Definition, advantages and fundamental aspects of a franchise

  It is necessary to have a clear concept of what is a franchise, how do they work, their benefits and other aspects in order to have a better understanding of the business in which Juan Chichero is the leader.

What is a franchise?

According to Meyer, H. in his book "Marketing", retail sales define the franchises, concessions or licences as a contractual agreement in which a main company (franchise granter) gives another company (franchise holder) the right to conduct business in his name under specific guidelines.

We can summarize in a simple way that a franchise granter has the ownership and rights of the name or registered trademark and sells a right to the franchise holder, we acknowledge this a product license.

In the most complex form, the license contract is a broader and constant relationship that exists between two parts, where very often, a complete range of services is enclosed, including the selection of the place where the franchise will operate, training, materials supply, marketing plans and also financing aspects.

The spectacular growth of the franchise holders represents the rapid growth of two tendencies: the need of the individuals to be their own bosses, fast, and the need of companies to find more efficient and cheap ways to expand.

Meyer, H. and Kohns, S. establish that during the time in which is valid a license agreement is called a conttract, and it can range from five years to an unlimited time; where the majority of agreements are for 20 years. After the period has finished, the franchise granter very often has the right to re-buy or re-sell the unit.

Other authors say franchises are a privilege given by an governmental organization to an individual, a collective society or anonimous company to use a public society, a street or a road, or the space over or under the street or road. The franchise can be by a fixed period of time, for an indetermined time or forever.

According to Phillips Kothler in his book "Dirección de la Mercadotecnia(The Direction of Marketing)" the concept of franchise is established as a concession or agreement with the concession granter in the foreign market, offering the right to use the manufacturing process, tha brand, the patent, the commercial secret and other value points, in exchange of fees.

Below you will find what the franchise granter receives in return for his franchise:

A franchise fee. It's a one time anticipated payment that the franchise holders make directly to the franchise granter in order to be part of the franchise system. This payment reimburses the franchise granter the location, qualification and training costs of the new franchise holders.

A sales fee, which is an annual payment, between 1% and 20% or more of the franchise holder's sales, which is payed to the franchise granter. This payments represent the costs of making business as part of a franchise organization.

A marketing fee. It is an annual payment, usually less than 3% of the sales, that covers the corporate advertising.

The profits for the sale of equipment, provisions, services or products to the franchise holders.

According to what we've seen, it would be wise to clear up that not all franchise holders are successful since they are tied up to the economy in which they develop. If the economy grows, the franchises will also grow, in the opposite scenario, when the economy of a country or region does not grow or develop, the franchises will not be able to grow. But if franchises are compared to small business, the probabilities of survival are better in the case of franchise holders, since many numbers show that about 5% of the total of franchises are discontinued every five years, compared to 50% of new independent busineses.


Which are the advantages of a franchise?

According to the administration of small busineses in the USA, the franchise has many advantages over retail independent busineses. They are:

Reputation: It is an established system on licenses that's well known, the new franchise holder does not have to work to establish the reputation of the firm. The product or service offered is already accepted by the public.

Working Capital: It costs less money to operate a franchise, because the ranchise granter gives the franchise holder good inventary controls an other resources and ways to reduce costs and expenses. When necessary, the franchise granter can also give financial assistance for the operational expenses and costs.

Experience: The advice given by the franchise granter compensates for the lack of experience of the ranchise holder.

Managerial Assistance: The owner of a little independent store has to learn and manage just about everything, and an unexperienced retail sales establishment owner could not be a master in all the aspects of finances, statistics, marketing and sales promotions. The best franchise companies give the franchise holder continuous assistance in this areas.

Profits: When reasonable franchise costs and agreements on materials supply, the franchise holder usually can expect a reasonable profit margin. The business is managed with the efficiency of a chain.

Motivation: Since the franchise holder and the franchise granter benefit from the success of the operation, both work adequately for common objectives.


Advantages for the franchise holder

The motivation for the franchise holder is mainly to benefit from experience, notoriety and guarantee that accompany the image of the franchise granter.To this basic motivation we can ad the following considerations:

To have the possibility of starting a business with little investment
To reduce the risk and uncertainty, since it is a project succesfully proven
Benefit from a better buying possibility from the suppliers of the franchise chain
To receive constant formation and assistance from the franchise granter.
To have access to the best locations thanks to the financial power and name of the
franchise granter
To receive help in the marketing issue and the financial and accounting issue
To have well conceived and decorated sales locations.
To benefit from the investigation and constant development of new products or services
To have the possibility of creating your own business as an independent belonging to a great organization. The franchise agreement is a relatively flexible collaboration between the franchise holder and the franchise granter. Nevertheless, there are three fundamental principles for the strength and stability of a franchise agreement, and those are:

The will to work being helpful to each other
The acceptance of a reciprocal transparent right
The legal fundamentation of the formula
This last one is essential; the franchise is an original method of distribution of a good product or a good service (a succesful formula). It will never be a solution to the problems of an enterprise in a difficult situation which declares itself a franchise granter without having tested his formula

Characteristics of a good franchise

A good franchise must be above all, a proven and transmissible successwhich can be reproduced by the franchise holder in his territory. A good formula has the following characteristics:
It has to do with the commercialization of a product or service of good quality.
The demand for the product or service is universal or, at least, it is not limited to the region of origin of the franchise granter.
It leaves the franchise holder, well established in a place, a right to reject at the beginning the implementation of one or more franchises in his territory.

It foresees an immediate transference of know how and an effective formation of the franchise holder in the techniques of marketing and in the inherent methods to the franchise.
Does some testing with a model enterprise.
Establishes the principles of a continuous relationship between the franchise granter and the franchise holder so that they can improve the conditions of exploitation of the franchise and interchangeinnovations, new product or services ideas, etc...
It describes explicitly the initial contributions (training, know how, etc.) and the permanent ones (marketing support, advertising, promotional actions, investigation and development, diverse services) of the franchise granter.
Expresses the immediate payments (initial fees) and continuous fees (cannon) that the franchise holder must make.
Involves the franchise holder in the process of the definition of the future orientations of the franchise, and makes it participate in the life of the franchise.
It forsees a procedure of renovation, renegotiation and annulment of the franchise contract, as well as the posibility of franchise rescue by the franchise holder. The franchise offers an interesting option compared to all the controlled or conventional vertical structures. As a matter of fact, in a franchised network, the investment of each establishment is made by each franchise holder, owner of the establishment. From the franchise granter point of view, the creation of a franchise network lets it have quickly and with a low cost an international network, and this, without investing directly in the property of the network, but controlling it by contract.

The franchise is an integrated distribution system, controlled by the franchise granter, but financed by the franchise holders. A good franchise is a good partner in which the success of the franchise granter and the success of the franchise holder are inevitably co-dependent.