Franchising is a business model in which a company (known as the franchisor) grants a third party (known as the franchisee) the right to commercially exploit its brand, products or services under certain pre-agreed conditions set out in a contract.
This type of agreement allows the franchisee to run a business using the franchisor’s trade name and know-how, benefiting from a brand already established in the market, while the franchisor can expand its distribution network without directly assuming the operational costs and risks.
Franchising is regulated by Law 7/1996, of 15 January 1996, on the regulation of retail trade, the Royal Decree regulating the exercise of commercial activity under the franchising system and the communication of data to the register of franchisors, Royal Decree 201/2010, of 26 February 2010 and Law 15/2007, of 3 July 2007, on the defence of competition.
The main aspects of the operation, advantages and disadvantages of a franchise are described below.
1.STRUCTURE OF A FRANCHISE
The structure of a franchise is based on the contractual relationship between the franchisor and the franchisee.
This contract sets out the terms, rights and obligations of both parties.
In general, the franchise contains the following key elements
– Trademark
The franchisor allows the franchisee to use its trademark, logos, designs, slogans and other elements of corporate identity. The trademark is one of the most important assets in a franchise as it allows the franchisee to operate under a name that is known and recognised by consumers.
As set out in the Patent Law and the Trademark Law.
– Manual
The franchisor provides the franchisee with a manual containing the rules and procedures to be followed in the operation of the business. This ensures consistency in the provision of services or products, regardless of the location of the franchise.
– Ongoing support
The franchisor usually provides the franchisee with initial training and ongoing support in areas such as management, marketing, sales, logistics and business administration.
– Royalty payments
The franchisee is required to pay the franchisor an initial fee and, usually, periodic royalties on the revenue generated by the business.
These payments may be a percentage of sales or an agreed fixed fee.
– Territorial rights
Often the franchise agreement grants the franchisee an exclusive or limited territory within which he has the right to operate his business, thus avoiding direct competition with other franchisees of the same brand in the same area.
2. TYPES OF FRANCHISE
There are several types of franchise, depending on the degree of control exercised by the franchisor over the franchisee and the nature of the business.
The main types are
a) Product or distribution franchise.
In this model, the franchisee sells products manufactured or distributed by the franchisor.
A classic example is a car or drinks franchise.
The franchisee acts as a distributor of products, but may also provide related services.
b) Business or service franchising
This is the most common type of franchise, where the franchisee adopts a comprehensive business model involving both the sale of products and the provision of services.
Typical examples are fast food franchises or chain stores.
In this model, the franchisor provides a complete business format that the franchisee must replicate faithfully.
c) Industrial franchising
In this type of franchise, the franchisee not only markets products under the franchisor’s brand name, but also manufactures the products.
The franchisor grants the franchisee the know-how and manufacturing rights under the brand name.
3. ADVANTAGES OF FRANCHISING
For the franchisee, the franchise model offers several advantages that make it attractive to entrepreneurs who wish to minimise the risks associated with starting a new business:
– Access to an established brand
By purchasing a franchise, the franchisee benefits from a brand with a reputation in the marketplace, which can attract customers from the outset.
– Training and support
The franchisor provides initial training and ongoing support, reducing the risk of operational errors, especially for inexperienced entrepreneurs.
– Risk reduction
The franchisee invests in a proven business model with a track record of success. This reduces the risk compared to starting a business from scratch.
– Economies of scale
By being part of a larger network, the franchisee can benefit from purchasing agreements for supplies and raw materials at lower costs, which would be difficult for an independent business to achieve.
– Marketing and advertising
Franchisees often benefit from national or regional marketing campaigns funded by the franchisor or by contributions from the entire franchisee network. This gives access to professional advertising strategies that can increase visibility and sales.
4. DISADVANTAGES OF FRANCHISING
Although franchising offers several advantages, it also has certain disadvantages that should be considered by potential franchisees:
– Lack of autonomy
The franchisee is obliged to follow the franchisor’s rules and guidelines for running the business.
This can limit the franchisee’s flexibility and ability to make independent decisions.
– Royalties and other payments
In addition to the initial investment, the franchisee is required to make periodic payments to the franchisor, such as royalties on sales and contributions to advertising funds.
These payments can reduce the profitability of the business.
– Saturation risk
In some cases, if the franchisor grants too many franchises in the same geographical area, internal competition may occur, which may adversely affect the franchisees’ sales.
– Duration of the contract
Franchise agreements are of limited duration and, at the end of the term, the franchisor may choose not to renew the agreement or change the terms, which may affect the stability of the franchisee.
5. OBLIGATIONS OF THE FRANCHISOR AND THE FRANCHISEE
The success of a franchise depends on a cooperative relationship between the franchisor and the franchisee. To that end, both parties have certain obligations:
a) The franchisor’s obligations
– Provide know-how
The franchisor must provide the franchisee with the necessary know-how to run the business efficiently.
– Ongoing support
The franchisor must provide ongoing support, including updates on operating methods and marketing campaigns.
– Brand protection
The franchisor must ensure that the brand is maintained in good standing and promote its growth through advertising and expansion.
b) Franchisee obligations
– Compliance with the operations manual
The franchisee must follow the franchisor’s guidelines to ensure consistency in the provision of services and products.
– Make payments
The franchisee must pay royalties and other fees as specified in the franchise agreement.
– Maintaining quality
The franchisee must ensure that the products and services it offers meet the quality standards required by the franchisor.
6. CONCLUSION
Franchising is a business model that offers a structured and less risky route to entrepreneurship, particularly for those who wish to operate under an established brand name and with the backing of a proven system.
However, it is important for the franchisee to carefully consider the contractual terms and conditions as well as the benefits and limitations of operating within this system.
The key to success lies in the cooperation between franchisor and franchisee, which allows the business to grow under a consistent and successful model.
At Quikprokuo, we take care to minimise the risks of franchising and ensure that franchisees have the best possible conditions for the success of their franchise. Contact us here.
