Many entrepreneurs who are looking for an opportunity to start a business from scratch with minimal investment have heard about the franchise. At first glance, cooperation in the format of franchising seems simple. But it has its own nuances and is associated with certain risks. To really make money on the franchise, you need to get acquainted with how it works.
Basic concepts of franchising
Franchising in Russia. So what is a franchise in simple words? To understand it in detail, you need to get acquainted with the basic concepts used in this area.
A franchise is a type of agreement in which one company (promoted, known) transfers to its partner the rights to use intellectual rights or exclusive technologies. Each franchise has its own characteristics, is provided on different terms, which is reflected in the contract.
It is a successful company that owns a well-known brand or technology, has a certain business reputation. It transfers the franchise to its partner on certain conditions and for a period clearly specified in the franchise agreement. Thus, the franchisor develops its business, improves it, increases brand awareness and at the same time receives a fee for the use of intellectual property rights.
What is franchising? This is a format of business cooperation based on the franchise. Its essence lies in the transfer of exclusive intellectual property rights to the partner for a specific period of time on the terms specified in the contract.
A franchisee may be a natural or legal person who acquires the right to use the trademark or technologies of the right holder under a franchise agreement for a certain period and under certain conditions.
One-time payment to the right holder for the opportunity to use the trademark, mark, technology. It is fixed, depends only on the terms of the contract, and not on the size of the benefits in the future.
Payment in favor of the rights holder, which is listed regularly throughout the agreement. The amount can be fixed or calculated as a percentage of the profit.
How does the franchise work?
Franchising is a specific scheme for doing business. To make money on it, you need to choose a partner and sign a contract with him. It is concluded for a certain period, after which the parties can either extend the contract or terminate it. The contract clearly states the rights and obligations of the parties. Compliance with the directives of the franchisor is not recommendatory, but mandatory, so before you sign it, you need to carefully examine each item.
This format of doing business, as a franchise, involves the granting by the franchisor to not only business models, technologies, and documentation, legal aid, information, and other comprehensive support.
The franchisor helps to organize the business, purchase equipment, hire staff, gives instructions for work, identifies a separate Manager, whose task is to help in establishing the workflow.
Franchise business is beneficial for both parties. The franchisor gets the opportunity to earn more and develop the business, increasing brand awareness, making it popular. The franchisee, in turn, can use the working business schemes with minimal risks, which imply small investments and guaranteed payback in the shortest possible time.
Main types of franchises
In the evolution of franchising, there are several types of franchises, which have their own characteristics in terms of cooperation and doing business. This allows a novice businessman to choose the best option for cooperation.
This type of franchise is widespread in the world. It is a classic scheme in which the franchisee pays a lump-sum fee and royalties, and the franchisor, in turn, exercises control over the organization and conduct of business, can make adjustments to bring it in line with corporate norms and standards. Suitable for a beginner who is poorly versed in the peculiarities of doing business, as the risks of errors will be eliminated by the franchisor.
This scheme is quite popular in Russia. Its distinctive feature is wide opportunities for franchisees. He can conduct business independently at his own discretion, except for the moments specified in the contract. The franchisor practically does not interfere in the activities of the partner. Therefore, the royalty fee under the contract is also low. This type of franchise is suitable for experienced entrepreneurs who know how to conduct and develop business, know its features and are confident in their abilities.
This type of franchise is more suitable for inexperienced businessmen. Its peculiarity is that the franchisor takes care of almost all the control activities and business development. For beginners, it is beneficial, as there is an opportunity to learn how to work, eliminating the possibility of errors. This scheme of doing business almost completely eliminates the possibility of franchisees to Express themselves or make changes in management, which is not the main goal for beginners at this stage.
The franchisee gets a fully ready-to-work business. You do not need to invest money, look for a room, hire staff. The franchisor has already taken care of everything and transfers to use the business “turnkey”. In this scheme, there are practically no risks and the probability of failure of the case at the stage of its formation. Such cooperation is best suited for beginners, it eliminates the need to organize your own business and allows you to Earn immediately, without putting much effort.
This type of franchise is suitable for experienced entrepreneurs who want to earn more. When buying it, the franchisee receives exclusive rights to use the business model. The entrepreneur is given a kind of Carte Blanche and a monopoly on business development and building its own network in the region.
The disadvantage of such a scheme is high costs because the gold franchise costs a lot. But practice shows that it will pay off quickly with the right approach.
Pros and cons of franchising
The franchise has its advantages and disadvantages that must be considered before entering into a franchise agreement.
Benefits of working on a franchise:
- brand recognition – the use of a well-known brand in the market guarantees a high level of customer flow, and therefore successful sales without additional costs for marketing, advertising, business promotion;
- quick profit – work on the franchise does not require large investments, at the same time the company can receive good revenue from the first day of work, so the business pays off quickly;
- support and training – the owner of the business does not need to spend money, time and other resources on training, all these concerns are taken by the franchisor, as he is primarily interested in a high level of service and product quality;
- discounts and savings – when purchasing raw materials, equipment, a franchisee can enjoy discounts and bonuses from suppliers who cooperate with the franchisor;
- risk minimization – franchise business is very beneficial for start-UPS, as the risk of becoming unprofitable and losing the competition is minimal, the franchisor provides all the conditions, provides assistance and support for successful work.
Another advantage is the independent choice of a suitable franchise. You can calculate in advance how much investment you will need, how quickly investments will pay off. Also, the terms of cooperation are clearly regulated by the contract. If the entrepreneur is a beginner, he can choose the option with the maximum coordination from the franchisor. If not – you can choose a franchise, which provides broad freedom of action.
Disadvantages of opening a franchise business:
- lack of independence – in this format of cooperation, the entrepreneur will not be able to realize his ideas and creativity, his activities are limited by the contract;
- royalties – it should be taken into account that for the use of the franchise it is necessary to make not only a one-time fee but also periodic payments in favor of the franchisor, which reduces the company’s profit;
- control on the part of the brand owner (brand) – the cooperation agreement is drawn up in such a way that the franchisor can use different methods to improve business efficiency. He carries out strict control over all processes: from the recruitment of personnel and ending with the purchase of raw materials and sales;
- the high cost of the franchise – successful franchises are expensive, for the exclusive right to work under the brand name of “promoted” brand will have to pay well, but in practice, these costs are covered by high sales volumes.
Another drawback is that at the end of the cooperation agreement the franchisee actually leaves the business. It loses the right to use a trademark or technology. But there are some advantages in this – during the work on the franchise, the entrepreneur received invaluable experience in business organization and management of the company, as well as earned some capital. This allows you to start your own business and successfully develop it. Despite some disadvantages, the franchise business provides a lot of advantages. This applies not only to the opening but also to doing business.
How to choose a franchisor?
When creating a franchise business, one of the most important problems is the right choice of the franchisor. To do this, you need to conduct a detailed analysis of the situation in the region, to determine the solvency and needs of the audience. Only after assessing the market supply and demand entrepreneur can determine the direction of activity and move to the choice of franchising on the main criteria.
The company’s reputation in the market shows how popular it is. Mature and popular businesses have a certain image, their own established group of buyers. Partnership with a successful company guarantees great interest from customers, stable operation and prosperity.
The level of support of the franchisor.
The support of the franchisor is very important. A large company has great opportunities, it will help its novice partner in a difficult situation. This applies not only to staff training, but also marketing, legal support, etc.
The size of the lump-sum payment and royalties.
Be sure to take into account the cost of the franchise. More successful companies for the use of their brand, brand, technology take a high cost, but in practice, it quickly pays off due to the high interest from consumers.
Development of trade networks.
If the company is actively developing its network, it means that its franchise partners work successfully and earn income.
The presence of competitors in the region.
If there is high competition in the region, business development may not be as dynamic. This factor plays an important role. Despite the recognition and success of the used brand, it is necessary to take into account the already established habits of buyers who can give preference to the store whose customers are long ago.
The partner for cooperation on the franchise should be chosen as carefully as any business partner: study the franchise agreement and the terms on which the cooperation is offered. Even if the company is successful and at all on hearing, it does not mean that it offers favorable conditions of franchising. On the contrary, the high demand for such a franchise is the reason that the franchisor puts partners in strict conditions and sets a high fee for the use of its brand.
Cooperation with a new and little-known brand, which has a small number of representatives, can be beneficial since the cost of such a franchise is low, there is no high competition. But getting support and assistance from the franchisor will below. He, developing, of course, will contribute to the dynamic development of the franchisee, but the novice franchisor himself will pass a number of difficulties that can negatively affect the partners.
What determines the value of the franchise?
For those who decide to start a franchise business, value plays a key role. It can vary significantly and range from several hundred thousand to several hundred million rubles. The main factors that affect the cost:
- the success of the franchisor and brand awareness;
- the region in which the business will operate in the format of franchising;
- contract period;
- availability of production facilities, equipment and other means of production (trade) from the franchisee.
The most expensive are the franchises of large international companies, whose name is known to almost everyone, such as McDonald’s cafe. As for small Russian companies that are just developing, the cost of their franchise can be 2-5 thousand dollars. It should be borne in mind that expensive franchises bring more income, but there is high competition and it is not so easy to become a partner of a well-known, promoted brand. It is necessary to meet the requirements of franchising and comply with a number of conditions.
Franchising is a great opportunity to start a business from scratch. By purchasing a franchise, the entrepreneur gets access to an effective business model and the opportunity to use the promoted brand, trademark, exclusive technologies. The franchisor helps to establish a business, train staff, provides comprehensive support, which minimizes the risk of failure.
But such activities are associated with certain risks, which for the most part are reduced to the correct choice of the franchisor. If you conduct a detailed analysis and choose the right partner, you can reach the break-even point in a few months and make a profit, while not investing much in the project.
Today, franchising in Russia is actively developing. Many companies use it to gain business experience or raise it to a new level. Specialists of BRB Ramo will help to understand the features of the Russian legislation, see what we can do in the framework of the support of franchise services.