This is not the first time we have talked about franchises, those businesses that practically run themselves, on this blog. But how do franchises work exactly?
Franchises are undoubtedly fast-growing models and have established themselves as a successful business format in every country in the world.
As a business concept, it can be Vietnam Phone Numbers said to be the “holy grail” of formulas that bring immense benefits to those who put it into practice.
Spain has a great acceptance, so much so that, according to information from relevant entities, the interannual growth rate of franchising is 20%.
We are now going to explain everything that this business model means and its most interesting aspects, as well as how franchises work.
What is a franchise?
A franchise is a system in which an investor buys only the rights to exploit the products or services of a brand in a market that the brand has not yet entered.
Now, according to Estudio Canudas in its work “the ABC of franchising”, it dictates that it is a commercial relationship between two parties that we have already seen.
The franchisor grants or awards rights to the franchisee to use the brand and commercial system thereof, supporting the latter with commercial assistance and product distribution, as well as all the commercial training necessary to develop the business.
However, the franchisee must pay the franchisor for the granting of rights , and assumes the management and risks of the brand, whether commercial or financial.
Its four fundamental premises are: transparency, brand, training and technical advice, know-how and continuous assistance.
What is NOT a franchise?
Very easy!
It is not an employment relationship.
It is not a multi-level system.
They are not agencies.
It is not a society.
It does not represent an investment instrument.
Is a franchise the same as a brand license?
For many, both concepts are similar, but they contain notable differences.
However, the business relationship called “trademark licensing” grants a third party the right to use a trademark, but without exclusive rights or training or technical advice .
In this case, the owner of the trademark grants limited rights to manage and operate the trademark, only in exchange for financial compensation and for a period of time that can be renewed.
With this transfer of non-exclusive rights, the owner has no control over the operations of the temporary holder.
In summary:
Franchising is a contractual commercial relationship between the franchisor and the franchisee, which involves training and assistance from Albania Phone Number List the former to the latter , with monetary compensation from the latter to the former.
The history of franchises
Do you know which was the first brand worldwide to exploit the franchise system? None other than the American brand Singer, which specialises in sewing machines.
Singer’s owner, Isaac Singer, created this licensing system to allow other people to distribute and sell his machines worldwide.
Now, the 20th century is “the century of the franchise.”
The following two decades saw internationalisation, with the company establishing itself in other countries.
Already in the 1990s and early 21st century, the system followed the pace of international expansion and application in various sectors or activities of society.
Characteristics of a franchise
If you are interested in this new and updated business model , it is important that you know its most relevant characteristics:
It is a fully tested system, consolidated worldwide – no improvisation!
Training and technical advice for those who will develop it as franchisees, as well as ongoing support from their franchisor.
Its model is fundamentally oriented towards the client and their needs.
For the brand, ease and speed of growth.
Excellent monetary utility . For some experts, it is almost 24% of the sales value.
Investment recovery between 18 and 24 months.
Constant and solid communication between the parties.
It adapts to any commercial area.
Once established, ease of reproduction and transmission of the Know How.
Ideal model for SMEs.
Ease of financing.
5 Advantages of having a franchise
The question of how franchises work comes with a series of answers, and we are sure that before learning about the concept, you need to analyze its advantages or benefits.
And the answer is yes.
Here in this blog we don’t publish meaningless things, but rather things that add value to both your life and your ideas. And below these lines, you will see the main advantages that a franchise can offer you:
1. Build a famous brand that sells more!
Franchising is a business model that allows a brand to be positioned quickly , managing to be in the best locations or sites in a certain city or, more broadly, an entire country!
2. Reduce costs
One of the most interesting, profound and important topics when it comes to creating a brand or business. The franchise format is more economical when it is growing .
How is this possible? Because buying small quantities is not the same as buying a considerable volume. In addition, more stores allow for a drastically reduced unit costs, having a better distribution of fixed prices thanks to a greater reach and sales.
3. It does not require an initial investment
For the franchisor, this is the fundamental advantage, what is known as economy of scale.
The franchise format does not require much initial investment, since it is the franchisees who make the investments.
In other words, the franchising company is responsible for developing the idea and the know-how . Therefore, by having limited resources at the beginning , it will be able to increase the speed of expansion without compromising its financial balance sheet in the “debt” section.
And there will be rapid availability of liquidity, because it grows with the contribution of external resources.
This will allow it to reach a representative size and sales volume , much sooner than other similar companies that do not have this format, in order to invest in other aspects, for example, improving logistics.
4. It has specialized and motivated personnel
When you have a franchise, there are few employees directly related to the brand.
Typically, key (brand) personnel focus on marketing and design, research, among other value factors.
However, the bulk of the staff belongs to the franchisees, who are responsible for hiring, supervising and managing their activities and other aspects such as safety and work efficiency.
But the best thing is that a franchise is synonymous with motivation , because it will attract the attention of many people who identify with its work and service mystique.
This will result in more motivated employees, which will translate into greater competitiveness and efficiency.
5. Improve contact with the end customer
For many companies, getting in touch with their customers can be a complete nightmare, due to the arduous logistical task they must face in order to market their products or services.
In the case of franchising, the task is much simpler, because the products are distributed directly to end customers without going through distributors or third-party intermediaries.
This also allows the franchising brand to save costs, significantly improve its final distribution and react much more quickly to customer trends.
Disadvantages of having a franchise
Of course, like any good trading system, it also has some significant difficulties or disadvantages.
However, if you are considering becoming a franchisee, we leave it up to you to evaluate the pros and cons and make the best decision.
1. The benefits are shared among everyone
One of the disadvantages of this form of business is that as it grows, profits are distributed equally, so each new entity means less potential profit for the others.
If you, as an entrepreneur, choose this type of business, you will have to abide by the profit margins, which will be lower than if you do it as a private individual.
Now, as a franchisor, profits will increase with each new entity that becomes part of the brand.
2. Little independence for the franchisor
Each franchise is an independent business entity. However, the control or management of certain activities will be coordinated between the franchisor and the franchisor, so independence is reduced.
However, for the franchisor it will be more important to play a conciliatory or dialoguing role , rather than imposing their particular ideas or solutions.
A franchise should represent mutual benefit for both parties.
3. There is a risk of mismanagement by the franchisee
Although the franchise provides know-how as well as advice, poor management by the franchisee could become a risk, causing loss of profit, sales and the consequent loss of reputation and image of the franchise.
It is important that before starting a franchise relationship, brand owners make a good selection of franchisees.
Advantages and disadvantages of having a franchise
How does a franchise work?
In this case, the two parties will share rights and duties through a contract, and they need to develop stable and friendly communication. By sharing all these things, they will have a number of impressive benefits.
The operation of a franchise is based on a business concept with relative success; the brand begins to gain relevance and finances increase steadily. Furthermore, operations are calculated and tested.
Despite the above, at the time of expansion, the owner will probably not have the necessary capital to carry it out.
This is how you sell your idea to a third party, turning the concept into a franchise.
To better understand how it works, let’s review the 3 fundamental parts involved in this successful business model, very much of the 21st century.
1. The franchisor
What does the franchisor do? He is the person who owns a brand and its products or services . As such, he is the one who is responsible for transforming the brand into a franchise-type business idea; therefore, he is responsible for managing and investing in:
Everything that has to do with marketing and brand design activities .
Concerning trademark registration .
Development of the project for the technical specifications that the various locations where the franchise is developed must have, as well as the work process .
It is responsible for finding suppliers to develop its products or services , as well as the various computer systems that allow their operation. It can buy them or design them.
To open your first business you will need:
Find the ideal space, whether owned or rented, in the most convenient area and carry out the various renovations.
Find the workers that your business type requires.
Adapt the management model to your business idea.
Open the business.
Now, when thinking about franchising, it refers to the expansion of the idea with all the advantages that it entails, but without the initial expense. To do this, you will need to prepare what concerns the business relationship:
Working conditions between the parties, which will be established in a commercial contract.
The franchise presentation manual (or dossier).
The operations manual with all specifications.
2. The franchisee
Select the ideal partners for the development of the franchise.
Budget the franchise.
Provides training in business management.
Provide franchise services in terms of marketing, research, product development, logistics and other services.
Recommend suitable locations for model development.
Coordinate matters relating to the installation of the franchise in the chosen locations.
What are the expansion skills that the franchisee must develop?:
Develop the training and commercial advice received from the franchisor.
Offer specialized attention to customers regarding the brand and its products or services.
Manage the various operations that must be executed.
Make responsible and timely payments of fees, rights and royalties.
Respect quality and work policies , among others.
3. Entry fee and royalties
The last part of how a franchise works, and one of the benefits that comes with creating a business idea, particularly for the franchisor.
Franchisor
The best examples of franchising in Spain and the world!
Concluding this important topic, we present some examples of success of this business model in full expansion, starting in Spain:
A fashion brand in the market. Zara is one of the most important Spanish franchises and a member of the Inditex business group. It is positioned in more than 88 markets, with more than 2,100 global stores.
Have you heard of El Corte Inglés ? Nobody imagines that it is a franchise-type chain of stores with significant success.
And where is FNAC ? Another chain of stores that has worked on the franchise concept, combining a variety of products with unique shopping experiences.
Now, at an international level, we still have clear examples of what this concept means; what’s more, these brands defined it and continue to do so:
Hilton Hotels are another clear example of a global hotel franchise, with majestic locations and luxurious service.
And you, what other advantages do you think there are to acquiring a franchise?
