Example of Franchises: Advantages and Disadvantages

There are more and more similarities between shopping centers in different parts of the world, whether they are located in Latin America, Europe or the United States. It is common to find in them the same commercial names, the same brands - all of proven reputation that on the one hand are a guarantee of success, and on the other, they reduce the risk of failure when opening a new shopping center - the same environment and the same packaging, flavors and procedures.

Homogeneity and tranquility go hand in hand, they move through the world, producing familiarity and confidence in the visitor and saving them, at the same time, the uncertainty of the unknown.

The aforementioned aspects are due, in large part, to globalization. This has marked a new stage in the world economy characterized by a strong exchange between nations, regardless of races, political or religious regimes. A living example of this are franchises. Franchises have managed to cross the strongest barriers and this thanks to the fact that this modality of Business represents profits of all kinds and a good source of employment in the nations where it is introduce.

ELEMENTS TO TAKE INTO ACCOUNT FOR A DEFINITION

1.- The property, the existence of an owner who is the owner of a name, an idea, a process or a secret procedure, a piece of specialized equipment and a know-how [4] (know-how / practical knowledge) associated and involved in the product and / or service same. Likewise, goodwill is incorporated as "goodwill" of goodwill.
2.- The transfer of a license by the owner, in the name of another person, allowing the use of a name, idea, process or equipment, as well as know-how and goodwill. This assignment will necessarily imply the existence of a contractual relationship.
3.- The inclusion in the license assignment agreement of the obligations and duties of each of the parties related to the operation of the business.
4.- The payment of a consideration or royalty for the rights assigned for all the service that the franchisor will provide to the franchisee; in the same way, the payment for the supply of merchandise or products exclusively.

Franchises have evolved so much over time that today almost every new franchise agreement can seem like a different contractual figure.

According to Meyer, H. In his book entitled Marketing, Retail Sales defines franchises, concessions or licenses, as a contractual agreement by means of the which a parent company (franchisor) grants a small company, an individual (franchisor) the right to do business in specific conditions, therefore, a franchisor has the right to name or trademark and sells the right to a franchisee; knowing this as a product license.

In the most complex form, the business license format is a broader and more continuous relationship that exists between two parties, where often comprises a full range of services, including site selection, training, product supply, marketing plans and also funder.

The spectacular growth of dealerships represents the rapid increase of two trends: the rush of dealers individuals to become their own bosses and the need for companies to find more efficient and cheaper ways to expand. Meyer, H. And Kohns, S. they establish that the time during which a license agreement is valid is called followed by the contract and can range from five years to perpetuity; where most agreements are for twenty years. After the period has ended, the franchisor often has the right to buy back or resell the unit.

According to Phillips Kothler in his book entitled Marketing Management, he establishes the concept of franchise or concession as an agreement with the concessionaire in the foreign market, offering the right to use the manufacturing process, trademark, patent, trade secret and other points of value, in exchange for fees or royalties.

What the franchisor receives in return for the franchise is:

A franchise right. One-time advance payment that dealers make directly to whoever grants them the franchise to be part of the concession system. The payment reimburses the franchisor for the costs of locating, qualifying and training the new dealers.
A royalty. It is an annual payment, between 1% and 20% of the dealer's sales that is paid to the franchisor. These payments represent the costs of doing business as part of a concessions organization.
A right of publicity. It is an annual payment, usually less than 3% of sales, that covers corporate advertising. Profits from the sale of equipment, supplies or services or finished products to the dealer.

TYPES OF FRANCHISES

 According to the rights granted:
Individual franchise: it is granted by the owner of a master franchise or by the initial franchisor to an individual investor for the management and operation of a single establishment, in a determined area.
Multiple franchise: through this type of contract, the rights to open several establishments in a geographical area are transferred defined, to a single franchisee, who is obliged to operate them all without transferring the acquired rights to a third.
Master franchise: through this, the franchisor assigns the rights to use its brand and know-how to a franchisee so that they can exploit in a wide geographic region through own products or by delivering multiple sub-franchises or individual.

According to the purpose of the franchise or branch of economic activity
Industrial franchise: in this franchise, the franchisee establishes and operates an industrial company, under the technological concepts, advice, brand and training that the franchisor gives him.
Distribution franchise: the franchisor transfers the products that it manufactures and / or the brand to its franchisees in exchange for royalties or higher purchase prices. Its basic characteristics are concentrated in the development of the product or service, rather than in the operation of the business. The franchisee is granted more freedom, but at the same time less operational contribution.
Product and brand franchise or non-exclusive distribution franchise: the franchisor grants the franchisee the authorization for the use of its brand, together with the sale of certain products and / or the provision of certain services, which are generally supplied by the same franchisor through its license.
The franchisor does not grant territorial or product exclusivity. The quality and quantity of support provided by the franchisor are minimal, despite some requirements.
Exclusive distribution franchise: the difference with the previous one is that the network of stores that work with the brand franchisor on the facade becomes the exclusive channel for the distribution of its products or services.
Conversion franchise: consists of the association of a group of companies, agencies, warehouses already existing under a single format. The main objective is to unite your marketing efforts, showing a unique facade, promoting the sales through massive advertising programs and systematizing the quality of the service offered to the consumer.
The first associates, in turn, can receive future franchisees or assign these rights to owners. of existing similar businesses, willing to change their name and methods to those of the franchise.

According to the evolution of the concept, rights assigned and transmission of know-how
Brand or first generation franchise: basically corresponds to brand licenses. The franchisor only grants the rights to use a trademark, design and / or industrial drawing to the franchisee for a consideration financial established and only once, if it is a temporary design or fashion, or compensation in time or royalties, if it is a design or brand permanent.
Business or second generation franchise: in addition to the transfer of the brand, the form of operation of the business is granted, "the recipe", but this advice does not extend in time, nor in the depth of the knowledge transferred.
Third generation format franchise: the franchisee receives a complete system to operate the business, a total plan that includes assistance from the franchisor in the search for the right place for the installation of the business, the training and the qualification of the personnel in all the areas of the same. This training continues for the life of the franchise agreement.
The franchisor grants the franchisee the exclusivity of the territory, and the latter sells or distributes the products or services exclusively.
The franchisee receives: procedure manuals, advertising support, assistance in the purchase of equipment and adequate sources of raw materials or products.

ADVANTAGES OF FRANCHISES

Reputation: It is an established and well known licensing system, the new dealer does not have to work to establish the reputation of the firm. The product or service being offered is already accepted by the public.
Working Capital: It costs less money to run a dealership business, because the franchisor gives the dealership good inventory controls and other means of reducing expenses. When necessary, the franchisor can also provide financial assistance for operating expenses.
Experience: the advice given by the franchisor compensates for the inexperience of the new owner.
Managerial assistance: a small independent warehouse owner has to learn everything, and a retailer experienced may not be a master in all aspects of finance, statistics, marketing and promotion of sales. The best franchise companies give the dealer ongoing assistance in these areas.
Profits: By assuming reasonable franchise costs and supply agreements, the dealer you can usually expect a reasonable profit margin, because the business is run with the efficiency of a chains.
Motivation: Because the dealer and the franchisor benefit from the success of the operation, they both work well to achieve it.

DISADVANTAGES OF FRANCHISES

Fees: The fees that the franchisor charges for the use of the business name, the prices charged for supplies and other expenses can be very high for a particular location. In such a way that losses or low profit margins can be incurred for the retailer.
Less Independence: Because the dealer must follow the franchisor's patterns, the retailer loses some of his independence.
Standardization: Procedures are standardized and dealers don't have much of a chance to use their own ideas.
Slowness: due to size, a franchisor may be slow to accept a new idea or adapt his methods to changes in conditions.
Cancellation: It is difficult and expensive to cancel a concession agreement without the cooperation of the franchisor.
Control: the franchisor has less control over the dealer than if he set up his own production facilities.
The competitor: If the concessionaire is very successful, the firm loses profits and when the contract ends it could find that a competitor has grown.

ADVANTAGES OF THE FRANCHISER

Agility and speed in expansion. The franchise system allows the entrepreneur who grants them (franchisor), to transfer to the franchisee the responsibility to provide the capital and labor force necessary for the installation and operation of each new point of sale. With this, the franchisor expands the coverage or penetration of its product or service in one or more territories in an agile way. It is not possible to imagine the incredible growth and expansion of Macdonald's without the contribution that, in money and time of work, has been carried out by its franchisees worldwide.
Strengthening the brand. One of the requirements for the development of a franchise is precisely that the brand or name that distinguish it is solid and that its penetration within a territory has been carried out in full form. This means that, to begin with, if there is no strong brand or trade name, the development of a franchise is not conceivable. The advantage in the development and granting of a franchise in the example of a restaurant chain is the strengthening of the institutional image of the restaurant. We found, therefore, that with the franchise, the institutional image of the franchisor benefits in an incredible way, we have that the message with the greatest impact on the consumer is growth. In addition, an image of greater customer service and support is transmitted, by bringing these products and services closer to the consumer. In other words, the franchise reinforces the identity and penetration of the brand, relating it to the product and the point of sale.
Agility in the development and maintenance of new markets and / or distant markets: the costs of opening new stores increase disproportionately when it comes to remote markets. Distances, as well as cultural and consumer differences, make it more expensive and difficult to expand in geographic areas far from the center of operation. In the same way, proper maintenance and operation in these distant markets is difficult, even in developed countries, where the means of communication are better than those that still exist in Latin America. Thus, the operation in distant markets and the consequent development of a concept in those markets is facilitated and expedited through franchises, since these are operated and controlled by inhabitants of the country who know their needs and weak points, in addition to being personally in charge of the deal.
Greater ease and efficiency in the general operation of the business. With the franchise, we find that the operation is facilitated and efficiency increases to the extent that the meticulous and absorbing daily operation of the companies is delegated. franchised units or businesses, in a businessman who, in addition to having adequate training and procedures, is motivated by his own boss. The interests and motivations of the franchisee are the same as those of the franchisor.
Franchisees provide an invaluable source of talent. One of the main benefits of working in a franchise system is obtaining the creativity and imagination of businessmen with the most diverse profiles and experiences in the most varied areas, are people who share the dreams and objectives of the franchisor: the success of the business. In addition, franchisees are closer to the market and their proposals for changes and improvements (new products) will be more based on consumer needs. In other words, for the franchisor, the franchisee will in many cases be the most important communication vehicle with the market. It is for this simple fact that operating through a franchise system allows us to become a large company, but you should never lose your orientation towards the market, a strategic point for the success of any large deal.
That ability to listen to franchisee comments has allowed McDonald's itself to create products like Mcd.l.t., the Big Mac.
Personal satisfaction. There are few ways to have a strong impact on the market and to develop a concept on a national and even international scale. One of them is the franchise system. A successful franchise is clear evidence that your product or service and in general your business concept, is valid, and that it works and satisfies a need in the market since it attracted the imagination, interest and money of a community.
Low capital investment in business expansion.
Increase in coverage and development of markets.
Charging an initial fee for the rights to use the brand, thereby recovering the investment in the development of the franchise system in the medium term.
Collection of royalties based on the gross sales of the articles or services of the franchises granted.

DISADVANTAGES OF THE FRANCHISER

Possibility of choosing franchisees not suitable for managing the growth of the chain, and its late detection.
Lack of control over quality.
Inability to engage in global strategic coordination.
Reduction of independence. The franchise system significantly alters the way the new franchisor views his own business. An entrepreneur who is willing to franchise his business must know that, with this, he will see himself in the need to share, among other things, their brands, experiences, knowledge and, in general, his own company with third parties. For this entrepreneur, the new product that he will have to market is the entire concept of the business, since in the franchise, the franchisor grants the franchisee a license for the use of a system, which includes much more than the simple brand or commercial name of the entrepreneur.
The risk of misuse of the trade name or trademarks is a matter that has taken a long time for the franchisor to establish.
There is a strong initial investment in the development of franchise systems, the franchisor or the brand must invest in their franchise system.
There are risks of low profitability index because obviously the profits are shared with the franchisees.
There are risks of resistance of the franchisees to fulfill punctually in the payment of the monthly royalties.
Risks of pressure from the franchisee to alter operating methods.
There is a possibility of breaking team spirit, loyalty and trust.

ADVANTAGES OF THE FRANCHISEE

Have the possibility of starting a company with little capital 
Guarantee of independence, the franchisee will always continue as his own boss, even if he is the one who works in his own commercial establishment.
The acquisition of knowledge (know how).
Profiting from a known name.
Initial and permanent training, because this is an evolutionary contract: the products, the service, the know-how are subject to constant improvement with the sole purpose of making progress.
The experience of the pilot center.
The logistical support of the plant.
Lower advertising expenses and greater diffusion. It is not necessary to remember how disproportionate advertising expenses tend to be in mass media such as television, radio and the press. However, communication with the markets is necessary to educate the consumer, tell them about the benefits of the product and finally, motivate them to visit the business. The only way to absorb expenses of this nature is as a team, distributing the load and also justifying the efforts within a territory, which will generate greater economies of scale. Most of the most developed franchise companies run local, regional and national advertising sharing programs. For example, macdonald's franchisees pay 4% of their gross sales for advertising. The sum of these small contributions produced campaigns that a year exceed 500 million dollars.
Possibility of operating an accredited business with lower commercial risk.
Technical and business assistance and support in the selection and training of personnel.
Security in supply and improvement in purchase prices.
Permanent innovation in methodological and technological aspects.
Access to administrative systems for the control and evaluation of the franchisee's performance.
Sense of belonging in a consolidated network of franchisees

DISADVANTAGES OF THE FRANCHISEE

Limitation in terms of your possibilities of obtaining greater benefits from the business, as you must pay royalties, royalties or other consideration for the very essence of the franchise.
Even if you are part of a franchise system, you will not have access to brand ownership.
Acceptance of permanent supervision and control of your business.
The uncertainty as to the duration of the contract that may be subject to a specified term or to be determined.
You have restricted rights to run your own business.
It is tied to the fate of the franchisor and each and every other franchisee.
The franchisee can innovate little and little can invent because everything is invented and everything is written in the operating manuals of the master brand.
Risk in the sense that there must be total adherence to the brand's operating manuals.
There is a risk of not having selected the business concept more akin to personal claims or the possibility of relating to an incompetent or unethical franchisor.
The franchise system is not the problem of a single person, decisions cannot be made arbitrarily, without consulting the franchisor.
The franchise system is not a solution to financial problems, understanding that first of all it is a system of marketing goods and services and not a way to make easy money.
The franchise system is not basically the development of representatives and distributors.
The franchise system does not guarantee immediate success.
The franchise system is not a temporary relationship, it is a relationship that must last over time and consolidate as the years go by, which implies commitment and fidelity to the image and vision of the deal.

ELEMENTS TO DIAGNOSE THE FRANCHISABILITY OF A BUSINESS

We cannot conceive of a concept being franchised if the name with the trademarks that distinguish it are not properly protected by one party or any other. other legal means provided for in the legislation, and also, the importance of the franchisor's brand being recognized by the public within the market.
Nor have franchise concepts that allow their franchisees operating margins that cannot be compared to industry standards have been successful.
Only those businesses whose product or service satisfies a real need of the market in which they intend to develop have been and will continue to be franchisable. That is to say, that they contribute an added value to the market, and that it is appreciated by the consumer of that market.
There can be no chance of success when a company decides to launch a franchise without proper experience and seniority.
In franchising, quite unlike trademark licensing and distribution contracts, the franchisor must live by and for the franchisee. The theory indicates that everything should revolve around the franchisee; advice, logistical and operational support, supplies, suppliers, etc.

CHARACTERISTICS THAT A FRANCHISER SHOULD LOOK FOR IN A FRANCHISEE

Knowledge of the local market.
Knowledge of the market segment that interests the franchise.
Flexible attitude 
Necessary financial resources 
Administrative resources required 
Ability to properly communicate with your franchisor 
Business experience in the franchisor's country 
Knowledge of the real estate market in your country 
Ability to assist in the selection of potential system providers 
Good relationships and experience in dealing with government officials of the country to which the franchise enters.
When the franchisor is multinational, that is, the one that tries to penetrate a foreign market, omits to select its foreign franchisee in light of the commented criteria and is guided only by the economic one (a situation that is unfortunately generalized), the chances of failure are important. In conclusion, for those entrepreneurs who are considering franchising their business; they will have to consider that franchises are a market solution to a market problem. Therefore, it is clearly inappropriate to use franchises as a solution to problems that are purely financial in nature.

CHARACTERISTICS OF A GOOD FRANCHISE

It is related to the commercialization of a good quality product or service.
Demand for the product or service is universal, or at least not limited solely to the franchisor's home region.
It leaves the franchisee already established in a place a right of first refusal at the time of implantation of one or more franchises in its territory.
It foresees an immediate transfer of know-how and an effective training of the franchisee in the marketing techniques and the methods of the franchise in question.
It does its tests with a pilot company.
It establishes the modalities of a continuous relationship between the franchisor and the franchisee in order to improve the conditions for operating the franchise and for exchanging innovations, ideas for new products and services, etc.
It explicitly describes the initial contributions (teaching, training, know-how) and the permanent ones (supports marketing, advertising, promotional actions, research and development, various services) of the franchisor.
It expresses the immediate payments (initial rights) and continuous (canon) that the franchisee must make.
It involves the franchisee in the process of defining the future directions of the franchise and makes him participate in the life of the franchise.
It provides for a procedure for the renewal, renegotiation and cancellation of the franchise contract, as well as a possibility of redemption for the franchisor.
The franchise offers an interesting option compared to conventional or controlled vertical structures. Indeed, in a franchised network, the investment in each store is made by the franchisee, the owner of the store. From the franchisor's point of view, creating a franchise network allows you to quickly and with little cost of an international commercial network and this without investing directly in the ownership of the network, but controlling it by contract.