Franchising - The ideal way to enter the business world

Franchising is one of the many ways to break into the business world, as evidenced by the significant growth of franchising businesses over the past decade. This type of business has proved its worth in the United States, where the revenues generated by this route are impressive. Prospective entrepreneurs who choose to enter the business world via this route have the best chance of success because they will be following a model that has already proven its value through success in other establishments.

Publication date: 20 February 2023

In the article below you'll find out what franchising is, who are the contracting parties entering into such a deal and what types of business can be developed through this model. You will also discover the main advantages and disadvantages and how you can turn opening a franchise into a success story.

Contents:

1. What is franchising?
   1. Franchise business - Franchise signatory parties
   2. Types of franchise
2. Advantages and disadvantages of franchising
   1. Advantages of franchising
   2. Disadvantages of franchising
3. Easy methods for running a successful franchise

1. What is franchising?

The term franchise emerged in North American business parlance when a sewing machine manufacturer named M. S. Singer wanted to expand his business but lacked the funds to open new production facilities. Instead, he offered his technology and brand to other manufacturers who had the funds, earning an initial fee and a percentage of subsequent sales.

This business model initially developed slowly, but in the second half of the 20th century it became one of the main forms of business development in various fields. Today, franchising is used in all countries with capitalist economies. Franchising is defined in economic language as the permission an individual or group obtains from the owner of a brand to use it, in return for royalties or shares of the profits.

A simpler definition of a franchise is that it is, in effect, a clone of a successful business that has made a name for itself nationally or internationally. The parent company provides an independent trader with the concept and rules of the business, the latter party is obliged to purchase the franchise and abide by certain rules laid down in the contract. Both parties have advantages, especially the newcomer trader, who can benefit from certain elements that guarantee his success, even if he is new to the business and does not have in-depth economic knowledge.

1.1. Franchise business - Franchise signatory parties

A franchise is acquired following the conclusion of a contract between two parties. The first is the franchisor, i.e. the parent company selling the right to use the business model, including the brand name. The second party is the beneficiary, also known as the franchisee, who in return for an entry fee and regular royalties gets everything it needs to set up a clone of the parent business.

The franchising contract concluded between the two parties stipulates not only the parties involved, but also the elements that the parent company offers to the person who has bought the franchise, as well as the rules that the franchisee must follow throughout the contract.

1.2. Types of franchise

Franchising is a very complex business, involving some of the world's largest companies operating in various fields. These include companies such as Coca-Cola, Pepsi Cola, McDonalds, Hilton, Yves Rocher and K.F.C. There are even Romanian franchisors who have created successful business models and offered them to other interested parties, including Meli Melo, La doi pași, The coffee shop and Uncle John.

Franchises can be classified according to several criteria. Taking into account the geographical coverage in which the business can be developed, there is simple franchising, where the beneficiary opens a single establishment, or master franchising, where the geographical area of development of the business is wider, for example, an entire country. With the latter type of franchise, a franchisee can obtain exclusive use of the brand name throughout the country.

Depending on the type of business, three types of franchises can be identified. Firstly, there is the service franchise, whereby a franchisee obtains from the franchisor the authorisation to use the brand name, methods and techniques to be applied in offering a service. The most popular franchises of this type are fast food, car rental and hotel franchises. Secondly, there is the distribution franchise whereby the franchisee obtains the exclusive right to distribute a company's products in a specific geographical area. This business method is particularly common in the cosmetics or soft drinks sectors. Thirdly, there are industrial franchise agreements, which concern the production of various goods (food, cars, clothing, etc.).

2. Advantages and disadvantages of franchising

Business experts have highlighted the value of franchising as an ideal way to enter the business world. Typically, franchises are relatively small businesses with a small number of employees that can be easily run by novice managers. Examples include fast-food outlets, bakeries, cafes, etc. There are also more expensive options for experienced entrepreneurs, such as large hotels and factories producing soft drinks or other food products. The practice has shown that franchising offers many advantages, but at the same time, new entrepreneurs should be aware that there are also small disadvantages that can be successfully addressed by using easy-to-use elements.

2.1. Advantages of franchising

Romania is one of the countries where franchises are increasingly present in many areas, with the number of such businesses growing exponentially in recent years. This positive development is primarily due to the chances of success of such businesses, with statistics showing that the percentage of franchises that make a profit, even when run by inexperienced entrepreneurs, is around 80%, which is much higher than for self-started businesses. Secondly, people who choose to buy a franchise gain several obvious advantages:

• They get the right to use an already well-known brand that attracts customers. What's more, the parent company will take care of marketing the brand in the future, which saves the beneficiary an extra expense. Basically, consumers will be able to watch advertisements and other advertising of the brand without paying anything;
• By concluding the franchise agreement, the franchisee obtains extremely useful information, which helps him to develop his business. This can include product recipes, ways of implementing business decisions and business advice;
• The parent company provides training for employees and even equipment and supplies for further operation;
• Obtaining financing to start the business is much easier, as banks are confident that the business will be successful, with a national or international brand name involved. Most banks offer preferential interest rates for those who wish to enter into a franchise agreement.

These advantages are particularly useful for new entrepreneurs who want to enter the world of business but don't have an idea that guarantees success, nor do they know the ins and outs of a business inside out, to make sure they don't waste their time and money.

2.2. Disadvantages of franchising

Although franchising is considered a turnkey business, new entrepreneurs should be aware that success is not 100% guaranteed and that there are some drawbacks to consider. A first disadvantage is the need for a franchise fee, the amount of which is variable. For those wondering how much a franchise costs, there is no definitive answer, as prices vary depending on many variables. In this respect, there are simple franchises, with prices starting from a few thousand euros, and in some cases reaching hundreds of thousands of euros or even millions of euros for franchises of well-known brands.

Another disadvantage is the obligation to pay regular royalties throughout the contract period. In particular, during the 5 or 10 years that a franchising contract is usually valid, the franchisee will have to pay a portion of the proceeds to the parent company each year.

Some entrepreneurs may also consider the imposition of certain rules regarding the products and services offered, their quality and even the way the business is organised as a disadvantage to be taken into account. It is true that strict rules are imposed regarding the future of the business, but they exist as a guarantee of the quality of the services offered. These rules also prohibit the marketing of products and services other than those laid down in the contract. Basically, the further development of the business can only be done by using those elements that the parent company offers, which prevents the business creativity of the management.

A final disadvantage is that there are certain limitations in terms of a possible subsequent sale of the business. The franchisee will not be able to sell the business to whomever they wish, the buyer must be approved by the parent company.

3. Easy methods for running a successful franchise

Business owners who choose to enter into a franchise agreement and develop such a business should be aware that although the chances of success are high, the possibility of bankruptcy is real. Business experts have provided some tips that can easily be applied to increase the chances of success:

• The choice of the franchise should be made in an informed way. There are thousands of types of franchises available in Romania, each with its own advantages and disadvantages. Mere previous success does not guarantee profit after franchise purchase, as there are other variables at play, such as location;
• The management of the business after the contract is concluded falls to the manager. Although the manager may receive advice from the parent company, it is often general and remote. In this case, it is more successful to call in specialist business consultancy firms, which can offer a range of services, such as financial auditing, regulatory compliance advice, VAT refund advice or even top-quality accounting services;

• Some franchisors make the mistake of relying on the marketing efforts of the parent company alone. It is true that it will promote the brand name, but not the establishment they manage. Managers should set up their own marketing activities to promote the services offered in the geographical area where the business operates. This could include promotions on various important days, advertising on local TV and radio stations or loyalty programmes to retain customers;
• An important concept in American business is that a business is only as good as its employees. This is true and, for this reason, managers need to carefully choose employees who will form a strong team, willing to work seriously for the satisfaction of all parties involved. A good and serious employee is hard to find, and managers must do everything possible to keep them.

In conclusion, concluding a franchise agreement is an ideal way to enter the world of business, a model that both beginners and experienced entrepreneurs can apply, with the certainty of success and the possibility of managing a business with a future.

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.