Modern business development can have different nature and specifics. One of its current forms is considered to be franchising. This process involves the work of companies on the basis of the franchise they have received. This document is a license that gives the relevant company the right to manufacture or sell certain products or provide commercial services in a specific territory.
The authority to issue such an official permit to industrial, commercial, and service enterprises of various sizes and profiles is vested in a certain person – the franchisor. The relevant rights holder and all key aspects of his work are discussed below.
Who is a franchisor?
A franchisor is a party to a franchise agreement that sells the franchisee the right to use its trademark, business methods, technical innovations and experience, and production system.
Various sources also refer to such an individual or, more often, a legal entity as a franchisor, franchisor, franchisor, or franchise seller.
However, the legislation of Ukraine does not contain the term "franchisor" as such. State documents use another concept with identical content - "rights holder".
In practice, the franchisor's services look like this.
For example, Ivan plans to start a business. To open this business, he has minimal start-up capital, which will ensure a steady income without employment.
This aspiring entrepreneur studies the franchise catalog and finds a commercial offer from the company "Svyatkova vypechka" in this list. Having familiarized himself with the content of such a business offer, Ivan contacts the official representative of the relevant company. As a result of communicating with him, the future businessman concludes that the terms and requirements of cooperation with the company "Svyatkova vypechka" are acceptable to him.
The next step is to sign a franchise agreement with the relevant company and pay Ivan a lump sum. This is the amount of money that the company "Svyatkova Vypichka" values its own franchise and all the benefits it provides to its new partner.
After concluding the relevant agreement, Ivan acquires the status of a franchisee of the brand "Svyatkova vypychka" and receives the right to open his own bakery with the same name at his own expense. He also receives advice and recommendations from the franchisor regarding the location of this enterprise, the search for professional bakers, sources of equipment, raw materials for flour products, etc.
In this case, the franchisor is the company "Svyatkova Vypichka", because it was they who sold Ivan the right to open a bakery like hers that meets their standards.
The franchisor's job is to perform the following functions:
- selling a franchise to other businessmen (franchisees);
- training them in successful entrepreneurship;
- providing these partners with contacts of proven suppliers of equipment and products (raw materials) necessary for doing business;
- support, advisory assistance aimed at the productive development of franchise companies.
By purchasing a franchise from its seller, the entrepreneur receives permission to use its brand and becomes the owner of exclusive territorial rights. Such a partner of the franchisor can count on the latter's help in drawing up a correct, optimal business plan.
The franchisor can also teach this novice businessman all the intricacies of entrepreneurship, from production technologies to product layout, and provides him with professional legal support. For example, he helps the franchisee in solving problems related to cooperation with the tax inspectorate and customer claims.
How to become a franchisor?
To obtain the appropriate status, a company or individual entrepreneur must own a business that is efficient and successful.
Most often, such activities are started by a developed network company with several branches. However, there are cases when private enterprises begin selling franchises after opening their first point. But in these situations, sellers of relevant licenses who do not have experience often take risks and suffer fiascos.
A necessary prerequisite for selling franchises is their "packaging", i.e. the preparation of everything necessary so that a businessman who has received franchisee status can use the franchisor's achievements. They and the license seller's instructions should lead this entrepreneur to profit.
Preparing for franchising
This work, which will become the necessary foundation for creating a successful franchise system, is multifaceted and complex.
Its algorithm includes five basic steps, each of which is briefly described below.
1. Valuing your own company
This process involves analyzing the experience, achievements, demand and competitiveness of the franchise applicant in the market. Such work is related to determining the level of profitability and uniqueness of the company. In order to be able to assess all these aspects objectively, the company must have been operating for at least a year.
2. Ability to provide the franchisee with all necessary conditions and services
This does not only mean a branded exclusive logo with a well-thought-out design that will help consumers recognize and identify your company among competitors. The key task of the franchisor is to transfer to the franchisee their own professional knowledge and experience that are directly related to business development. That is, in fact, an experienced franchise seller provides the franchise buyer with know-how as a guide for effective sales of goods, service, enterprise management and its financial management.
3. Calculation of the cost of cooperation
The task of this analysis is to calculate the return on investment of the business for both parties to the transaction. It is necessary to take into account the amount of investment from the franchisee, the real terms of starting its work "in the plus" and the initial financial investments necessary for the business. Also, based on the amount of current expenses, the size of the franchise fees in the network is calculated. They must be acceptable to the franchisee.
4. Processing of the franchise package
This involves preparing a franchise agreement that will regulate the rights and obligations of its partners during the relevant cooperation and after the term of this agreement expires. Additionally, an operational manual is required, describing the franchisor's know-how and its business plan. Such processes are time-consuming and require a professional approach.
Only if all of the above preparatory work is performed qualitatively and thoroughly can you begin searching for franchise buyers.
Franchise development
The algorithm for creating and launching such a contractual document, which will grant a paid right to conduct business by a third party on behalf of the brand, includes several stages:
- preparatory – it is described in detail above (the result of monitoring the existing business model may lead to a conclusion about the need for its refinement);
- designing a business book and developing a presentation of your company (brand) - this type of work is called "packaging" entrepreneurship in a franchise;
- formation of a sales department, creation of a landing page (corporate website with one page) and specialized and professional training of managers;
- organization of a technical support unit to provide legal and other advisory support to franchisees at all stages of starting a business.
Such processes will require the franchisor to make a number of investments related to developing a franchising strategy, automating the work of all franchise structures, marketing the franchise, preparing a package of necessary documentation, and creating additional departments of the company, whose employees will have to be paid.
Legal aspects
The list of legal terms that should be taken into account when concluding a franchise agreement and correctly reflected in this document is given below:
- the range of rights granted to copyright holders, with the identification standards corresponding to them;
- type, category of franchise (it can be trade, service, production or mixed);
- conditions for providing the user with commercial and technical documents;
- the territory within which the franchise agreement will operate;
- the term of use of the rights of the copyright holder;
- sizes, terms, algorithms and other features of reward payments;
- coordination of aspects of competition policy;
- establishing clear product (service) quality criteria and monitoring of relevant standards by the franchisor;
- the procedure for providing and protecting confidential data;
- sanctions that will be imposed on franchisees in case of non-compliance with the terms of the agreement.
The document must also clearly state the conditions under which the relevant commercial agreement becomes invalid.
The most important provisions of this agreement for the franchisor include the date of commencement of use of the rights, the limits of their application and the scope of obligations, and the procedure for the franchisee company to provide the rights holder with accounting and financial statements.
Advantages and disadvantages of franchising for the franchisor
Selling a franchise is profitable because for the seller of such a license, it has several priority features.
- This is the fastest and most convenient way to expand your network, grow your brand, and require relatively small financial investments.
- Increasing profitability - the franchisee pays the franchisee a lump sum payment (these funds fully cover the amount of his expenses for opening a new branch after the sale of the franchise and include a profit item).
- Royalty income. This refers to the payment for the services of specialists who provide support for the commercial activities of the newly created "point" and the income item from such a service.
- Popularization of its own brand. As the network expands, the franchisor's trademark becomes known in a wider region. More people recognize it, because the branch is associated with the owner of the company it represents.
- Reduction of staff and, consequently, the costs of maintaining these full-time employees. Many duties that would have to be performed by corporate office employees are transferred to franchisees.
- Ease of supervision. The franchisor company is not responsible for the daily management of its branches. And mistakes made by the franchise partner related to his unreasonable financial expenses or purchases do not affect the franchisor's profit.
- Increasing the value of the business. Compared to other enterprises, the commercial activities of franchising companies are valued many times higher. In this way, the respective rights holders create a scalable and effective growth model for themselves and increase their rating.
A solid range of relevant advantages provides a clear answer to the question, Why become a franchisor?This type of business contributes to the rapid and intensive development of the distribution network of goods or services of the copyright holder company.
There are far fewer disadvantages to this type of entrepreneurship than advantages. Here are a few relevant negative points:
- the likelihood of a deterioration in the brand image if the franchisee fails to comply with the required quality standards;
- the likelihood that this partner will transfer the secrets of the franchisor's business success to its competitors;
- the need for constant financial costs associated with servicing, assisting and training franchisees.
And the most important disadvantage is that the copyright holder does not have the ability to directly control the level of sales of his products.
Examples of successful franchisors
We can name many such companies that have reached leading positions in Ukraine or the world.
- SPAR is an international supermarket chain, currently the largest in the world. Founded in 1932 in Holland, this conglomerate is considered a pioneer of franchising in the food retail industry. As of 1999, this huge corporation covers 22 countries on four continents.
- McDonald's is a famous brand with the status of the world leader in fast food franchising. Its career began with the opening of a tiny hamburger restaurant in California in 1954. The number of franchisees of this concern, which currently does not need advertising, in 1987 already exceeded 10 thousand. Our country joined their number in 1997.
- "Nash Krai" is a domestic TM that is among the TOP grocery retailers in Ukraine that have chosen the franchising model for development. The market experience of this brand, which operates in three different formats (supermarket, convenience store, and express cafe), has been going on for over two decades.
- KFC is a global niche fast food company with a network of thousands of franchise restaurants, over 30 of which currently operate in Ukraine. It is known that this world-famous brand was founded in the USA in the 1950s by Harlan Sanders.
The most successful and most expensive franchisors in Ukraine as of this year also include the brands DNIPRO-M, Pizza Celentano Ristorante, KIMS Dry Cleaners, and Lviv Chocolate Workshop.
Frequently asked questions
How do I determine if my business is ready for franchising?
Key signs of potential readiness for such a development path are profitability and stability of profit, availability of work experience, a worthy reputation and competitiveness of the company. Desirable criteria are the mobility and adaptability of the business, its potential accessibility for franchisees and a brand that is known and recognized.
What should be included in a franchise package?
The standard of such a license, also called a franchise, includes a trademark, know-how, an operating manual, a range of services that the franchisee receives from the copyright holder, and monetary payments to the latter.
What legal aspects need to be considered when opening a franchise?
The legal aspects of this process are regulated by Order of the Ministry of Justice No. 1601/5 "On Approval of the Procedure for State Registration of Commercial Concession (Subconcession) Agreements", which entered into force on October 21, 2014.
First of all, attention should be paid to clause 4 of this Order. It covers all points related to the procedure for state registration of commercial concession agreements.
How much does it cost to create a franchise?
The amount of the franchise "packaging" depends on the size of the lump sum payment. These funds usually amount to 100 thousand hryvnias - there are significantly more applications for such franchises than for value franchises, the price of which can start from 400 thousand $.
How can a franchisor control the quality of services provided to franchisees?
Common ways of conducting a relevant audit include the "mystery shopper" method, which allows you to objectively assess the quality of the sales process or service, identify problems and see the effectiveness of the complaint handling procedure. In this case, they are based on objective observations.
Conclusion
Small and medium-sized businesses have a real opportunity to use well-known trademarks for their development.
This strategy involves the use of a proven business model, many years of experience, and an established system of a leading company. This effective form of cooperation between enterprises is called franchising.
