AZ Franchising Guide

What is franchising?
It is the agreement whereby a company grants a person or company, on payment of a fee, the right to use the brand, sign and to sell products or services. Franchising is an collaboration agreement between a company, the franchisor - which has an established business formula - and the person or company, the franchisee or affiliate, which adheres to this formula. The franchisor grants the franchisee the brand, its products or services, technical assistance and operational management of the method.

THE PROTAGONISTS

The franchisor

The entrepreneur, who chose the franchise commercial formula to replicate his activity’s business model creating an affiliates network, the franchisees, who use the brand, the format and the products.  

The franchisee

The entrepreneur who, through a franchisor-binding contract, operates within a system related to the enterprise, the franchise, to which he’s bounded by established contractual duties (for example the brand’s exclusive use).

Why franchise?

• The franchise promotes the spirit of enterprise and initiative and encourages independence work. The validity of this excellence formula in national and global economy is confirmed by official data for 2008: the turnover of the franchising networks was 21 billion and 419 million euros, 1, 40% the previous year, with a total of 182,215 persons employed.
• This business method is a limited risky business investment.
• Join a network means using the sign, the products / services, a concept that the market already knows. This makes it easier to get in touch with the market of potential customers and to avoid errors caused by lack of experience.
• The affiliate can take up the business, relying on the right training and transfer of know-how from the franchisor.
• The affiliate can count on continued support and assistance by the company.
•  The franchise business uses a scale of optimized costs: from those for the advertising that the franchisor can make to those of the goods directly purchased to the franchisee by the franchisor.
•  The franchisor "sells" a proven and successful formula and above all avoids the occurrence of errors that usually the independent commits for inexperience and where can sometimes be found the origin of the business cessation.
• The franchise is the ideal formula for those who want their own businesses.
• The franchise is the only way through which any person, even with limited capital, can make himself independent with the possibility of increasing his assets in proportion to their real ability and commitment.
• The main feature of the success of the franchise is the release of creative energy that occurs when the franchisees decide to invest their savings. The sector still needs capital and immaginative entrepreneurs who can discover and fill any gaps in the distribution system.

FROM THE FRANCHISEE’S POINT OF VIEW:

What to ask the franchisor at the first meeting:

1. Which are the requirements for the potential franchisees?

2. Which are the store’s characteristics?

3. Are there affiliated stores in my city? In which area?

4. What are the costs for launching an activity?

5. What does the network development plan schedule for next year?

6. Which is the network development rate over the past three years?

7. How much does my initial investment yield, which is the ROI (see box below)?

8. How much do you invest yearly in advertising and which channels do you use most?

9. What is the investment in communication?

10. Are you the ones who study the communication on the store?

11. Are you the ones who prepare flyers, press communication and billboards for the opening?

12. Which kind of training is offered to the affiliate, is there a training program catalogue?

13. What are the training and consultancy costs?

14. What support do you offer?

15. Is there an operative manual?

16. Is it possible to see images or photos of other existing stores?

17. Will the franchisee be helped by a designer free provided by the franchisor and followed in all creation phases until the opening?

18. Which is the “average” square meter cost for furniture and  lighting?

 What is ROI (Return On Investment)

The ROI is an index that shows the yield ratio relative to the investment of one euro of invested capital. It’s calculated dividing the operate income by the capital required for starting the business.

            OPERATE INCOME

ROI =    ---------------------------------

                INVESTED CAPITAL

What to ask the franchisor in the pre-contractual phase:

1. What is the estimated income for the first year and throughout the duration of the franchising contract?

2. How long, after the store opening is the break even point’s reaching expected?

3. Is there a consultancy from the franchisor for the advertising programs on local scale?

4. Is it possible to see the operative manual’s index in order to understand how your format is structured?

5. What is the estimated cost for masonries, plaster, shaving, painting, electrical system, heating system, padding, shutters, windows and mirrors, any permission and administrative papers? Is it possible to have a quote?

6. What are the estimated costs for transport and assembly?

7. Has the format the “turnkey” formula or can all the previous items, excluding furniture and lighting, implemented by the franchisee with local and/or trusted companies?

8. Whenever I think of a promotion, do I have to get through to you in order to examine a suitable communication?

9. What kind of communication freedom have I got on the store?

10. To create a communication, do you send all the graphic material in digital format?

11. Is there a loyalty program or are you going to launch it?

12. Who carries out market analyses on demand and competitors to orientate the network strategically, minimize opening risks and optimize marketing costs?

13. Do you schedule higher affiliate contracts with banks for funds and leasing?

14. Is the first stockroom payment facilitated and how?

CAUTION

Distrust the franchisor, who tells you:

“I cannot give you a copy of the contract”

 “You should pay to know the contract and the characteristics of our work”

“It’s not possible to determine the ROI (Return On Investment)”

“Because of privacy, I cannot give you the list of our franchisees’ contacts”

What must the franchisor tell you BY LAW

At least 30 days before the affiliation contract signing the franchisor MUST give you a complete copy of the contract to sign with:

- main franchisor data (company name and share capital, a copy of the balance of the past three years or since the beginning of the activity upon a franchisee request);

- list of the brands used by the system;

- brief illustration of the features of the franchising business;

- list of the affiliates currently working in the system and of the direct point of sales;

- description of the variation, year by year, of the affiliates’ number with their location of the last three years or since the beginning of the affiliated activity, if happened less than three years ago;

- brief description of any legal or arbitral proceedings.