits of franchising for a franchisee.

A plus 1. Minimal risk in doing business

When an entrepreneur decides to start his own business, there is always the possibility of failure - may be incorrectly assessed the attractiveness of goods or services to consumers, etc.. However, in the case of franchises, this is practical impossible - because a novice businessman gets full instructions for the development of successful business.

As a result, if done according to instructions, profit will not take long. Way, to be passed by the franchisee, has already been passed to him by the owner of the trademark - and he is guaranteed to bring income.

A plus 2. Trademark recognition

A lot of money, if a company is created "from zero", goes to its promotion and brand advertising. When it comes to franchising, such costs will not be required - because the brand is already well known to potential consumers of goods or services.

In this case, the company already has a positive reputation, therefore, the franchisee can use the image when working, which has already won the trust of the people and is known in the market.

A plus 3. Quick profit

Because there is no need for advertising and time to promote the company, the first profit will be received very soon after the opening of the franchise. And it's not just beautiful words, and a fact confirmed by practice.

So, when McDonalds opened in Moscow, on the first day of his work several thousand people took a turn in this establishment still to its discovery.

So no need to worry about that, how to live the first time while the business is under development - the first income will be received very quickly. In a separate article we also wrote, how to earn money quickly and what ways of additional earnings are possible in free time from the main job.

A plus 4. Minimum costs for advertising campaigns

The lion's share of costs when opening any company is accounted for by advertising. in addition, it is not so easy to find really good specialists, which will be able to attract the maximum number of consumers to the company. Moreover, the success or bankruptcy of a firm depends largely on it, as far as it is able to retain its customers.

The franchise agreement avoids all these costs and headaches for the businessman. Franchisors supply their franchisees with a complete package of documents for starting and running a business, and this package includes complete recommendations for successful advertising campaigns and various events.

A plus 5. Opportunity to receive support and training

Usually, starting your own business, the person finds himself alone with this situation. He has no one to ask for help or advice. When concluding a commercial concession agreement, everything is different - not only he is interested in the success of the franchisee, but also the owner of a retail chain. That is why franchisees will receive maximum support and, if necessary, will be fully trained. As a result, he will be able to successfully run his business and earn the desired income.

in addition, most franchisors offer ongoing supervision and the assistance of qualified lawyers in those situations, when such assistance is needed.

So, with the full support of the franchisor, the business will grow very quickly, and the franchisee will make a profit. But there are drawbacks to starting a franchise business.

Cons (?) Franchise business

There are also five main ones.

Minus 1. Lack of possibility of "independent maneuver"

Usually, all actions of the entrepreneur are strictly regulated, and he must abide by the rules and codes, provided by his franchisor.

A businessman does not have the opportunity to show his creativity in doing business - he must agree with the owner of the brand.

Minus 2. The need to make periodic payments or purchase goods and equipment

If the entrepreneur does not work under a franchise agreement, then all the income he can appropriate and spend so, as he wishes. And the franchisee must make periodic payments (usually, once a month) and, in some cases, purchase goods or equipment from the trademark owner. this is additional costs, which will need to be deducted from income throughout the term of the franchise agreement.

Minus 3. High price for franchises

Though, that creating your own business under a franchise agreement is much easier, than without this agreement, franchises cost a lot. This is especially true of well-known and promoted brands and master franchises.

Minus 4. Control by the trademark owner

Not every entrepreneur will like it, that his every step is controlled by someone. And it is impossible to avoid this control when buying a franchise. The franchisor will control all business processes, to make sure, that the franchisee does his best to maximize business profits.

Minus 5. Impossibility to apply a creative approach

The franchisee has no right to choose the direction of development of the business or to show creatively at development of marketing and other programs.. He must clearly follow the development program, offered by the franchisor.

So, in franchising, as in any other form of business, there are not only virtues.

The table below lists the main criteria (parameters) comparison of franchise business and traditional business:

№ comparison parameters ordinary business Franchise business
1 Terms of business promotion Months and years (-) A few weeks (+)
2 risks High (-) Low (+)
3 initial investment Great (-) За домовленістю (±)
4 Support and assistance Missing (-) IS (+)
5 Advertising costs High (-) Low (+)
6 Freedom to do business High (+) Low (-)

The table shows, that the main differences between the franchise business and the "usual" traditional one are the terms of business promotion, advertising costs, risks, initial investment of money and freedom to do business.

Popular franchises for small and medium businesses

5. TOP-5 franchises for those wishing to become franchisees

First, than decide to enter into a franchise agreement, you need to look at real examples of such business. It is worth paying attention to the company, incoming in the TOP-5 most popular brands, offering to conclude such an agreement.

1 place. «McDonalds»

This company is well known, literally, worldwide. The owners of this company came up with the idea of ​​franchising, deciding to bypass competitors and expand its catering network outside of America.

However, considering buying a franchise for this company, you need to prepare for investing a lot of money at the initial stage. To start this business, you need to not only buy a franchise for 45 000 dollars, but also to have an initial capital of at least 950 000 dollars. Not every businessman can afford it.

Most franchises are bought by wealthy businessmen as an investment.

2 place. Popular Perekrestok supermarket chain

These supermarkets sell products for those, who prefers high quality, freshness of products and good service. But, that this franchise brings its buyer a stable good income, the supermarket should be located in a crowded and densely populated area of ​​the city, have parking and convenient access roads.

in addition, the franchisor has high requirements for the area of ​​the premises, in which the supermarket will be located, to conduct internal communications, lighting and even to the design of shop windows.

3 place. Subway Restaurant

This is an ideal option for start-up entrepreneurs, адже вартість початкового внеску за договір франшизи становить 7 500 dollars. in addition, the franchisor is happy to provide its partners with various bonuses and benefits, reduces the lump sum and provides comprehensive support in resolving legal and marketing issues.

It is for these reasons that the network of these restaurants in Russia is constantly growing. To date, it works approximately 700 such restaurants in different regions of the country.

4 place. "Coffee with you"

Coffee with yourself deservedly ranks fourth in the ranking. Because the cost of the franchise is everything from 100 to 400 non-taxable minimum incomes. Many people, who want to start their own business on the basis of a franchise agreement, stop their choice on this brand.

in addition, this is a very popular area, after all, more and more lovers of quality and delicious coffee, as well as those, who spends most of the day on the run and can't stop at a cafe, to drink coffee.

5 place. "Orange Elephant"

In fifth place in the TOP-5 - a franchise chain of stores for children's art "Orange Elephant". The dynamics of development of these stores is impressive, in addition, this network is not yet fully promoted and is not present in all cities. And that means, that franchisees have a high chance of success with relatively little competition.

The network not only sells, but also manufactures products for children's creativity presented in its stores. Today there are franchisees in America online, Turkey, Israel, Iceland and many other countries.

So, every novice businessman can pick up that franchise, which will suit him - as the specifics of the activity, and the value and requirements for initial capital.

6. FAQ - frequently asked questions, relating to franchises

There are questions, who are often asked to enter into a franchise agreement.

Question 1. How to choose the right franchise?

First of all, it is necessary to decide on that amount, which the entrepreneur is ready to invest in their business at the initial stage. Today it can be found as an inexpensive franchise, so are those, which require very large financial investments.

You do not need to overestimate your capabilities, after all, the success of the business largely depends on it.

Selecting several franchisors in the desired price category, you need to study all these brands and answer the following questions for yourself:

  • what they do (what goods or services they offer);
  • what is the policy of these companies;
  • what advertising they conduct.

Based on this, you need to stay on one company - the most suitable for its specifics. It is very important, as the businessman should with pleasure be engaged in the "child". There is no point in turning it into a matter of your life, to which the soul does not lie.

Then you need to contact the company's representatives and discuss all issues, interesting questions, concerning the conclusion of the contract. If everything suits you - then, the deal is done and the franchise is chosen.

Question 2. Is it worth starting a franchise business, if there is no experience?

One of the main ones benefits franchising - that, that he allows you to open your own business even, who had nothing to do with business before.

It is safe to say, that in the case of a franchise the risks for the entrepreneur are minimal. It has to do with that, what, after concluding a commercial concession agreement, trademark owner (franchisor) provides a novice businessman with a business plan and detailed instructions for creating and promoting a business. By the way, You can download free ready-made examples of business plans in one of our previous materials.

So, The franchisee not only receives a guaranteed income in the very near future, but also invaluable business experience.

Question 3. How much is a franchise and what does its value depend on?

The cost of concluding a franchise agreement may vary.

The price depends on several factors:

  • brand promotion;
  • kind of franchise (example, A master franchise will always cost much more, than a standard franchise - but the revenue will be large);
  • ambitions of the trademark owner.

in addition, you need to consider lump sums and periodic payments in favor of the franchisor - they can also be attributed to the cost of the franchise.

There are franchises (example, "Orange Elephant"), which are relatively inexpensive, do not require very large financial investments at the initial stage, but quite profitable for your own business.

And there are some, such as the KFC fast food restaurant franchise, where the down payment is from 47 thousand. dollars, and investment from 700 thousand. $.

KFC restaurant franchise

Question 4. Is there a franchise without investments?

Turnkey business without investments is, apparently, dream any entrepreneur. But is it possible to make this dream come true??

Really, there are companies, offering to enter into a franchise agreement without the first - lump sum - payment. However, this does not mean, that the business will not need to invest money. Franchisees must be able to invest their own money in the construction or lease of the premises, ordering advertising campaigns and paying salaries to employees. So, it is unrealistic to completely avoid costs at the initial stage.

in addition, any franchisor will require a royalty, which are usually close 10% Income under the franchise agreement.

Therefore it is necessary in any case not to forget about necessary expenses. But in the case of a franchise, the business will really pay off much faster, than usual.

Question 5. What franchise business can you open in 2017-2018 year with minimal investment?

Dare to start your own business under a franchise agreement 2017 year, you need to keep in mind the five most popular destinations, which are more likely to bring quick income:

  • internet sphere;
  • sphere of service and provision of services;
  • sphere of public catering;
  • Transport services,
  • production.

There are franchises, giving hope and promising a quick profit to their franchisees:

  • Multicolors - company, which sells windows from different materials; down payment - from 100 thousand rubles.
  • Ticket Com - company, which advertises on checks, which are issued to customers when paying for purchases in stores; down payment - from 150 thousand rubles.
  • Linguistics - a network of centers for learning foreign languages, lump sum - 220 thousand rubles.
  • Stardog! S - catering outlets, who sell hot dogs. The lump sum may vary from 22 to 330 non-taxable minimum incomes.
  • Gift calendar - network, which sells souvenirs and accessories for the holidays, requiring the availability of initial capital in the amount of 790 thousand rubles.

P.S. You can also find profitable business ideas with minimal investment for beginners in one of our articles.

7. Conclusion + video on the topic

So, concluding a franchise agreement - a real and fairly easy way to start your business from scratch. It is especially suitable for those, who does not yet have experience in setting up and managing an enterprise.

in addition, in the process of organizing such a business and its management, you can learn a lot from more experienced businessmen - brand owners.

Many prosperous entrepreneurs today started with the purchase of a franchise - and did not make a mistake with their choice. Everyone can do it, not even having a lot of money for the down payment!

Finally, we recommend that you watch the video "What is a franchise and franchising, what are the advantages and disadvantages of the franchise business, and a list of areas, where franchises are popular »: