What is franchising and who is a franchisor?

In this material:

The concept of franchising

From a literal explanation, franchising is a type of preferential business. This is the name of one of the many forms of equal business relations and partnerships. With this connection, the franchisor and the small firm have equal rights of cooperation, sealed by an agreement.

More precisely explained, franchising is a kind of long-term business relationship of several companies, with a few notes:

a well-known company sells the rights to a particular product to a franchisee;
independent businesses capitalize on the popularity of the franchisor.

The whole essence of this system lies in the fact that a large company that has a good reputation among consumers concludes many contracts with small and, for the most part, independent firms. Thanks to this form of cooperation, independent entrepreneurs receive special rights to the product using a trademark already well known to consumers.

The names of the parent company and the name of the independent enterprise are clearly defined:

franchisee is an independent firm (or entrepreneur) that acquires from the franchisor the right to study and assist in creating a business, while paying a certain fee for the operation of a well-known brand, know-how and additional systems provided directly by the franchisor;
franchisor is a well-known company that has a widespread trademark and provides it for use by independent enterprises (entrepreneurs) for a fee, and, in addition to the brand name, provides additional systems and know-how.

In the case of small companies that have just been created and are not yet known, this form of cooperation is very useful and even convenient. Particular convenience is due to the fact that an independent company does not need to spend a lot of money on advertising, since the intended consumer will receive a product with a trademark familiar to him. Brand popularity and the number of possible consumers also play a significant role. Thus, the greater the fame, the more likely the franchisee will be quickly promoted.

It should be borne in mind that the amount of services provided for an independent company, of course, will be much lower than the cost of advertising and promoting your own trademark.

Franchising interactions

As a rule, a company with a popular trademark (the franchisor) does not form an association with a single small company (the entrepreneur). Instead, the franchisor creates many contracts with many different, small enterprises (companies), thereby creating a whole network of its commodity, industrial offshoots. As a result, the franchisor forms small enterprises that are independent of the parent company and use the franchisor's trademark.

It should be noted that the contract includes full compliance with all the rules, which may include:

the principle of trade;
uniform (and other little things);
product manufacturing.

While the franchisee, under the contract, follows the prescribed rules, the franchisor is obliged to provide all possible support to the independent enterprise (entrepreneur):

provision of raw materials;
delivery and supply of equipment;
technology transfer;
providing the necessary knowledge to all service personnel;
additional services to assist in accounting.

The franchisee also has full rights to:

operation of the trademark of the parent company;
application of the style and design of the parent company;
using the reputation of the parent company among other enterprises, which, to one degree or another, are equated to the franchisor.

A franchise is a variation of doing business that is provided by the franchisor to the franchisee at the time of the conclusion of the contract. Also, the franchise is called: franchising business package. This package usually includes:

detailed manuals for the work;
other, additional documentation that makes the transaction of enterprises equally equal.

In the vast majority of cases, the relationship between the parent company (franchisor) and an independent enterprise (franchisee) brings the same benefit to all parties.

Franchisees are required to strictly follow the prescribed rules.

Conduct business on halts set by the franchisor.
Fully comply with the franchise.
Take direct part in all events and promotions created by the franchisor.

As a result, the franchisor gives the franchisee everything he needs:

attracting a mass of unique consumers;
many new deals;
increase in sales;
high-quality advertising at no extra cost.

Thanks to the work done by the franchisor, the franchisee does not need to compete with other independent, and not only, enterprises. This is of great importance, because for the franchisee, without support, this would be a very big problem.

The franchisor, as the parent company, is obliged to provide the franchisee with all the necessary assistance in doing business, so that the independent enterprise is able to perform the operations required of it with a clear regularity.

Because of this form of cooperation, a small business gets the opportunity to conduct a licensed, independent business activity with the maximum use of the trademark of the franchisor and its customers.

Franchisors usually take on:

advertising campaigns;
delivery of products.

Under such a system, the franchisee of the contract under any circumstances remains an independent enterprise and undertakes to pay the agreed, under the contract, fee to the licensor for the provision of all services prescribed by the franchise. Franchisors cannot violate contracts, as this threatens with numerous penalties.

legal demand for financial services (credit) from the franchisor;
necessary equipment (with leasing conditions);
training of employees (improvement of qualifications, additional consultation, etc.).

In a general sense, franchising is:

business development of any kind with financing;
a way to sell a variety of services and products.

Franchising is divided into several types:

product franchising - large sales networks are organized, while the parent companies are responsible for advertising, know-how, spare parts and tools;
franchising of services - numerous foreign companies work according to this principle: they rent premises, train employees in the necessary work skills, provide equipment required for production.

Features and notes of franchising

In an abbreviated explanation, franchising is a system of relationships that consists in the transfer by the franchisor (a company that is especially popular among consumers) to a franchisee (an independent company, without an established image) of a number of its products (marking and style).

The franchisor, at the same time, is obliged to provide full support to small businesses:

provide technological assistance;
and full consultation on any issues.

Sources of income of the parent company

The franchisor receives the main profit:

from supplier discounts;
from the initial contributions of an independent organization;
from advertising fees of small companies;
from premiums received after selection of premises and technologies for franchisees;
from interest on loans provided to participants in cooperation.