How to develop a business using a franchise model

Franchising is one of the business trends.

They talk about it, study it, analyze it. The truth is, what a franchise business model is does not become clearer. There is a huge amount of material about franchising on the RuNet, but it is full of complex terminology and is often difficult to understand.

We have selected words that will allow even your grandmother to understand the topic! In this article we will tell you in very simple words what business franchising is and why entrepreneurs respect it so much.

Today, a franchise is a very broad concept. This is a convenient, inexpensive mechanism for expanding an existing business. And also a predictable and effective method of creating something new. Too difficult yet? Be patient for a few minutes, we'll explain. But before that, let's understand the terms.

What is the difference between franchising and franchising?

A few words on the topic: What is franchising and franchise

and what is their difference? Franchising is a way of business development based on a partnership between the franchisor and franchisee. The franchisor company sells its franchise to the partner, who will henceforth be called the franchisee.

Franchise

is an agreement under which the franchisor sells a package of services and the right to operate under its brand to the franchisor.

To put it simply: franchising is a caring mother who simplifies the way to create a new business. The franchise is its smart child, the very benefits that are transferred for the development of business under a well-known brand.

A little clearer? Great! Go ahead.

A franchise with a catch: how a bet on franchising can turn into failure

The last straw for Chubarov was the break in 2020 of cooperation with FedEX, a large delivery operator. “All franchisees paid for FedEX services centrally through the parent company, but, as it turned out, the money did not reach the operator,” says the entrepreneur. “The company really faced difficulties that were associated with the crisis state of the economy in the country and strong fluctuations in the dollar exchange rate. In fact, the rubles received from the franchisees were not enough to purchase the required number of dollars to pay for FedEX,” comments Moiseenkov. “The payment discipline of the franchisees cannot be called ideal either: some paid on time, others were constantly late in payments.” FedEX did not respond to RBC's request regarding this incident.

After breaking off relations with FedEX, Chubarov lost 20% of his revenue. The entrepreneur decided to terminate the contract with the management company and, through the court, recover the amount of the lump sum contribution and the royalties paid for a year and a half. Several more franchisees followed his example (according to Interfax SPARK, since 2013, 16 lawsuits have been filed against MBI-Eurasia JSC). Sergei Moiseenkov has his own version: “During these turbulent times, a number of franchisees began to shake up the situation, writing letters to Italy about their desire to purchase a master license. I think their goal was to take away the trademark rights.”

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In the spring of 2020, Moiseenkov announced that he was leaving.

After this, the company changed several general directors, and delivery services en masse refused to work with MBE representatives; franchisees tried to negotiate with them directly. “The business was falling apart piece by piece, no one understood what was happening. The franchise, which should provide us with a ready-made business model, has turned into an endless headache,” says Konstantin Chubarov.

The current general director of MBI-Eurasia (according to SPARK Interfax) Alexander Shilo declined to comment in a conversation with RBC. 99% of the shares of MBI-Eurasia JSC are owned by an offshore company from the British Virgin Islands, Korenelli Invest, Ltd.

Franchise without a handle

In the summer of 2020, a new actor appeared in the history of Mail Boxes - Saratov-based MBI-RU LLC, which announced that it was buying from the Italians the right to operate the brand in Russia. Judging by Rospatent data, on November 9, 2020, the master license of MBI-Eurasia JSC actually ceased to be valid and the rights to work in Russia were transferred to MBI-RU LLC for a period until May 8, 2027. Representatives of MBI-RU declined to comment.

“According to the Civil Code of the Russian Federation, a commercial concession agreement automatically loses its force if the parent company ceases to be the owner of the master license. So the franchisee needs to either remove the MBE sign or renew contracts with the new copyright holder,” explains Moscow office lawyer Ruslan Mannapov.

Konstantin Chubarov decided not to sign an agreement with the new owners of Mail Boxes, but registered his own Postburo brand. “Over the past four years I have managed to understand this business and now I feel much calmer and more confident,” he explains. Chubarov developed his own CRM system and now sells the franchise himself. Postburo points operate in Moscow, Voronezh and Kazan.

The only thing that still connected the entrepreneur with Mail Boxes was a lawsuit that lasted more than two years. On November 16, 2017, the court nevertheless decided to consider the agreement between MBI-Vostok LLC (Chubarov’s company) and MBI-Eurasia JSC terminated and to recover 2.3 million rubles from the latter.

Photo: Tom Bergin/Reuters

Another unlucky MBE franchise buyer is Ivan Ponaida from Surgut. He opened one of the most expensive Mail Boxes offices in the country - he spent about 3 million rubles on repairs and the purchase of equipment alone. Another about 1.44 million rubles. gave it to the management company as a lump sum contribution.

The entrepreneur often went on business trips and always used courier services through Mail Boxes Etc. I found out that the company was selling a franchise and decided to buy a business for my wife: “People usually buy beauty salons for their wives, but I buy a courier service.” He concluded two commercial concession agreements with MBI-Eurasia JSC to occupy the entire territory of Surgut.

For the first six months, things went well, the office was working well. The problems began in 2014, when, amid the crisis, the company had a significant decrease in clients. I could no longer rent a spacious office in the city center of Ponaida and, in order not to lose money, I moved to a smaller premises. At the same time, according to him, the head office did not take any action to help the franchisees. “The site was in its infancy, there was no general CRM system in which records could be kept, no one was involved in advertising, the brand was not promoted. It’s unclear what the money was paid for,” the entrepreneur lists. “This business is like a suitcase without a handle, stuffed with my hard-earned money, and it’s hard to carry and it’s a pity to leave.”

Due to a jump in exchange rates, Ponaida was unable to open a second office, and he closed the first on December 1, 2020. “We must pay tribute, Moiseenkov is a wonderful negotiator: he persuaded me to buy a meaningless second franchise, and as soon as I called with complaints, he promised to come fishing and settle everything with some cognac. Yours on the board, as they say,” says Ivan Ponaida. He abandoned the correspondence delivery business and is engaged in his main company, which rents out special equipment.

Four Signs of a Troubled Franchise

Nina Semina, CEO of the consulting company and founder of the franchise catalog Franshiza.ru

1. Inexpensive franchise of an international brand not yet represented in Russia. Unscrupulous companies can imitate a well-known brand by registering a similar trademark and develop a network, taking advantage of the reputation of a “big brother.” To avoid becoming a partner of such a false leader, you should go to the website of the management company and check whether Russia is among the partners. Even better - write to the head office email address. (However, the history of Mail Boxes Etc. shows that problems can also arise with official representatives of the brand. - RBC.)

2. Startup franchise . Often franchisees are led by a bright idea, a charismatic leader and first places in media ratings, but this is not enough for quality franchising. If a startup starts selling a franchise a month after its launch, this is a reason to be wary. In such a short period of time, it is simply impossible to develop a training program, establish communication processes and support partners.

3. Serial franchisor . Quite a lot of companies have appeared on the market that offer a whole range of franchises in a variety of areas - from coffee-to-go chains to sporting goods stores. As a rule, such franchisors do not have a single outlet of their own. Most likely, the company makes money by selling ideas; you shouldn’t expect any support.

4. The agreement specifies a large lump-sum payment and there is no royalty . This scheme is acceptable if we are talking about retail trade, where the franchisor makes money from the resale of goods. In all other cases, this condition indicates that the franchisor’s main goal is to sell as many franchises as possible. After the conclusion of the agreement, the financial success of the partners is unlikely to worry him.

Chasing the tender

The problems of Mail Boxes franchisees are far from an isolated case; sometimes the franchise business model fails even without any external difficulties such as currency jumps and changes in owners.

A taxi driver from Kirov, Roman Abramov, saved up some money and decided to open his own business. The Goszakaz Life franchise in the field of government procurement seemed presentable to him. According to Abramov, the management company promised to find attractive tenders on the Internet, inform franchisees about them, and even select order executors. “I had to prepare documents, submit applications where they told me, win tenders, purchase goods and deliver to the customer,” says Abramov.

The contract contained guarantees: if the franchisee submits 20 applications per month, he will definitely win from one to 10 victories per month. “We give this guarantee because, according to our statistics, if you submit at least 20 applications for participation every month, it is not difficult to win from one to 10 contracts,” says Rinat Abuzarov, founder of the Goszakaz Life project. According to him, the company selects tenders with little competition and specific products and gives access to its own database of suppliers who provide discounts to the company’s partners.

Roman Abramov and his brother took out two loans of 300 thousand rubles each. and in 2020 entered into an agreement with the management company Goszakaz Life - Digital Consult LLC. The lump sum contribution amounted to 350 thousand rubles, and the entrepreneur had to pay another 3% of the revenue to the franchisor as a royalty. “They immediately began offering me participation in competitions, but in those where I had to spend 700-800 thousand rubles at once on the purchase of goods, which I, of course, did not have. I had to refuse many offers,” the entrepreneur recalls.

The management company claims that Abramov did not warn about the lack of working capital. “Initially, he said that there were sufficient investments, but when it came to practice, it turned out that he did not have that kind of money,” Rinat Abuzarov outlines his version of events. One way or another, due to downtime, Abramov was unable to pay the next loan payment and again began working as a taxi driver. “I couldn’t even imagine how long it takes to collect documents: in order to submit 20 applications a month, this is all you need to do,” the entrepreneur complains.

Judging by the tender documentation, in eight months of working with Goszakaz Life, Abramov won five tenders, but, according to Abramov himself, this did not bring him any significant profit. According to the terms of one of the competitions, Abramov had to supply a batch of toilets to a Kazan enterprise. After all the expenses for packaging, transportation and taxes, 1 thousand rubles remained in his current account. “It’s a headache, but there’s zero emissions,” the businessman is indignant.

Deciding that the problem was that the tender manager, who is attached to each franchisee, offers him competitions that are not attractive enough, Abramov asked to replace the specialist, but this did not help: “It turned out that each manager has dozens of people like me, and they are just physically They don’t have time to do their job well.” For each tender specialist there are no more than 5 partners, and their staff is constantly being replenished, they counter at the head office. Now the entrepreneur is paying off the loan and living on the money he receives from working as a taxi driver.

Stanislav Kuznetsov has similar problems. He was successfully engaged in renting out real estate, but decided to try to make money through tenders. “I looked through a website with a rating of franchises, the Goszakaz Life model seemed promising to me, the injections were adequate,” he says. In 2020, the agreement with Digital Consult LLC was concluded by TK Tex LLC, controlled, according to SPARK Interfax, by Sergei Komissarov. Kuznetsov became an investor in the project.

In two years of work, Kuznetsov concluded only two contracts with customers, and only one was fulfilled. The first success was the supply of rubber gloves to the blood transfusion station. But within three days allotted for fulfilling the order, the supplier of gloves found by the head office of Goszakaz Life did not fulfill its obligations, and there was no time to look for a new manufacturer.

The second order won was the supply of weapon models to the military department of the Ural Mining University. This time, too, the manufacturer failed because he did not have time to produce the models on time. “These models were so rare that it was almost impossible to find them on the open market. We searched everything and ended up buying them at the same store. But the price was so high that we ourselves earned almost nothing,” says Stanislav. After deducting the costs of transporting the models and taxes, the profit from this transaction was zero.

Stanislav Kuznetsov was unable to make money from tenders due to an unsuccessfully chosen taxation system, the management believes, says Rinat Abuzarov.

Abramov and Kuznetsov believe that suing the franchisor is useless. “The owners registered a second company with a similar name and conduct all business on its behalf,” says Kuznetsov. According to SPARK Interfax, the General Director of Goszakaz Life Rinat Abuzarov is indeed the head of three legal entities: Consult Group LLC, Consult-Group LLC and Digital Consult LLC. The first two companies were registered only in 2020, and Digital Consult has been a defendant in court 12 times this year under articles of “failure to fulfill or improper fulfillment of obligations” and “unjust enrichment.” According to Rinat Abuzarov, at the moment Digital Consult LLC has been sold to third parties to work in other areas.

“Most often, people who buy franchises do not quite understand that active action is required on their part. Our company does 90% of everything for clients, and some partners think that we are an investment project where they only need to invest money,” explains Rinat Abuzarov. “But we have 70-80% satisfied clients who actively participate and achieve results.”

The agreement between TK Tex LLC and Goszakaz Life terminated in April 2020. “I just gave up on this matter - they won’t return anything, so it’s wiser to save your nerves and money,” sums up Kuznetsov.

Nina Semina calls the stories described by RBC typical and common: many brand owners make money by collecting lump-sum contributions, without caring about the future fate of their partners. On the other hand, many franchise buyers believe that they are investing in a “money printing machine.” This is not true - franchisees face the same risks as any new entrepreneurs. And not always the owners of franchise networks are able and want to solve their problems.

Five steps to enter into a successful franchise agreement

Moscow office lawyer Ruslan Mannapov

1. Check the other party to the contract for reliability. To do this, you should contact the databases of the Federal Tax Service, the Arbitration Court, the bailiff service, and the Federal Register of Bankruptcy Information. Read reviews about the company on specialized websites and communicate with existing franchisees directly.

2. Check on the Rospatent website whether the franchisor has rights to the trademark and other results of intellectual activity transferred under the agreement: know-how, copyright objects, commercial designation, patents, etc.

3. Specify the boundaries of the franchise. A license for the right to operate under a brand can be exclusive (only one franchisee has the right to operate in a specified territory) or simple (the rights to operate can be transferred to an unlimited number of persons). Conflicts due to competition with each other are not uncommon in franchise networks.

4. Make sure that all oral promises of both parties are enshrined in the contract. Prescribe penalties for violation of clauses of the contract and the conditions for its termination. Think of the contract as a business plan that covers different situations. Getting into a business relationship is always easier than getting out of it.

5. Register the agreement with Rospatent . The fact of transfer of the right to use a trademark is subject to mandatory state registration.

What is franchising in simple words

To understand what a franchise is all about, it's easiest to tell the story of how it came to be.

Let's imagine a business that is well established in the market. He has well-established business processes, a balanced budget, an understanding of the audience’s needs and the market situation. Within our region, our smart business has reached its “ceiling”. Having thought about how to develop further, I opened several representative offices. I realized that this was a risky and expensive business. Monitoring new points requires a lot of time and money. The business began to think about how else it could expand its enterprise and strengthen its brand in the regions.

Now let’s imagine an entrepreneur or former top manager who wants to open his own business. He has capital, but little experience in running a business. He wants to enter the market segment that interests him as easily as possible.

A company that has accumulated positive entrepreneurial experience and an entrepreneur who is ready to invest in a working model are made for each other.

Franchising comes to their aid. What is it and how does it work?

Advantages and disadvantages

Let’s first look at the pros and cons of running such a business for brand owners.

Advantages	Flaws
Reducing the cost of opening new branches.	Exposure to misconduct by franchisees. He can use the knowledge gained and implement his own brand.
Increased sales and brand awareness.	There is a risk of ruining a reputation if a partner conducts activities in bad faith.
Development and expansion of business.	Inability to fully control the work processes of all branches.

Advantages and disadvantages for those who purchased a license.

pros	Minuses
Effective and successful start, high demand.	Impossibility of free access to the market of services and goods.
Minimal financial investments for advertising campaigns, since the brand has already been promoted.	There is no way to somehow influence the development of a business; all decisions and changes are agreed with the owner.
Guaranteed delivery of materials and raw materials.	It is difficult to stop cooperation, since the owners indicate many prohibitions for the franchisee to exit the activity.

What is usually included in franchising a business?

The business creates its own franchise. That is, a proposal that includes:

The company brand under which the franchisee will work.
Franchisee book - a guide to business management. It describes all the business processes of the franchisor company, work standards, recruitment tips and much more.
Training for our franchisees.

An entrepreneur reviews the completed franchise proposal. The cost of the franchise, the scope of services provided by the franchisor, and the degree of its intervention in the work suit him. Since our entrepreneur has no experience, he likes that the franchisor guarantees assistance in finding premises, preparing documents, recruiting personnel and opening a business. The franchisor also provides support to the franchisee after opening: providing him with advertising, new development concepts, and consultations on emerging issues.

During negotiations, partners discuss the terms of cooperation and draw up a commercial concession agreement. After the agreement is concluded, the franchisee pays a lump sum fee. This is a one-time payment for the right to use the franchisor's intellectual property and its brand. Monthly payments to the franchisor for its support are called royalties.

Our business receives representation in the region and regular income through royalties. An entrepreneur opens a business following the instructions of the franchisor.

Where can an entrepreneur find the offer of his dreams? You can find specialized catalogs on the Internet. Many companies post requirements for their franchisees on their official websites. We thought and created a catalog of franchises for 2020. It's easy to find, impossible to lose, and easy to use.

Relationship between franchisor and franchisee

The franchisor is the parent company that sells the rights to franchise its brand to potential franchisees. The franchisor is the one who developed the company, brand and operating system. After deciding to franchise their business, the franchisor offers franchisees the rights to their proven business model, recognizable brand name, established business system, as well as their training and support.

A franchisee is an individual who purchases the rights to sell products or services and uses the proven and established business systems mentioned above. Although a franchisee is essentially purchasing a pre-established business, franchisees must work hard to build loyalty in their market, attract talented performers, and grow their franchise business. After all, it is the franchisee who runs the day-to-day business.

The franchisor/franchisee relationship should be built on mutual respect, understanding and support. Of course, as in all relationships, no two people are alike. Although the relationship between franchisee and franchisor will differ from brand to brand, one thing always remains the same: the franchisee/franchisor relationship is of utmost importance.

Why does business love franchising so much?

Thanks to the sale of a franchise, a smart business ready to expand receives additional funds and opens representative offices in the regions

, which do not require constant monitoring and investment. His brand becomes more popular and his network wider.

An entrepreneur buys a franchise, which spells out all the steps to develop the business. He knows the exact amount of his investment, payback period and profit level. That is, the entire business is absolutely calculated and the result is predictable.

This is a significant advantage. Thanks to working under a well-known brand, the franchisee saves money on a marketing campaign; the audience already trusts the well-known brand.

Very briefly, what is the essence of the franchise. It connects the hearts of a business willing to grow with minimal risk and an entrepreneur willing to invest their capital in a proven business model.

Example No. 3: Subway fast food restaurant chain

The modern pace of life dictates its conditions, and fast food cafes are becoming increasingly popular. The Subway restaurant chain was opened in 1965, but the startup experienced a real boom in its development in the period from 1990 to 2000, when it launched franchises around the world. In Russia, the Subway franchise offer appeared in 1994.

Automation

The brand owner and its buyer need to maintain continuous feedback in order to improve their activities. To do this, you need to automate the franchise. Automation also improves conditions for partners and supplies, marketing policies and consumer loyalty.

Key tasks that the automated franchising system solves:

Creation of a unified accounting technique.
All data is always up to date.
Reducing the risk of errors and omissions.
Analytical information is provided to the owner in a clear and convenient form.
Implementation of a unified tool for managing marketing activities.

For equipment and software for automation, you can contact us. We will help you find an effective solution for your business.

In this article, we told you everything about the meaning of the word franchise, explained simply and clearly what it is, what it means in business, what it looks like, what it includes, cited all the pros and cons of franchising, and analyzed the principle of operation.

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