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A franchise is a form of independent undertaking based on an agreement or license between a franchisor and a franchisee.
It usually consists in the lawful use of a trademark, brand name or business model by a third party (the franchisee). The franchisee has to pay a financial counterpart to the owner of the trademark or business model (the franchisor).
As a general rule, the franchisee pays a fee between 2 % and 10 % of his turnover in return for assistance from the franchisor which can take several forms:
The franchisee is hence not left on his own as he is granted the right to benefit from the franchisor's experience and proven operational model.
He will also benefit from the brand's reputation and the franchisee's fame.
An independent undertaking in the form of a franchise can be particularly interesting for persons who:
As a large well established company, the franchisor usually:
The assistance provided can be limited to the start up phase of the collaboration or take the form of continued advisory services or training for the franchisee.
The franchising agreement is usually concluded for a period between 3 and 7 years, but it generally includes the possibility of a renewal.
The franchisee will usually be granted "territorial exlusivity" within a given geographical area where no other franchisee can operate as a competitor.
In exchange, the franchisee has to pay for the support received. The payment can take the form of:
Depending on the details of the franchising agreement, the franchisor can decide how the franchisee should run his business, which providers to use and even how to fit out the commercial premises. The franchisee may even have to adapt specific stages in the operational process according to the instructions from the franchisor.
These strict conditions serve the purpose of guaranteeing the quality but also maximising profits.
In the case of a production franchise, the franchisor offers his expertise concerning the production of a certain good. The franchise is usually based on the use of a patent or the transfer of a licence required to produce certain goods protected by intellectual property rights. This means that the franchisee himself is manufacturing and selling goods under the franchisor's trademark and according to his instructions.
A distribution franchise is based on the distribution of products in the name of the franchisor. This type of franchise is often seen in the cosmetics industry or the retail trade. The franchisor is responsible for the production of the goods whereas the franchisee is responsible for their sale.
The services franchise is the best known form of franchise. This type of franchising agreement is often used by fast food chains or ready-to-wear clothing companies. The franchisee uses a business model which has been developed by the franchisor in the services industry and obeys certain strict rules.
A franchising agreement must include the following information:
The franchisee can:
The franchisee must cover all expenses related to:
Most of the time, the franchisor has to meet administrative expenses, namely with regard to the implementation of monitoring systems which are necessary for the protection of his brand name.
A franchise represents a certain loss of earnings for the franchisor as he gives up earnings he would have had if he had managed his business on his own.