What is a Franchise? Is it a Good Option for Your Business?
If you have been bitten by the entrepreneurial bug, you should bear in mind that it will be very difficult to get rid of it, so you will have to do something about it. But don’t worry, having your own business doesn’t always mean starting from scratch.
Sometimes it is something simpler because you have the support of a large company behind you. This is what happens with franchises. If you are interested in this form of entrepreneurship, you will like this article. Let’s see what a franchise is and if this business model is really the most appropriate for you.
I’ll tell you in advance that this system has good things and bad things, but in general it can be quite interesting, as long as you’re willing to give up part of your management power to a company that has a successful brand.
Surely you have heard on occasion that franchising is a complex process, but this should not discourage you. There are many examples of entrepreneurs who have achieved success through a franchise , even though at the time they knew little or nothing about the sector they were going to enter.
The important thing is that you are willing to learn, that you do not procrastinate and that you follow the guidelines indicated by the parent company.
Do you find the world of franchises interesting? Well then I won’t entertain you anymore, read on and discover everything you need to know about them.
What is a Franchise?
From a technical point of view, we can define it as a business model in which a person or company gives another the right to exploit their business system in exchange for an economic consideration.
But for you to better understand what a franchise is, I am going to give you a much simpler definition. It is a business model in which you can carry out an activity under the name of a recognized brand in the market . But in exchange for this, said brand will tell you how you should carry out the exploitation of your business and will also charge you a fee for it .
Elements that make up the franchise
What we have seen so far you will understand better when you know the different elements that are always present in a franchise:
- Franchisor or franchisor : is the person or company that owns the brand and the know-how .
- Franchisee or franchisee : is the person who undertakes his business sponsored by the franchisor’s brand. You may be yourself in the near future.😉
- Brand : It is the key when it comes to understanding how a franchise works, since the success of the franchisee depends on being able to respect the image of the brand that the franchisor has created. The brand is what makes the franchise recognized and what allows undertaking through this formula to have less risk than starting a business completely from scratch.
- Know how : in Spanish it would be something like “know how” . It is all those processes and systems that have led the brand to success. This is what means that if we decide to eat in a VIPS restaurant, we do not notice much difference in the food, service or decoration, regardless of whether we are in one of their establishments in Madrid, Valencia or anywhere else.
- Contract : it is the legal document that binds the franchisor and the franchisee. Through it, the franchisor grants the franchisee the right to use its brand and transmits its know-how, while the franchisee undertakes to respect the processes and systems of the brand and to pay the agreed amounts.
Types of Franchises
Now that you know what a franchise is and you know its basic elements, it’s time to complicate things a little more, because not all franchises on the market are the same. There are different modalities that you should know.
Franchises according to the type of business
- Industrial : in this business model, the franchisee and the franchisor are within the industrial sector and what is done is to assign the right to manufacture certain products.
- Distribution : here the franchisee is a mere distributor who is responsible for supplying the franchisor’s products.
- Services : the franchise gives the franchisee the know-how to correctly provide a certain service.
- Commercial : it is the most common model, in which the franchisee is responsible for the sale of the franchisor’s products.
- Production : the franchisor is in charge of the production and the franchisee of the sale.
Franchises according to the relationship between franchisee and franchisor
- Master : the franchisee has the right to develop a company following the same process as the franchisor and the same strategy in a specific area. Its main characteristic is that it allows subfranchising.
- Representative area : the franchisor not only acquires the know-how but also gets involved in the search for talent for the company and supervises their activity.
- Multiple : implies the possession of several franchises of the same brand.
- Additional participation : one of the parties is part of the shareholding of the other. The common thing is that the franchisor becomes a partner of its franchisee.
Franchises according to your location
- Online : in this case there is no physical location as such, which greatly reduces the costs of entering the business.
- Corner : the activity takes place in the premises of another business.
- Shop in Shop franchise : it is similar to the previous model, but the decoration is usually implemented so that the end customer does not appreciate that they are two different businesses.
- Regional : the right to operate a number of franchises in a specific geographical area is transferred.
Some examples of franchises that have succeeded in Spain
Before delving into more complex issues about how to create a franchise and its advantages and disadvantages, we are going to review some examples of companies that have succeeded through this business model.
I would also like you to keep in mind that franchising is a very good way to grow a business . If you have a company with a very defined business model, turning it into a franchise may be the best way to grow. This way you reduce risk while seeing your brand expand even globally.
For this reason, knowing what a franchise is and understanding how it works is interesting both for new entrepreneurs, who may consider starting one, and for entrepreneurs who already have their business active and are looking for ways to expand it.
And now yes, we review some examples of successful franchises that you surely know.
How does a Naturhouse franchise work?
The Naturhouse company was founded in 1986 and currently has more than 2,300 centers spread over 30 countries . It has specialized in nutritional advice combining it with the sale of food supplements based on natural extracts.
It usually carries out master franchise contracts, so that a franchisee can acquire the exploitation rights in a certain area, even in an entire country.
What is a Lizarran franchise?
The Lizarran brand emerged more than 30 years ago in Barcelona and gradually began to spread, until it became one of the best-known taverns. Today it has more than 200 establishments spread throughout Spain and more than 30 abroad . One of its strengths is that it is committed to training and advising its franchisees so that the brand image is exactly the same in all its stores.
I have chosen Bershka as an example, but the truth is that any of the Inditex Group brands is emerging as a good franchise option as they are internationally recognized brands with a high sales volume .
Why choose the franchise model if you are an entrepreneur?
If you go to a franchise fair, or ask for information on companies whose business interests you, they will paint everything very nicely for you. But, as you can imagine, all that glitters is not gold in a franchise. This form of entrepreneurship also has some drawbacks that it is important to know about .
We will start by reviewing the advantages it has and then we will see the negative aspects. This way you can make your decision in a more informed way .
Advantages of franchises
You don’t start from scratch
Starting a business completely from scratch is something that can cause a lot of fear and uncertainty, because you don’t know if the idea will be good and if it will work or not. However, with the franchise this does not happen.
You jump right into a business that has already been tried and proven to be successful . With products or services that consumers already know and are willing to purchase.
The franchisor transmits its know-how to you
The franchise is interested in you as a franchisee doing well. And that is why he will put at your disposal all the necessary means for you to achieve success. This implies training in all the areas that are necessary to manage the business and the transfer of its strategies to succeed.
The franchisor passes on his experience to you, and that is something that is invaluable . If you were to start your business completely from scratch, it would take years to design a system that would be totally effective and give good results. In addition, you would surely have to invest a lot of money in training to learn how to manage the business.
You already have a brand image
All companies and freelancers know that building a brand image is essential to attract customers. But this is neither easy nor fast , and any small mistake can ruin everything you have achieved.
The good thing about entering a franchise system is that you save yourself all the worry and work related to creating the brand image, since that is taken care of by the parent company. Thus, you have the security of reaching the market with a product or service that is already recognized and that already has loyal customers .
You have help throughout the start-up process
When the day comes to open the doors of your business for the first time, you feel an incomparable emotion. But to get to that point, you first have to go through a maze of planning, decision-making, and paperwork .
Getting a business up and running involves finding an establishment in the right place, negotiating a good price and a contract that is as beneficial as possible for you, obtaining the relevant administrative licenses and much more.
All this can take you months and generate a lot of stress, because it is an issue that is unknown to you and that you do not know very well how to approach. But if you start from the hand of a franchise you will not be alone in this process .
Most franchisors help their franchisees with everything they need to get them to open their business. Some even offer the “turnkey” service , which implies that the franchise takes care of all the paperwork and leaves your business ready for you to exploit it, without you having to worry about any paperwork related to the opening.
In addition to these advantages that we have seen, undertaking through a franchise has other pros :
- You can acquire the stock with more favorable purchase conditions.
- You don’t have to deal with advertising.
- Access to financing is easier thanks to the franchise’s collaboration agreements with certain financial entities.
- The franchise continues to innovate in products and services that you can then sell.
Disadvantages of franchises
Entry and permanence in the franchise is usually expensive
Although today there are what are known as “low cost” franchises, the truth is that this form of entrepreneurship is not cheap at all. Under normal conditions, it would be cheaper for you to set up a normal hamburger restaurant than to enter the Burger King chain.
The usual thing is that you have to pay an entry fee that covers costs such as training and advertising. In addition, depending on the income you get from your business, you will have to pay a series of royalties , so not all the profit from your business will go to your pocket.
There is hardly any room for creativity
A franchise is not a business in which you are going to have freedom when it comes to creating new products or services, or offering promotions to your customers. All of these issues are addressed by the parent brand and breaking their guidelines could result in some type of penalty.
The power of the franchisor is quite high
This has a lot to do with the above. Although you are the owner of the business, in reality your management power will always be limited by the franchisor, who will be the one who makes the important decisions .
In some cases, the franchise can even terminate the contract or impose limitations on the sale or transfer of the business.
How to start with a Franchise?
I hope that what I have explained to you so far has helped you better understand how a franchise works . It’s time to go one step further, and see some tips that will help you make the final decision on whether or not this form of business is right for you .
To begin with, remember that you must have time to dedicate to your project. If you don’t know very well where to get it, I recommend reading my article on 10 ways to find time for your project . Planning is one of the keys to success, so spend as much time as it takes.
Evaluate the pros and cons
You have already seen that this business model has its good things and its bad things. My recommendation is that you put this on your particular scale and decide if the good things outweigh the bad , or the opposite.
Choose the franchise well
If you have decided to go ahead and fully enter the world of franchising, it is time to choose the franchisor. And this is not easy at all.
Today there are franchises in practically all sectors, so your first decision should be about which one to enter. Once you have it clear, you have to start an arduous task of investigation , because you should not stay with the first option you find.
I give you as an example the sector of self-service laundries, which in recent years has developed quite a bit. It is profitable and the initial investment is not too high, but there are many franchises operating in it and not all of them will offer you the same conditions.
My recommendation is that you inform yourself very well. Contact the franchises that interest you and ask for information. But also do your own study with the help of the Internet and specialized media . The more information you have, the better you can decide.
At the end of this study work you should be left with two or three franchises, which will be the ones you will choose from.
Before making the decision, interview personally with the franchisors . In person they will give you more information about the conditions that they will demand of you as a franchisee and the profitability that you could obtain. In these interviews, do not hesitate to ask everything you consider necessary.
Check up to the last point of the contract
Once you have chosen the franchise you want to work with, one of the most delicate moments arrives, that of signing the contract. Keep in mind that this is never an equal negotiation here . So the company is going to offer you the same standard contract that all its franchisees have.
But this does not mean that you have no room for action. If you play your cards right, the parent company might support some tweaking (not too many).
The contract is the document that establishes your rights and obligations and those of the franchisor, so once you stamp your signature, you will be bound by what you put in it. My advice is that you never sign it without first consulting it with a legal specialist .
There are lawyers specialized in this matter. Believe me when I tell you that it pays you to pay a consultation and have the contract explained to you point by point. This way you will be able to know if what you are going to sign is really what you have been told and also resolve all your doubts with someone who is totally unrelated to the operation and, therefore, objective.
Once you fully understand the content of the document and have no doubts, you can sign the contract and become a franchisee.
Get fully involved in the process
After signing the contract, your life is going to turn into real chaos for a few weeks, because there are hundreds of things to do before opening the doors of your business . Immerse yourself fully in the process and don’t forget to enjoy it, because it will be hard but it will also help you learn .
Make the most of the training that the franchise gives you and do not hesitate to ask for help when you need it. As I told you before, the parent company is the first interested in your doing well, because the more you earn, the more it earns . So she will always be ready to give you support.
Of course, try not to leave the fold at any time. The rules that they give you regarding the decoration of the premises, marketing, offers, processes, personnel, etc. they are there to fulfill them. They are part of that valuable know-how to which we have referred, and without them the business might not work the way you expect.
If you integrate well into the franchise from the beginning and adjust to the way they work, you will be one step closer to success . However, if once your business is up and running you consider that it is not giving the profitability that it should, consult immediately with the franchisor to find out what is failing and take action before it is too late.
By working hard, you will get your business to move forward and become one more success story of the franchise to which you belong. But remember that undertaking through a franchise is not a guarantee of anything . If you don’t do things right, you could fail and lose a lot of money along the way. Therefore, the best advice I can give you in this case is that you follow to the letter all the guidelines that are imposed on you by the parent company.