Franchising is a type of contract in which one company (the franchisor) grants to another (the franchisee) the right to market certain products or services within a given geographical area and under certain conditions. This, in exchange for financial compensation.
Therefore we have two main figures:
- The franchisor:Charges some marketing rights so that the franchisor can use its brand, the commercial name and the design of the franchisee’s establishment. In most cases, these elements cannot be modified to maintain the same quality levels of the franchisor. In addition, the know-how , business experience and technical and commercial assistance during the term of the agreement are also provided.
- The franchisee:It is the business owner and who makes the necessary investments for its implementation. Thus, he pays a fee to the franchisor to use his brand. Such payment is like a “right of entry” into the business. Even periodic amounts may be established in the contract according to the volume of sales and / or technical and commercial assistance. In addition, the franchisee exclusively has the franchise regime with respect to a specific geographical area and a type of products.
An inherent benefit of this type of business is undoubtedly brand recognition, since the customer is already accustomed to its services in other establishments. This means that the entrepreneur can somehow save an important part of investing time and money in advertising and marketing .
Franchising is usually one of the most common formulas to establish distribution networks in international markets.
On the other hand, for the franchisee there is an excessive dependence on the franchisor that causes him to be at a disadvantage in the face of any agreement or conflict, subtracting capacity and flexibility from any change in the market.
Types of franchise
There are multiple types of franchises that can depend on the type of activity and the level of integration.
- Distributionfranchise: The franchisor assigns the marketing rights of manufactured products manufactured by himself or by third parties.
- Service franchises: An idea of service and a way of providing it together with the brand, the franchisor’s prestige and his know-how and experience is transferred.
- Industrial franchise: Itmixes the license and franchise agreements, and the rights are ceded both to manufacture and to market products under certain characteristics.