The idea and subsequent development of a franchise business is based on the prior operation and success of a project, which can then be exploited through a franchise model.
The franchisor must begin its franchising business by defining the fundamental aspects of the business and what he wants to transmit to the franchisee for its project to function. Within the fundamental aspects, we would like to highlight the following:
- Transmission of the business model
- Transfer of the corporate image, brand, commercial name, and other elements of industrial property
- Support for the franchisee during business development
A company that wants to franchise its business should first determine if it can support a franchisee with regard to each of the abovementioned points.
The franchisor must previously develop and thoroughly know the business model and the corporate image. Notwithstanding, at the time of franchising, a business must find and analyze the aspects that can truly add value to the franchisor.
What is the distinguishing element of a successful franchise business?
It should be a combination of factors, which can vary depending on the type of business. It could be a successful product with attractive prices for the franchisees, a system of product manufacturing, or the direct provision of services by the franchisor to the franchisees.
The more well-known and prestigious a brand is, the greater value the corporate image has. However, this does not imply that franchises that do not have a particularly well-known brand will not thrive. There are businesses, such as the catering industry, where a good corporate image and design of the premises can be elements that contribute to the success of the business. It is not strictly necessary that a business have a particularly well-known brand from the start. Moreover, the advantage that the franchises business model offers to the corporate image is that franchisees can contribute economically and de facto increase brand awareness. During the business development, the brand will acquire greater value overall. Franchisees are commonly required by contract to pay a fee for publicity and marketing for brand awareness.
From a legal point of view, the franchisor must have its industrial property rights duly registered and protected. The franchisor would incur a high risk in its business if, for example, during its development, any issue should arise relating to the ownership and use of the brand and industrial property. Proper counseling prior to starting a franchise business is the best way to reduce these risks.
Lastly, but no less important, is the support of the franchisor. The type of support should be different in the various phrases of the business. In the preliminary stage, it is common that the advice is related to local research — for those businesses in which the physical location is important —, as well as training of the franchisee. In such training, the franchisee should learn the most important issues relating to the business model he will develop.
Once the business has been franchised, the type of support that should be provided is different and usually of a lesser intensity. However, it is very important that the franchisee feels supported by the franchisor. The franchisor should engage in the franchisee business and pass on its knowledge and advice from experience of its own business.
When the franchised business is fully operational, the franchisee may feel he no longer needs support from the franchisor. This situation may eventually lead to a break in the franchise relationship. Therefore, the support that the franchisor can provide to the franchisee at this stage is highly important. The franchisor should help develop the business of the franchisee through publicity and advertising and closely follow the business, jointly setting business plans and semester or annual objectives. The franchisor cannot restrict itself to observing the business of the franchisee, but must become part of the franchise by transmitting and supporting it with the franchisor’s own experience.
For the success of a franchise business, it is fundamental that both parties, franchisor and franchisee, gain a clear benefit from the business relationship. Many franchise businesses fail because once the franchisor has passed on its expertise and know-how, the franchisee feels that he no longer needs to follow the franchise agreement, and that he can develop the business himself, without the costs of the franchise system.
Consequently, such transmission should be supplemented with other basic elements mentioned: the transfer of a known image or an image that should become known during the business development, as well as support to the franchisee as an added advantage.
In any case, to protect the franchisor’s know-how, it is essential that the franchisee assumes the obligation of non-competition in the franchise agreement, not only the company that signed the contract as a franchisee, but all partners, in order to extend such protection. However, such commitments by virtue of the governing regulations on competition cannot be assumed for long periods of time.
Taking into account the above, a franchisor must be cautious prior to franchising its business and assess, whether or not the franchise system provides added value, not only at the start of the project, but throughout its life.
This article is not considered as legal advice