What is Franchising?

The essence of franchising is to sell a successful, complete and comprehensive verified business system. It is not a usual business partnership, but a very special form of business network organisation of legally independent entrepreneurs.

Major requirements – terms for setting up a franchise network are governed by the code of franchise ethics of the European Franchise Federation – are, that the franchising system can be developed by a company, proven in this line of business, a company that is not entering into franchising due to lack of fund, time or personell. Therefore a company must be able to provide a business formula, enabling new in-coming companies a solid and verified basis for a successful and lucrative business.

The rights and liability authorizes each franchisee and at the same time binds him to use the franchisor’s name or brand, know-how, business and technical methods, the system of procedures and other rights attaching to the intellectual property. The franchisor provides them with constant business and technical support in the method and for the time as set forth in the franchise contract which was concluded between the franchisor and franchisee for this purpose.

Why should someone choose a franchise instead of developing their own business?

Today, the Franchising World Federation and European Franchise Federation, estimate that there are more than 12,000 franchise systems operating in Northern America and Europe. There are currently around 8,500 franchise brands providing 2.5 million jobs, with more than 390 billion EUR of revenues (data for the year 2007) in Europe, and more than 4,000 franchise systems in USA, representing over 50 % of retail sales, with over a trillion in revenues. 

Extraordinary growth of this form of business system is evolving in Asia and Latin America, especially in China and also India. In the last few years a real franchise boom has occurred also in countries of Latin America, especially in Mexico, Basil and Argentina. If we were to add to numerous European and American franchise systems as well as those of South-eastern Asia, Japan and Central and Southern America, we find thousands of additional franchise systems. Since it is one of most propulsive forms of business operation we need to add, that these numbers are growing fast from month to month based on the very high growth rates.

Advantages of the Franchise System

Key arguments, in favour of acquisition of franchise over the development of one’s own business idea are:

1. Acquisition of a franhise enables you to purchase an established business formula and entry into a successful, upgraded and verified business system

This franchise system was developed by franchisor and verified through his business operations, therefore providing a proven formula that works, is successful and repeatable. Certainly, this is not in itself a guarantee of success (it would be a mistake to reason, a franchise needs no effort to make it into a successful business), but the risk is without a doubt significantly lower than it would be, if you were to enter a new market with a new product that you would firstly need to develop.

2. Product development and management is already established

This means that a product has an already recognised (and registered) trade mark, existing distribution channels, supply chain, recognizable marketing communication and last but not least established consumer confidence. These are those strategic activities, requiring the most knowledge, time and funds. Since the whole system is already developed, you can fully concentrate on operating your business and promotional activities to increase its sales.

3. Whole support network is already established

This means that you are provided with complete technical support and the whole know-how that has been developed by the franchisor, usually over many years. After the initial technical and professional training, where a franchisor services you with a complete package of knowledge and expertise which develops your competence for an individual business, at start-up you are offered 24 hour help. After establishment stage of your business the franchisor is at your assistance in designated time. Therefore you have more time to focus on your own smooth business operations.

4. With membership in an established franchise business system you have more possibilities of acquiring financing

Most banks see membership as a greater guarantee for the security and success of a business. Besides that a franchisor will assist you by designing a stimulating tailored package comprising of initial fee and subsequent royalties, which enables you to start up business, cover cost from operational activities and to reach a certain degree of return as quickly as possible.

5. Practice and statistics show, success is much higher in a franchise company than it is in a non franchise small company

Research has shown that more than 60% of non franchise companies go bankrupt in the first year of business, this number is lower, only 40% for franchise companies, whilst over a longer time period the figures show even more advantages for the franchise business system. Thus, in the first ten years following the establishment of a company as many as 90 % of independent companies go bankrupt, while only 10 % have the same fate among franchise companies.

90% of individual, non franchise companies go bankrupt

As many as 90% of non franchise companies go bankrupt in the first ten years of business, while only 10% have the same fate among franchise companies.

90% of franchise companies succeed

Quite the opposite is true in the case of franchise companies - where in the first tenyears only 10% cease to operate.