The Franchise Concept

Franchising has become a popular route to global growth for many businesses, with some aspiring investors looking to transfer franchise ideas from the West to other countries. However, there are also many local innovations that are set to go global, making use of the evolving franchise principle. In his book "Shortcut for a Better Life," Ziad Rayess sheds light on the concept of franchising from several perspectives, both positive and negative. Franchising is a method of developing new markets by authorizing others to invest in and recreate the business in another location using certain standards and rules.

In his book "Shortcut for a Better Life", the writer Ziad Rayess mentions: Some people looking to invest are researching the franchise ideas put forth in the West, especially the United States, in order to transfer them to our countries. They want to be part of the system in which franchise companies operate. But lately, there have been many ideas and very important local innovations that are set to go global, thereby developing and expanding using the evolving franchise principle.

Many ideas can be turned into franchises: restaurants, maintenance services, real estate development services, professional and academic training, etc.
Therefore, I wanted to shed some light on this concept from several perspectives, positive and negative, as it’s one primary route toward global growth.

Defining “Franchise”:

Franchising is a method of developing new markets so they become models of successful business. This is done by authorizing others to invest in the franchise and recreate it in another location using certain standards and rules. The franchisee is required to preserve all elements of the original business in terms of marketing, operations, commercial activities, and production.

Franchise Terms:

1. The owner of the original business is called the franchisor.
2. The person authorized by the franchiser is called the franchisee.

Types of Franchises:

There are two types of franchise relationships:

1. Single-unit franchises (one location only).
2. Multi-unit franchises (in which a certain geographic area includes a number of locations, perhaps in one country or several countries).

Conditions for Franchising:

The franchise concept can’t be applied to every business. Several conditions must be fulfilled:

1. There must be a franchise concept in operation offering the service, with a clear financial position.
2. The franchise concept must be reproducible in another area or another customer group.
3. The franchise concept must be profitable, with enough of a profit margin to be divided between the franchisor and the franchisee.
4. It must be possible to train others to operate the franchise concept and offer the same service or product.
5. It must be possible to secure all primary materials to offer the final product or service to the client.
6. There must be a detailed operation manual and a system for follow-up and monitoring that governs the franchisor-franchisee relationship.

Stages of the Franchise Contractual Relationship:

1. First stage:

A preliminary study on the possibility of implementing the concept in a new market, as well as gathering all operational and financial information required for the study.

2. Second stage:

Signing a non-disclosure agreement and exchanging the necessary information to complete an economic feasibility study for the project.

3. Third stage:

When the preliminary study of the concept and the possibility of implementing it in the new geographic location is completed, and when the franchising agreement, including the franchisee’s obligations toward the franchisor, has been signed, the following steps are completed:

• The franchisee takes the necessary steps to establish a branch or company, as legally defined.
•  Supervise and participate in the financial study of the incorporation requirements, as follows:
  o The capital required for purchasing assets
  o The required working capital
  o Financial projections for future years, using the projected income statement for the first, second, and third years at a minimum.
  o Participate in laying out an organization chart for the branch, including the company management, the finance department, the marketing department, and the maintenance team; helping to secure the necessary employees, taking into account the requisite qualifications.
  o A three-month employee training program covering the management, operational, and financial tasks required.

4. Fourth stage:

This stage comes after the company is established.

Company management is supervised in the following areas:

• Operations and abiding by the contract terms
• Financial reporting
• Exchanging information and benefiting from the franchisor’s network to secure sales for the franchisee.
• Using the franchisor’s network and suppliers to help the franchisee with purchases and resources.
• Benefiting from the transfer of sales orders to the franchisee; the opposite is also true, as a larger segment of clients will be satisfied.
• Using indirect ad campaigns on social media.
• Using all the monitoring, quality, and operating follow-up systems used by the franchisor.
• Benefiting from the value of the shares at the percentage that was agreed upon, if it was sold in whole or in part to the parent company or the branch.

Developing a business through franchising is one of the fastest ways to expand your business. Others invest in your business concept, which you’ve worked to establish and bring to fruition.
The franchise concept financially ensures the concept owner through the fees that are agreed upon in the franchise contract.

These are divided into several types:

• One-time franchise fees, paid in exchange for a certain contract duration (10–15 years, for example).
• Franchise royalty fees, paid periodically and tied to sales percentages.
• Other fees, like marketing fees for participating in joint ad campaigns.
• Another benefit may be primary material purchases, which are made through the franchisor.
  On the other hand, there are some negative aspects of franchising that you may encounter, including:
• The possibility that the final product or service may be offered to the client at a lower quality, for several reasons.
• Any defect or shortcoming at one franchisee location that carries the brand name will affect the entire chain.
• The more decentralized quality control and financial auditing is - the more of a challenge it poses.

When we look at some of the biggest brands in the world, like McDonald’s, Burger King, KFC, etc., we find that they owe their widespread presence to the franchise concept.

Conclusion:

Developing a business through franchising is one of the fastest ways to expand and grow a business. Franchising provides financial security to the concept owner through various fees outlined in the franchise contract. However, there are also negative aspects to franchising, such as the possibility of offering a lower quality product or service to clients, and the challenge of maintaining decentralized quality control and financial auditing. Nonetheless, some of the biggest brands in the world owe their widespread presence to the franchise concept, which has proven to be an effective means of developing successful business models in various locations.