Concept and main principles of franchising

Introduction 
 

       Interest to this concept of economic interaction not casual. In spite of the fact that for many Russian businessmen the concept "franchising" still remains unfamiliar, today we observably practically universal use of its elements in various fields of activity. First of all, it is shown in active distribution of known trade marks.

        Franchising enables the franchisor to develop the network and to advance the trade mark at the limited own means. Due to the given kind of activity the franchisor «comes nearer to the consumer». At development by franchising the franchisee who is the independent businessman, belongs the income of his enterprise, except for a royalty, and the success of his activity directly depends on own efforts.

            Advantages of franchising consist in reception of known mark and the technologies connected to it. To the franchisee, having bought the franchise, it is not necessary to think of advertising the enterprise, development of image, creation of technologies of work as all this in the kind ready and checked up by time is got at the franchisor, and advertising is carried out on-line. Except for it, franchising is protected from a corporate competition: according to the contract the franchisor in this territory will not sell the franchise to anybody to another.

       The consumer also remains in a prize - he receives an opportunity to use in the area products (services) of the known trade mark of the certain quality and on a uniform price. 
 
 
 
 
 
 

Concept and main principles of franchising 
 

       On the today's moment there is a set of formulations of concept the "franchising", the given relations are defined as: Franchising is system of contractual relations between head firm and the enterprise small working or created again, conducting retail of the goods or   rendering services.

       Franchising is such organization of business in which the company (franchisor) transfers the independent person or the company (franchisee) the right to sale of a product and services of this company. The franchisee undertakes to sell this product or services in beforehand certain laws and rules of business dealing which are established by the franchisor. In exchange for realization of all these rules the franchisee receives the sanction to use a name of the company, its reputation, a product and services, marketing technologies, examination, and mechanisms of support.

       Usually two groups of businessmen participate in franchising. The one, who gives this right (franchise), refers to the franchisor. He has long-term experience in manufacture of the given product, has developed system, has appropriated                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    to it the name or a trade mark and has knowledge that can result in success and that is not present. The franchisee is a person whom buys the right on business dealing (franchise) under the certain name or the trade mark.

       Franchising can be determined as a way of delivery of production or services to the consumer, a way of development of business and a gain of the market on the basis of cooperation material and financial assets and efforts of the various enterprises.

       Franchising can be considered as well as the agreement at which the manufacturer or the privately-owned distributor of a product or the service, protected by the trade mark, gives exclusive rights on distribution in the given territory of production or services to independent businessmen (retail dealers) in exchange for reception from them a royalty under condition of observance of technologies of industrial and serving operations. The royalty is the regular monetary deductions made by the franchisee to the franchisor for participation in his network. Represent either the fixed sum, or interest from a revolution of the franchisee.

       In franchising as it was already marked, two groups of businessmen participate: the franchisee and the franchisor. Benefits from association of efforts in business to take uneasy. When people cooperate, it gives not only the useful effect, but also creates the certain difficulties and the restrictions following from system of cooperation. Each partner should subordinate itself of an overall aim, to the general rules, the general arrangements.

       The essence of franchising consists in such way of enterprise business at which the firm - franchisor gives the partner (franchisee) the right to carry out the certain kind of activity with use of the technology, licenses, a know-how, the firm trade mark. The contract imposes on the franchisee a number of obligations - a payment for use of licenses, strict observance of standards, instructions on the organization of business. Besides in the contract also the financial control of activity of the franchisee, as a rule, is provided on the part of the franchisor. On the other hand, franchising enables the businessman to begin own business, using experience, knowledge and support of the franchisor.

       The franchisee himself pays expenses for creation of business. The franchisee buys an opportunity of training and the help at creation of business from the franchisor and pays (royalty) for use of a trade mark, know-how and systems of conducting works of the franchisor. Very much frequently the student gives very favorable discounts for the important deliveries (materials, account mean). These discounts always enable the franchisee to buy products from the franchisor under lower price and thus it costs more cheaply than to develop business without the franchisor. The franchisee does an initial payment for the help on creation and opening of business. The franchisee takes up a duty to pay monthly payments for the right using the trademark and business by system and for support, training and the consulting, given by the franchisor. If all goes under the plan the franchisee conducts successful business, and its profit surpasses expenses.

       Thus, in the growing markets, such as Russia, franchising is the fastest way of training of businessmen to practical standards, which are necessary to conduct profitable business. For the companies franchising is a way of distribution of business. For businessmen franchising is one of ways to become the owner of business. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Advantages and lacks of franchising 

       Having considered the maintenance and purpose of franchising, and also having defined main principles of functioning of system of franchising, we can to allocate the basic advantages and lacks of franchising as summarizing the given chapter. 

The basic advantages of franchising consist 

       For the franchisor:

       The franchisor develops the concept of business and proves its profitableness on an example of own shops. He divides the experience with all franchisees of system, giving them an opportunity to conduct the business as is successful. Therefore, if the company wants to find out, it is possible, whether to transform their business into the successful franchise, they simply should look as far as has successfully passed such transformation into the friend, similar business. The success of the franchise company in much depends from profitableness business of the concept. Sale of the franchise brings considerable money which can be enclosed in the further development of business. Having signed in addition some franchise contracts with franchisees, the franchisor can sell him other services in management, such, as special support on consulting and marketing. Both bargains (initial sale of the franchise and sale of special services) are an additional source of the income for the franchisor. Besides all working franchisees monthly pay to the franchisor for granting of services. The part of this money goes on granting of services in support of franchisees of this system (training of the personnel, advisers etc.). Franchisees bring a name of the franchise on the new market. Each separate franchisor receives huge advantages in all market because the franchisee, quickly extending in the new market and doing investments in development of this business in new cities, create a wide network of business on which development the franchisee never would have money. The increase of quantity of paid payments quickly and effectively allows the franchisor to develop in the market.

       With opening the new enterprises consumers find out about a product and services more. It is very important, as the new franchise becomes known in the market in process of granting the services. The numerous franchise enterprises in the specific market open economical access to advertising in mass media that does franchising known among the greater number of consumers. Use of advertising results in increase of sales and the profit in each enterprise of franchise system. 

       For the franchisee:

       The franchisee gets professional support from the franchisor. Such support helps him to avoid those mistakes which are done usually by other businessmen. The franchisor preserves the franchisee from acceptance of wrong decisions which could damage or in general destroys his enterprise. And at the same time the franchisee always remains the independent owner of business. This independence means, that he never will dismiss from this work. The biggest advantages are relations between the franchisor and the franchisee. All materials and the support given by franchisors to individual franchisees, are intended for support and amplification of the importance of the franchise. In the list of such advantages it would be possible to list: materials, training and consulting. The franchise system gives the information which helps the franchisee to find suitable site for the enterprise to make its design and will be convinced that business correctly functions. The franchisee it is not necessary to worry about the problems arising at an initial stage because he has experience of the franchisor. After opening franchise business the franchisee continues to receive professional services from the franchisor on questions of daily business dealing and marketing. If there are problems their first task will check up all given materials and manuals. But, however, can arise and specific problems. In this case the franchisee can call the franchisor and address for the help. Just because there is such communication between the franchisor and the franchisee, problems of the franchisee can be solved with the help of the skilled franchisor.

       The franchisee never will face an open aggressive competition. The franchisor defines to the franchisee territory of business dealing. Borders of this territory are determined by conditions of the franchise contract. Receiving territory, the franchisee effectively can develop the business in the certain territory. It removes threat of rivalry on the part of other owners of same franchise. The franchisee receives the untwisted trade mark in hands. Only the franchisees, working in system of the given franchise, have the exclusive right to use a trade mark of the franchisor. To the moment of opening of restaurant, all in district already know that it will render services on high a professional level.  

       For the consumer:

       The consumer receives an opportunity to use in the area products and services of the known trade mark of the certain quality and in a uniform price. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The basic lacks of franchising consist: 

       For the franchisor:

       To make the control of bargains of the franchisee for the franchisor not so it is easy. You see franchisees are independent owners of business. Quite often the franchisee will carry out financial frauds. Franchisors establish structure of payments for the given service, assuming as a basis interest from a total sum of sales in each enterprise. Franchisees are obliged to give the report on a total sum of sales to the franchisor to define the sum of payment for service. The franchisee can try to hide the sum of sales and to give the incomplete report to underestimate a payment to the franchisor. If the franchisee does not carry out laws of franchise business, the franchisor can not finish the relation with him. The franchise contract defines a nature of relations between the franchisor and the franchisee. The franchise contract provides a number of the positions protecting the franchisee. These positions provide impossibility for the franchisor to terminate the contract with the franchisee. If any student badly conducts the business it will cast a shadow on all beautiful system. And many consumers perceive each franchise enterprise as a part of one circuit of the enterprises working under a uniform trade mark. Principles of business of the franchisor represent a trade secret and form a basis of success of franchise system. The franchisee gets access to commercial secrets, being trained on the program of the franchisor. And though the franchise contract forbids the franchisee to disclose the similar information, all the same it happens. It is difficult for franchisor to struggle with it. At any stage the franchisee can count, that franchise relations impose on him too big restrictions and as a result to lose interest to this business. Having terminated the contract with the franchisor he, probably, will want to open own business which will represent a direct competition to the franchisor. The organization of franchise system - very big responsibility before own business. Franchisors very carefully should select businessmen whom they want to sell franchises. After the franchisee to become a part of system, the franchisor should observe of how there are his affairs. The franchisor quickly should be able define becoming ripe problems and immediately to make of the decision. The franchisor should support continuous communication with the franchisee and find out from him about new ideas and decisions of already existing problems. Working together with the franchisees, franchisors can avoid problems which could put a serious loss to all system. 

       For the franchisee:

       Franchisee can make the offers, but they can not change system. Franchisee should observe rules of franchise system. These rules are formulated in the franchise contract and all franchisee without exception should carry out them. In addition to the franchise contract the franchisee should follow the special rules concerning daily operations in business and use of a trade mark of the franchise. It is all it is described in the program of training of the franchisor. Such restrictions can concern working hours, borders of territory, assortment of a product and the services offered to the consumer. The franchisee should agree to acceptance of these restrictions prior to the beginning of action of the franchise contract. The franchisee should define a level of support before the contract will start to operate. Insufficient support on the part of the franchisor undermines force of franchise system. The potential franchisee attentively should familiarize with work of franchise system, whether to define the franchisor gives necessary support on management or conducting works. The franchisee is obliged to cooperate with others franchisees, he wants that whether or not. Though the franchisee represents the independent owner of the business, he is the important link in a network of owners of the franchise. Each separate franchisee is comrade on business. Not looking on that franchisees give on the market an identical product and services, they are not competitors. Can happen so, that the franchisor will declare bankruptcy that can result in sale of the franchise or its annulment. Before signing the franchise contract the student should execute a number of necessary procedures if he cares of the future business. The potential franchisee should familiarize with the materials given by the franchisor very carefully. The potential franchisee should meet other franchisees of this system and to define, how the franchisor carries out the promises on granting services. Whether the franchisee should find out is the franchisor a member of local association of franchising. If yes, the franchisor should carry out requirements of the Ethical Code of Association. As it is necessary to visit local Association of Franchising more find out about the franchisor. 

       For the consumer:

       Restriction of a competition - absence of a competition inside a franchise network owing to the unified price and commercial politics and granting by the franchisee of exclusive rights on territory served by them. An opportunity, in case of unfair performance by the franchisee of the duties, deterioration of given products or services. 

Literature 

1. Рыкова  И. В. Франчайзинг: новые технологии, методология, договоры. – М.: Современная  Экономика и Право, 2003.
2. Мюррей Я. Франчайзинг.  СПб.: Питер, 2004.
3.   Земляков Д.Н. Франчайзинг. Интегрированные формы бизнеса. – М.: Юнити-Дана, 2003 .
4.   Черепанова Е.А. Франчайзинг в России: правовой аспект. – М., 2005.