What kind of business is ready to create a franchise: the lifespan of the business

Zaur Abutalimov

Product Director at Ivideon, a cloud video surveillance and video analytics service whose clients include the Dodo Pizza, Vilgood, SDEK and others franchises.

The Russian franchising market is at the stage of rapid development - this is confirmed by a number of studies that franchises are decreasing in price. The model has many advantages for budding entrepreneurs, but there are also disadvantages. When selling your franchise as quickly as possible, problems arise for both parties: the franchisee receives a “crude” and unviable product, and the franchisor receives a bad reputation and legal claims. We'll tell you what you need to pay attention to to avoid unpleasant surprises.

Price issue

Franchise costs consist of two payments - a lump-sum starting fee and a royalty. The first is paid immediately upon conclusion of the contract, and the second is paid by the franchisee at a certain frequency (for example, once a month, once every six months or once a year). In the most popular Russian franchises, the lump sum payment does not exceed 500 thousand rubles. For example, at Dodo Pizza it is 350 thousand rubles. You can open a store even cheaper: according to Pizza, beer, car pawn shop: how much do the most popular RBC franchises cost, the starting fee for popular retail outlets is up to 150 thousand rubles.

Royalties can be calculated using different models - percentage or fixed. In the first case, the franchisee pays the franchisor a portion of the turnover - from 1 to 10%. In the second, the payment amount is known to the franchisee in advance and remains stable. It is worth noting: a fixed model does not always mean that the amount of deductions will remain unchanged. Sometimes franchisors gradually increase the amount of fixed payments as the franchisee gets on its feet. In other cases, the royalty amount is already included in the price of the goods sold by the franchisee.

Through a lump-sum payment and royalty, the buyer receives the right to use the franchisor’s brand, its internal tools and know-how, business and employee management methods. However, all worries about registering a legal entity, paying taxes, insurance and pension contributions fall on the franchisee.

The cost of purchasing a franchise is not the entire cost of starting a business. The final amount of costs consists of many factors: the cost of repairs and rental of premises, equipment, training and hiring of personnel. You can open a store with well-known franchises Pizza, beer, car pawnshop: how much do the most popular franchises cost for 1.5–3 million rubles, and if we are talking about regions - for 400–700 thousand rubles. For pizzerias and car services, the initial investment will be higher - from 6 to 16 million rubles.

The payback period of the business also depends on the size of the start-up costs. For example, according to some estimates, with an investment of 10–20 million rubles, the franchise pays for itself in at least two years. However, it is impossible to accurately estimate the period of profitability based on the starting capital alone: ​​for different networks this period can differ by 1.5–2 times with the same amount of investment.

Franchise Business: Pros and Cons

Perhaps the main difficulty for a beginner is the availability of basic capital. A franchise business involves a large financial investment at the start. It is impossible to make money on it from scratch. It's not just about the cost of buying a franchise. The franchisee is obliged to pay all the costs of opening a new outlet. And don't forget about the main money catch. The more famous the brand, the more expensive its franchise cost. But before you there are many examples of their success. But cheaper and less popular brands are a pig in a poke. Experts advise not to buy a franchise that has been on the market for less than three years. She can “shoot” and exceed all expectations. But it may also wither without taking root in the new soil.

Another disadvantage of such a business is that you will never catch up with the franchisor. You can grow with a franchise up to a certain capital. This means your growth is limited from the start. So why are people actively buying franchises? It's all about safety.

The tenant is not alone in the turbulent sea of ​​business. The franchisor is his guarantee and support. It is beneficial for him that your business takes off. See the item with Ray Kroc, who became rich from the success of the franchisee. Plus, you don't have to go through trial and error to find an effective way to run your business. The franchisor has already found it before you. And for a lump sum fee, he will tell you his working strategy. If a company sells franchises, it means it is in demand. Once you enter the market, customers will appear. They are already familiar with the brand. It turns out that you can save on your own advertising.

Signs that a franchise is worth buying

The secret of a successful franchise is the balance of a working business model and a package of additional services for franchisees.

They will help you find a room

A reliable franchisor will try to conduct research in advance and offer you a location with high traffic, and then will monitor traffic, comparing it with the indicators of other areas or chain establishments in the same area.

A good franchisor can offer franchisees to install a special analytical module - a visitor counter - in order to independently track the conversion of guests into buyers and quickly respond if this business indicator decreases.

You are guaranteed to receive training on franchise management

Operational processes, work with personnel, accounting, use of additional services and IT platforms, legal issues, compliance with all types of regulations - ideally, all aspects necessary for understanding and running a specific business should be disclosed to you at the start.

Along with the franchise you will purchase a package of additional services

These may include remote video surveillance services required both for the HoReCa segment and for medical institutions. “Anti-terrorism video surveillance has become mandatory for all medical organizations, online broadcasts from the catering kitchen, and online display cases. Modern analytical modules based on computer vision and cloud technologies can also be used: for example, facial recognition to prevent theft and develop loyalty programs, IT solutions for monitoring employee activities and recording working hours, ensuring security and quality control.

Some pizzerias use video analytics to recognize the quality of pizza from an image. The neural network analyzes the appearance of the test, looks for flaws in it and gives a rating on a ten-point scale

You will be provided with marketing support

Reliable franchises almost always promote the network as a whole - for this, franchisees transfer advertising fees to the head office. Smaller companies help partners promote their own locations: for example, the medical organization LabQuest provides what franchisees need to know to get maximum profit from a medical franchise marketing tools. Owners of outlets receive assistance in online promotion, PR, development of loyalty programs and interaction with doctors.

You will be provided with financial documentation in advance and demonstrated open business indicators

Everything is simple here. Everything related to money and financial obligations, as well as the financial history of the franchisor, requires thoughtful verification. It is not a sin to involve a professional accountant or auditor if the potential franchisee lacks the necessary knowledge.

Common franchisee mistakes

Here are some of the biggest mistakes that can be costly for a new entrepreneur.

Ignore market specifics

No business exists separately from the surrounding territory, residents and infrastructure. If the franchisee does not take into account the conditions in which his company will develop, then even a successful proposal from the franchisor may not work. One example is the Franchise case: how to open a running school of the I Love Supersport running school: its branch in Yekaterinburg has been operating for four years and makes a profit, and in Magnitogorsk it closed after a year and a half. One of the main reasons for the failure is the lack of suitable places for running in the city, due to which the sport has not attracted a sufficient number of fans.

Overestimate the franchisor's assistance

The franchisee may not know about the intricacies of the business and relies on the help of a partner - sometimes placing too high hopes on this help. Let's say a novice entrepreneur has no experience in marketing and does not know about the need to invest in attracting customers during the low season. The franchisor, on whose help he is counting, does not provide the necessary instructions to increase the number of visitors, and the business risks going under.

Buy an unverified franchise

Franchising market analysts believe that in Russia up to half of offers for the sale of franchises are fake. This means that companies provide partners with incorrect data about franchise costs and market conditions.

In some cases, misinformation concerns the same “help” from the franchisor. A few years ago, Franchises faced this problem with a catch: how a bet on franchising can result in the collapse of the franchisee of Mail Boxes Etc., which is engaged in the delivery of documents and small parcels, as well as printing. When purchasing a franchise, the organization promised to provide the materials necessary for opening an office on preferential terms. It turned out that the “favorable” price was several times higher than the market price, and the head office did not help the franchisees in any way in promoting and organizing sales.

❓ Do you need your own franchise?

Has your business been operating for 1 year or more than 5 years? Are customers or entrepreneurs interested in your business model? If the answer is yes, then your business is ready to be franchised. Interest in your product/service has closed in your region and it’s time to reach the next level.

Are competitors already developing franchises? It's time to act! Competitors can completely take over the market and there will be nowhere to develop. The most current type of business scaling is franchising. It is accessible and allows for rapid replication.

Legal subtleties

According to Russian legislation, the franchisor and franchisee can enter into one of two types of agreement - a commercial concession or a license agreement.

The commercial concession agreement implies the “Civil Code of the Russian Federation (Part Two)” dated January 26, 1996 No. 14-FZ (as amended on July 29, 2018) (as amended and supplemented, entered into force on December 30, 2018) the transfer of a number of exclusive rights from the copyright holder to the user (from the franchisor to the franchisee). A mandatory part of the agreement is trademark rights.

The transfer to the franchisee of the right to use a trademark and a set of exclusive rights in business activities is registered with Rospatent - without this stage, in the event of conflicts between the parties, the court will not be able to apply franchising regulations. This is important primarily for the franchisor - in the absence of registration, the court may require the return of all payments for the use of the company’s brand and intellectual property, even if the franchisee used these services and received income with their help.

The commercial concession agreement also specifies other rights that the franchisor transfers, for example, to use databases, computer programs, inventions of the copyright holder, and so on. The document may also describe restrictions for the parties: a ban on the franchisee competing with the franchisor, pricing policy, obligation to transfer contributions to advertising campaigns. Such an agreement can only be concluded between legal entities or individual entrepreneurs.

A license agreement is chosen when the franchisor does not want to transfer the right to use the trademark to the franchisee (or has not registered the trademark). Such an agreement allows the “Civil Code of the Russian Federation (Part Four)” dated December 18, 2006 No. 230-FZ (as amended on December 27, 2018) for the franchise buyer to use any intellectual property: the franchisor’s IT system, its operating methods, logo. Parties to a license agreement can be not only legal entities and individual entrepreneurs, but also individuals.

The main difference between a license agreement and a concession agreement: the second involves close cooperation between the parties, for example, control of the quality of services on the part of the franchisor. The licensing agreement only gives the franchisee the opportunity to use specific developments of the franchisor. Because of this shortcoming of the document, it may be supplemented with supply and service agreements, which spell out in more detail the franchisor’s responsibilities for selling goods or consulting business partners.

Regardless of the type of agreement, before signing it, the franchisee and franchisor must discuss the terms of cooperation in detail. Here's what you should pay attention to:

• Term and territory - where and for how long the franchisee can operate under the terms of the franchise. It is important to spell out these points in the contract in as much detail as possible. It is also necessary to clarify the exclusivity of the franchisee's rights to work in a certain region - without this clause, the franchisor can sell the franchise in this territory to someone else.
• Methods of transmitting information - we are talking about the process of exchanging documents. A vague wording like “in any available form” is not suitable - without specifying a specific data carrier, the parties to the contract will not be able to prove that they transferred or accepted the franchise package.
• Procedure for terminating the contract. Franchisees can cancel the franchise agreement unilaterally; to do this, it is usually enough to notify the franchisor in advance. However, the procedure should be discussed before signing the contract. It may turn out that the franchisee, under the accepted conditions, will be required to give a year's notice of leaving the business. During this entire time, the entrepreneur must pay royalties - even if the franchise only brought losses.
• Duties of the parties. Selection of suppliers, pricing, training of employees and promotion of franchisees - any obligations of the seller and buyer of the franchise must be known and understood before concluding a transaction.

A franchise is not just buying a ready-made “recipe for success”, but running a joint business with the franchisor. Therefore, the next step for franchisees will be to create the ground for communication.

Business Model Canvas

One of the first tasks we perform when packaging a franchise is developing business models for our client's business and for its franchisees.

A business model, or in other words, a business outline according to Alexander Osterwald, is a table with 9 blocks:

1. Consumer segments;
2. Value Propositions;
3. Distribution channels, sales;
4. Relationships with clients;
5. Income Streams;
6. Key Resources;
7. Key activities;
8. Key partners;
9. Cost structure.

Want to learn how to franchise your business yourself? We have prepared a free video course with 23 videos for 8 hours and 20+ templates, examples and other documents. We are sure you will be interested!

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Our client's franchise business model, presentation slide

A business model is necessary to show your business in a simple and understandable form

• Who is the business for?
• What makes it work?
• Thanks to whom does it work?
• What value does it offer to customers, what business proposition does it convey?
• Why do clients choose this company?
• How is it advertised?
• Through what distribution channels does it sell its product or service?
• How does it generate income and where are the expenses?

The first task is to draw up such a model for your business. It is necessary to describe the most important and key elements that best characterize your brand.

After this, it is necessary to identify the basic interactions.

Building relationships with a partner

As in any other business, trust between the parties and common goals are important in franchising. As a rule, at the beginning of work, the franchisor provides the partner with a number of documents: a brand book with a description of the brand and its style, a business book with management advice and a handbook with requirements for employees.

The franchisor's further participation in the business depends on the terms of the agreement. Sometimes the franchise seller only transfers the rights to know-how and helps choose a location for the outlet, but does not teach the buyer the intricacies of the business. But even in this case, the franchisee can usually count on consultation with the head office in case of difficulties - especially if the parties have entered into a commercial concession agreement, which involves assistance in the development of the project.

Successful franchises usually do not limit themselves to consultations and collecting reports on the achievements of their “wards”: companies create common employee training centers so that the quality of services and goods throughout the network is the same. For example, how to create a successful franchise from scratch is the chain of men's hairdressing salons Chop-Chop, which opened its own academy to improve the skills of hairdressers from different regions of Russia. Large chains are no exception: Subway, before opening a restaurant, teaches the Sandwich Artist how much a Subway franchise brings to the owner, managers and staff of the new outlet.

Franchisors monitor the work of franchisees even after training. In the Doubleby chain, each coffee shop is inspected once a week, and a separate specialist is responsible for the professional development of all baristas. Some franchises develop relationships not only between headquarters and individual locations, but also between the franchisees themselves. In the Red Cup coffee chain, all entrepreneurs share their experience and best practices, and the best ideas can be implemented at any point of sale.

It is important to understand that the success of a business mainly depends on the franchisee himself. Franchisors often note that their partner support programs and additional services are just an effective tool for doing business, but not a “pill for all diseases.” It is wrong to believe that by purchasing a franchise, you will get a business in which everything is already so streamlined that you just need to make a profit. It doesn't happen that way.

Checklist for future franchisees

• Pay attention to the ratio of payments to the franchisor. The terms of cooperation may include a high lump sum fee and no royalties. This model is justified for stores when the franchisee, instead of paying royalties, purchases goods from the franchisor for sale. In other cases, the lack of regular payments may mean that the company wants to sell as many franchises as possible and is not concerned about the success of individual branches.
• Ask about the age and experience of the company. The proposal may turn out to be “raw” and unfinished. The franchisee cannot count on competent support and assistance in such a situation.
• Check the company's representation in official sources. This advice applies to offers to purchase franchises of large international brands. Unscrupulous sellers can register a similar trademark and pretend to be a Russian division of a company that is actually not represented in the Russian Federation. In order not to buy a fake, it is advisable to obtain confirmation of the legitimacy of the organization’s activities (sometimes it is enough to check the data on representative offices on the brand’s website or write a request to the head office).
• Ask if the company develops its own establishments or retail outlets. If the franchisor has stopped opening new divisions and only sells franchises, this may indicate the ineffectiveness of its business model.
• Find out what you will receive from the franchisor. If a company only sells a sign, you will not benefit from working with them. Ask what tools, discounts on affiliate programs, developments and manuals the franchisor provides, how further communication with the parent company will take place and who will be responsible for training employees and monitoring their work.
• Check the contract carefully. It is important to pay attention to the validity period of the franchise, the territory under control, the obligations of the parties, methods of transferring information and terminating the transaction.
• Meet other franchisees of the network. Before concluding an agreement, other entrepreneurs will help you understand whether you should get involved in the business, and after that they will share their experience and their own best practices.

What to do first

What is needed to open a franchise? There are a few steps you should take first before starting a franchise. There is a fundamentally incorrect opinion that the main task is to sell a business idea. But only a few aspiring entrepreneurs can simply implement it. If the product is not packaged and there is no adequate and comprehensive support for it, then such an undeveloped model of cooperation will backfire on the parent company and affect its business reputation.

The introduction of franchising requires the involvement of professionals in this field

Acting solely with your own hands won’t really work. Even at the initial stages, it is worth having at least one savvy specialist on staff who has the necessary arsenal of knowledge and skills to launch each new project together with the franchisee.

A detailed description of all business processes and actions in different situations that may arise in the process of opening a new business is also important. That is, you need an absolutely detailed step-by-step plan for opening a franchise.

Before creating a franchise of its business, it is important for the parent company to understand for itself whether its own business model can be described in such detail, calculated and implemented in the conditions of a particular city, region, within a specific budget.