Table of contents:
- Issue price
- Signs that a franchise is worth buying
- Common mistakes franchisees make
- Legal subtleties
- Building relationships with a partner
- Checklist for future franchisees
2023 Author: Malcolm Clapton | [email protected]. Last modified: 2023-05-22 06:26
What to look for when choosing a franchise, how to correctly draw up documents and avoid common mistakes.
The Russian franchise market is at the stage of rapid development - this is confirmed by a number of studies that are reducing the price of the franchise. The model has many advantages for aspiring entrepreneurs, but there are also disadvantages. When a company seeks to “package” and sell its franchise as soon as possible, both parties have problems: the franchisee gets a “raw” and unviable product, and the franchisor gets a bad reputation and legal claims. We will tell you what you need to pay attention to in order to avoid unpleasant surprises.
The cost of a franchise consists of two payments - the start-up lump-sum and royalties. The first is paid immediately upon conclusion of the contract, and the second is transferred by the franchisee at a certain frequency (for example, once a month, once every six months or once a year). In the most popular Russian franchises, the lump-sum payment does not exceed 500 thousand rubles. For example, in "Dodo Pizza" it is 350 thousand rubles. Opening a store can be even cheaper: according to Pizza, beer, car pawnshop: how much are the most popular RBC franchises, the entry fee for popular retail outlets is up to 150 thousand rubles.
Royalties can be calculated according to different models - percentage or fixed. In the first case, the franchisee pays the franchisor a part of the turnover - from 1 to 10%. In the second, the amount of the payment is known to the franchisee in advance and remains stable. It is worth noting that a fixed model does not always mean that the amount of deductions will remain unchanged. Sometimes franchisors gradually increase their fixed payments as the franchisee gets on its feet. In other cases, the amount of royalties is already included in the cost of the goods that the franchisee sells.
Due to the lump-sum payment and royalties, the buyer gets the right to use the franchisor's brand, its internal tools and know-how, methods of business and employee management. However, all the worries of registering a legal entity, paying taxes, insurance and pension contributions fall on the franchisee.
The cost of buying a franchise isn't all the cost of starting a business. The total cost is made up of many factors: the cost of repair and rental of premises, equipment, training and hiring personnel. You can open a store for well-known franchises: Pizza, beer, car pawnshop: how much the most popular franchises cost for 1, 5-3 million rubles, and if we are talking about the regions - and for 400-700 thousand rubles. For pizzerias and car services, the initial investment will be more - from 6 to 16 million rubles.
The payback period of the business also depends on the size of the start-up costs. For example, according to some estimates, How to understand that a franchise is a fake, with an investment of 10–20 million rubles, the franchise pays off in at least two years. However, it is impossible to accurately estimate the period of gaining profit based on the start-up capital alone: for different networks this period may differ by 1, 5-2 times with the same amount of investment.
Signs that a franchise is worth buying
The secret of a successful franchise is the balance of a working business model and a package of additional services for the franchisee.
1. You will be helped to find a room
A reliable franchisor will try to conduct research in advance and offer you a point with high traffic, and then will monitor the attendance, comparing it with the indicators of other areas or network establishments in the same area.
A good franchisor can offer a franchisee to install a special analytical module - a visitor counter, in order to independently track the conversion of guests into buyers and quickly respond if this business indicator decreases.
2. You are guaranteed to receive training on franchise management
Operational processes, work with personnel, accounting, the use of additional services and IT platforms, legal issues, compliance with all types of regulations - ideally, all aspects necessary to understand and run a specific business should be disclosed to you at the start.
3. Together with the franchise, you will purchase a package of additional services
These may include remote video surveillance services required both for the HoReCa segment and for medical institutions “Anti-terrorist video surveillance” has become mandatory for all medical organizations, online broadcasts from the kitchen for catering, online showcases. Modern analytical modules based on computer vision and cloud technologies can also be used: for example, face recognition to prevent theft and develop loyalty programs, IT solutions for monitoring employee activities and time tracking, security and quality control.
4. You will be provided with marketing support
Reliable franchises almost always promote the network as a whole - for this, franchisees transfer advertising fees to the head office. Smaller companies help partners to promote their own outlets: for example, medical organization LabQuest provides What You Need to Know to Get the Most Out of a Medical Franchise Franchise Marketing Tools. Outlet owners receive assistance in online promotion, PR, development of loyalty programs and interaction with doctors.
5. You will be provided with financial documentation in advance and demonstrated open business indicators
Everything is simple here. Everything related to money and financial obligations, as well as the financial history of the franchisor, requires thoughtful verification. It is not a sin to involve a professional accountant or auditor in it, if the potential franchisee does not have the necessary knowledge.
Common mistakes franchisees make
Here are some of the top mistakes that can be costly for an aspiring entrepreneur.
1. Do not take into account the peculiarities of the market
No business exists separately from the surrounding area, residents and infrastructure. If the franchisee does not take into account the conditions in which his company will develop, then even a successful offer from the franchisor may not work. One example is the Franchise case: how to open a running school for the I Love Supersport running school: its branch in Yekaterinburg has been operating for four years and is profitable, and in Magnitogorsk it closed after a year and a half. One of the main reasons for the failure is the lack of suitable places to run in the city, which is why this sport has not gathered enough fans.
2. Overestimate the help of the franchisor
The franchisee may not know about the intricacies of the business and counts on the partner's help - sometimes placing too high hopes on this help. Let's say a budding entrepreneur has no marketing experience and is unaware of the need to invest in customer acquisition during the low season. The franchisor, on whose help he is counting, does not provide the necessary instructions for increasing the number of visitors, and the business runs the risk of going bankrupt.
3. Buy an unverified franchise
Analysts of the franchising market believe How to understand that a franchise is fake, that in Russia up to half of offers to sell franchises are fake. This means that companies provide partners with incorrect data on franchise costs and market conditions.
In some cases, misinformation concerns all the same "help" from the franchisor. A few years ago, the Franchise faced a trick with this problem: how a bet on franchising can turn into a collapse of the franchisee of Mail Boxes Etc., which deals with the delivery of documents and small parcels, as well as printing. When buying a franchise, the organization promised to provide the materials necessary for opening an office on preferential terms. It turned out that the “favorable” price was several times higher than the market price, and the head office did not help the franchisee in any way in promoting and organizing sales.
According to Russian law, the franchisor and the franchisee can conclude one of two types of agreements - commercial concession or licensing.
Commercial concession agreement implies the "Civil Code of the Russian Federation (part two)" dated January 26, 1996 No. 14-FZ (as amended on July 29, 2018) (as amended and supplemented, entered into force on December 30, 2018) transfer of a number of exclusive rights from the copyright holder to the user (from the franchisor to the franchisee). The obligatory part of the agreement is the rights to the trademark.
The transfer to the franchisee of the right to use a trademark and a set of exclusive rights in business is registered with Rospatent - without this stage, in the event of conflicts between the parties, the court will not be able to apply the franchising regulation. This is primarily important for the franchisor - in the absence of registration, the court may require the return of all payments for the use of the brand and intellectual property of the company, even if the franchisee used these services and received income with their help.
The commercial concession agreement also specifies other rights that the franchisor transfers, for example, to use databases, computer programs, inventions of the copyright holder, and so on. Also, the document may describe restrictions for the parties: a ban on competition between the franchisee and the franchisor, pricing policy, the obligation to transfer contributions for advertising campaigns. Such an agreement can only be concluded between legal entities or individual entrepreneurs.
License agreement choose when the franchisor does not want to transfer the right to use the trademark to the franchisee (or has not registered the trademark). Such an agreement permits the "Civil Code of the Russian Federation (Part Four)" dated December 18, 2006 No. 230-FZ (as revised on December 27, 2018), to the franchise buyer to use any intellectual property objects: the franchiser's IT system, its working methods, logo. The parties to the license agreement can be not only legal entities and individual entrepreneurs, but also individuals.
The main difference between a license agreement and a concession agreement: the second presupposes close cooperation between the parties, for example, quality control of services by the franchisor. The license agreement gives the franchisee only the opportunity to use specific developments of the franchisor. Because of this shortcoming of the document, it can be supplemented What to look for when buying a franchise with contracts for the supply and provision of services, in which the responsibilities of the franchisor for the sale of goods or consultations of business partners are prescribed in more detail.
Regardless of the type of contract, before signing it, the franchisee and the franchisor must discuss in detail the terms of cooperation. Here's what to look out for:
- Term and territory - where and for how long the franchisee can work under the terms of the franchise. It is important to write these points in the contract in as much detail as possible. The exclusivity of the franchisee's rights to work in a certain region should also be clarified - without this clause, the franchisor can sell the franchise in this territory to someone else.
- Information transfer methods - we are talking about the process of exchanging documents. Vague wording like "in any available form" is not suitable - without specifying a specific data carrier, the parties to the contract will not be able to prove that they have transferred or accepted the franchise package.
- The procedure for terminating the contract. The franchisee can cancel the franchise agreement unilaterally - for this, it is usually enough to warn the franchisor in advance. However, the procedure should be discussed before signing the contract. It may turn out that the franchisee, according to the accepted conditions, will be obliged to warn about the exit from the business one year in advance. During all this time, the entrepreneur must pay royalties - even if the franchise has brought only losses.
- Duties of the parties. Supplier selection, pricing, employee training and franchisee promotion - any obligations of the seller and buyer of the franchise must be known and understood before entering into a transaction.
A franchise is not just a purchase of a ready-made “recipe for success”, but a joint business with a franchisor. Therefore, the next step for the franchisee will be to create the ground for communication.
Building relationships with a partner
As in any other business, in franchising, trust between the parties and common goals are important. As a rule, at the beginning of work, the franchisor provides the partner with a number of documents: a brand book with a description of the brand and its style, a business book with management advice and a handbook with requirements for employees.
Further participation of the franchisor in business depends on the terms of the contract. Sometimes the franchise seller only transfers the know-how rights and helps to choose a location for the outlet, but does not teach the buyer the intricacies of the business. But even in this case, the franchisee can usually count on consultation with the head office in case of difficulties - especially if the parties have entered into a commercial concession agreement, which assumes assistance in the development of the project.
Successful franchises are usually not limited to consulting and collecting reports on the achievements of "wards": companies create shared training centers for employees so that the quality of services and goods throughout the network is the same. This is how, for example, How to make a successful franchise from scratch works, the Chop-Chop chain of men's hairdressing salons, which has opened its own academy to improve the skills of masters from different regions of Russia. Large chains are no exception: before the opening of the restaurant, Subway teaches Sandwich Artist: how much does the Subway franchise bring to the owner, managers and staff of the new outlet.
Franchisers monitor the work of the franchisee after training. In the Doublebee chain, every coffee shop is checked once a week, and a separate specialist is responsible for the professional development of all baristas. Some franchises develop relationships not only between the head office and individual locations, but also between the franchisees themselves. In the Red Cup coffee shop network, all entrepreneurs share their experience and best practices, and any point of sale can implement the best ideas.
It is important to understand that the success of a business mainly depends on the franchisee itself. Franchisors often note that their partner support programs and additional services are just an effective tool for doing business, but not a "pill for all diseases". It is wrong to believe that by buying a franchise, you will get a business in which everything is already so fine-tuned that you just need to make a profit. It doesn't work that way.
Checklist for future franchisees
- Pay attention to the ratio of payments to the franchisor. The terms of cooperation may include a high lump-sum fee and no royalties. Such a model is justified for stores, when the franchisee buys goods from the franchisor for sale instead of paying royalties. In other cases, the lack of recurring payments may mean that the company wants to sell as many franchises as possible and is not worried about the success of individual affiliates.
- Ask about the age and experience of the company. The proposal may turn out to be "raw", unfinished. The franchisee cannot count on competent support and assistance in such a situation.
- Check the company's representative office in official sources. This advice applies to franchise purchase offers from major international brands. Unscrupulous sellers can register a similar trademark and pretend to be a Russian division of a company that is not actually represented in the Russian Federation. In order not to buy a fake, it is advisable to obtain confirmation of the legitimacy of the organization's activities (sometimes it is enough to check the data on the representative offices on the brand's website or write a request to the head office).
- Ask if the company develops its own establishments or retail outlets. If the franchisor has stopped opening new divisions and only sells franchises, this may indicate the inefficiency of his business model.
- Check what you get from the franchisor. If a company sells only a sign, you will not get the benefits of working with it. Ask what tools, discounts on affiliate programs, development and guidance the franchisor provides, how further communication with the parent company will take place and who will be responsible for training employees and monitoring their work.
- Check the contract carefully. It is important to pay attention to the duration of the franchise, the controlled territory, the obligations of the parties, the methods of transferring information and terminating the transaction.
- Meet other franchisees of the network. Before the conclusion of the contract, other entrepreneurs will help you understand whether you should get involved in the business, and then they will share their experience and their own best practices.