How to choose a franchise and what to look for when buying one

An entrepreneur who has reached a certain level of development in his native country sooner or later thinks about entering the international market. Such a decision is difficult to make, and even more difficult to implement. One of the formats for business going abroad is a franchise.

The international franchise market is growing rapidly and many entrepreneurs are looking to expand their business through the franchise model or acquire a franchise to launch their new business.

The concept of "franchise" is of French origin and literally means "favor". Franchise — This is a business model in which the brand owner company (franchisor) grants the franchise buyer (franchisee) the right to use the brand for commercial purposes on contractual terms. A franchise enables the franchisee to carry out entrepreneurial activities under a well-known brand, as well as to use all the resources and tools of the franchisor for successful business. That is, according to the agreement, the franchisee has the right to open a similar business using an already proven and working business system. For a franchisor, a franchise is beneficial in that it is one of the fastest and most affordable methods of expanding a business. There is an opinion in the market of the CIS countries that expanding a business using a franchising system allows you to develop a business five times faster, unlike other ways of scaling and replicating it.

Franchise Costs

Usually, the purchase of a franchise involves the payment of such fees:

• Lump-sum fee (entry fee) — this is a one-time fee paid by the franchisee to the franchisor for the right to use the brand and the existing business model. 
• Royalties — these are periodic (monthly, quarterly) deductions that the franchisee pays for using the franchise. 
• Marketing Fee is a payment that may already be included in royalties or charged separately. In fact, this is a payment to the franchisor for brand advertising campaigns, from which all franchisees benefit. Typically, the contribution is 1-2% of the business turnover of each franchisee.

Some franchisors do not require a monthly royalty payment (often this payment is "sewn" into the cost of shipping goods), while others offer to purchase a franchise for a minimum amount of money.

There are really working franchises that can be purchased for several thousand dollars. For example, these are franchises of coffee houses, beauty salons, online schools, farm products stores, travel agencies under the brand of a tour operator, etc.

On the contrary, there are franchises that require huge investments. For example, to launch the world-famous Baskin Robbins ice cream parlor, you need from $500,000 (after the rebranding, Baskin Robbins operates in Russia under the new trademark BRandICE). So the variety of offers allows entrepreneurs to focus on their own financial capabilities.

Lump-sum and marketing fees, as well as royalties are not the final investment in the business. Separately, an entrepreneur rents a room, purchases goods, and pays a salary to the team. It is not always necessary to independently calculate all possible costs, they are usually indicated by the franchisor in the proposal before signing the contract.

Types of franchises

Depending on the type of business, there are 3 main types of franchises - commodity, production and service. Let's talk about each in more detail.

Commodity franchise

The franchisee receives the right to open branded stores and sell goods from the franchisor. Simply put, it sells products of a certain brand. The stores of the network have a similar interior, assortment, uniform service standards, sales techniques, but they are separate organizations with different owners. Examples of product franchises are H&M, Athletics, JYSK.

Production franchise

The cooperation model provides for the granting by the franchisor of the right to produce and sell goods under its own brand. Franchisees receive technological instructions, raw materials, and sometimes special equipment on lease, and undertake to comply with the quality standards of the main company. A manufacturing franchise is offered by organizations specializing in the manufacture of household chemicals, building materials, furniture, and food products. The most striking example — Coca-Cola factories around the world.

Service Franchise

When buying a service franchise, in addition to the possibility of doing business under a well-known brand, the technology of providing service according to proven and well-established standards is transferred to the entrepreneur, and his team is required to undergo training. Service franchise is a broad category. Beauty salons, fitness centers, travel agencies, dry cleaners, as well as coffee shops and catering establishments operate according to this type (in this case, food is prepared at a franchise point).

Franchises are also classified according to the form of work:

• Exclusive - only one entrepreneur is a partner of the franchisor in the territory specified in the contract, for example, in a certain region.
• Non-exclusive - several franchisees can operate in the same territory.
• Master Franchise - the franchisee is granted the right to develop a franchise in a certain territory with the possibility of selling the rights to other entrepreneurs.

Pros of a Franchise

• Established business model. The franchise provides a ready-made and established business model that has already been tested in practice. The finished business model is a well-established system of work based on the experience and success of the parent company. Companies can use these out-of-the-box models to improve their operational efficiency, streamline processes, and improve performance. With pre-designed and tested methods, companies can avoid mistakes and reduce the time it takes to launch new projects or expand a business.
• Brand recognition. Franchises are usually associated with well-known and recognizable brands. Purchasing a franchise allows you to build on an existing reputation and attract customers who are already familiar with the brand.
• Support and training. Franchisors typically provide support and training to franchisees. This may include staff training, marketing support, operational processes and support. The support of the franchisor can greatly simplify the management and increase the success of the business.
• Business scaling. Acquiring a franchise allows you to expand your business to new markets and territories without the need to invest significant resources in the development of a new brand. A franchise can provide access to new customers and market opportunities.
• Increased profits. A franchise can provide an opportunity to increase profits by expanding the business and exploiting economies of scale. A large business can benefit from procurement, cost savings, and efficiency gains that can ultimately lead to increased franchise profitability.

Cons of a franchise

• Limited flexibility. A franchise usually has certain standards and operating processes that must be followed. This can limit the flexibility and ability of a business to implement customized strategies and make independent decisions.
• Dependence on the franchisor. Franchise buyers become dependent on the franchisor, their rules and decisions. The franchisor may change the terms of the agreement or make changes to the business model that may affect the operation and profitability of the franchisee.
• High start-up costs. Purchasing a franchise can require a significant investment. Entry fees, license fees, space rentals, equipment purchases, and other costs can be high for a young business. This can put pressure on the company's financial resources.
• Competition. In some cases, especially if the franchise is popular and successful, competition from other franchisees in the same network can be intense. This can limit the growth and profitability of the business.
• Legal restrictions. Purchasing a franchise also involves signing a franchise agreement, which may contain certain legal restrictions and obligations. The entrepreneur needs to be careful in studying and understanding these conditions in order to avoid possible problems in the future.

Examples of franchises

There are also a number of companies in Russia that have successfully expanded their market presence through franchise networks. Here are some examples:

The network of supermarkets «Pyaterochka» is one of the largest franchise networks in Russia. They offer entrepreneurs the opportunity to open their own point of sale under the Pyaterochka brand, which allows them to successfully run a food retail business.

"Children's World" — the largest Russian network of children's goods. They provide franchisees with the opportunity to open their own Detsky Mir stores. and use a recognizable brand and a successful business model.

Restaurant chain «Yolki-Palki» offers entrepreneurs a franchise to open their own restaurants with a traditional Russian menu. They provide support in choosing a location, organizing a restaurant and marketing activities.

"Domino's pizza" — an international network of pizzerias that is actively developing in Russia through franchises. They offer entrepreneurs the opportunity to open their own pizzerias under the Domino's pizza brand. and use a proven business model.

International franchises

Foreign companies in Russia work according to two schemes:

• A large foreign company sells a master franchise, for which the owner of the master franchise will bear full responsibility. It collects royalties throughout the country from sub-franchise holders and receives a certain percentage for this. For a foreign company, this form of relationship is convenient because there is no need to track the work on each franchise sold and be in contact with a mass of customers. All responsibilities are thus shifted to the owner of the master franchise. An example of a master franchise — Russian network of coffee shops «Shokoladnitsa».
• Sale of a franchise by a special representative. In this case, the decision to sell the franchise to various legal entities is made by the main office, and the representative acts as an intermediary between them and oversees the representative offices that are opened by the franchisor himself. An example is the Subway chain of eateries.

The main advantage of foreign franchises — their stability. This fact is confirmed by the huge number of franchisees operating around the world. Parent companies have an "iron" a reputation that has been built up over many decades. It is clear that the style and methods of work of such companies have been tested by time and a variety of market disasters.

The business organization product of foreign franchisors is often brought to perfection. Foreign companies value their reputation very much, so scrupulous adherence to the highest standards is their corporate identity. Our businessmen, being representatives of such companies, adopt their methods of work, experience and reach the level of full compliance with the world level.

The example of McDonald’s has shown that sanctions and bans do not particularly affect foreign franchise business. McDonald's announced the closure of all its Russian restaurants, and on May 19, 2022, a little-known businessman from Novokuznetsk Alexander Govor became their new owner. On June 12, on the Day of Russia, after an almost three-month break, he restarted the network under the new brand “Vkusno — and dot. In June, 65 restaurants began to operate under the new sign, in July — 200, and until the end of September — all the rest. In November, Govor announced its entry into the Belarusian market, 25 local McDonald’s restaurants will be renamed Vkusno — and dot».

More and more businessmen today choose the franchising system when it comes to expanding their business and entering a foreign market.

With the help of franchising, you can significantly minimize the risks, as well as the financial costs of launching franchise outlets abroad. The thing is that a foreign franchisee knows the local market better and understands the needs of local residents, which is very important when entering the international arena. In addition, part of the financial costs of such a business scaling system falls on the franchisee.

Entering the international market — responsible and time-consuming process for any entrepreneur. Therefore, in order to successfully implement this issue, it is still worth asking for help from professional consultants in the field of franchising. One of such professional teams operating in the international market, — this is Russian-Eurasian Business Broker (REAB).