Do You Want to Grow Your Company Bigger? Then Use Franchising

23 minute read

What is a franchise?

Franchise has many definitions, but one of the most comprehensive ones is the one suggested by Martin Mendelsohn, describing franchise through the following features:

  • Franchiser is the owner of the name, idea, secret work processes, product or specialized parts of the equipment, and goodwill of the company with which it is associated.
  • A specific contract, franchise agreement, is signed, that allows the franchisee to use the name, idea, processes, products or equipment, and goodwill of the company with which it is associated.
  • Franchise agreement includes the regulations and control mechanisms related to operative process management of the company in which the franchisee fulfills their obligations/rights.
  • In return for the acquired rights, marketable goods or provided services, the franchisee pays the franchiser use or license fee.

According to another Lucyna Lewandowska’s approach, franchise consists of the following components:

  • Trademark – legally protected emblem that distinguishes its owner from other organizations.
  • Know-how – confidential technical and technological information regarding how goods are produced or services provided.
  • Code of Practice – detailed description about how the franchise business should be run.
  • Charges – amounts paid by the franchise buyer. Typically, starting fee constitutes about 10% of the franchise buyer’s costs; use fee is 2-5% of the franchise business’ net annual turnover, and marketing fees vary 1-3% of the sales.

The two primary types of franchises are product and business format franchise.
In product franchise, the franchisee is an independent entrepreneur selling specialized products that bear the manufacturer’s name or trademark – for example, gasoline – for a certain fee. The franchised vendor’s greater identifiability, along with the franchiser’s trademark, product line, service concept, and marketing methods, sets product franchise apart from the typical supplier-dealer relationship. The goods are not sold to many vendors and dealers, but to a few chosen partners that are specialized on selling only specific products and services, and don’t offer competitors’ products. By limiting the selection of distributors, and appointing fixed distribution areas, each franchisee is guaranteed a solid and sufficient market share; meanwhile, there is no intra-brand competition. Occupying a market niche is the biggest motivator in product franchising.
Business format franchise is a continuous business relation between franchiser and franchisee that doesn’t incorporate only products, services, and trademark, but the entire business model – marketing strategy and plan; code of practice, instructions and standards; quality control; consistent two-way communication. In general, this type doesn’t involve manufacturing of products by the franchiser, however, the franchisee may be provided with necessary equipment, components, packing material, computer software, or promotional materials.
Business format franchises are found among catering and housing businesses, car aftersales, convenience stores, car rentals, business services (e.g. accounting and bookkeeping services, casual workers), and consumer services (cleaning companies, realtors, etc.)
In fact, it is increasingly difficult to differentiate the two types, because they are quite similar.

Therefore: Franchiser is the party that has seized a business opportunity, and created a new operative company. Just like the founders of Easy Wine restaurant in Riga, Latvia. Franchisee sees value in the company created by the franchiser, and purchase the rights to imitate the company in a new location.

Mendelsohn, Martin. The Guide to Franchising. 7th Edition. London: Thomson Learning, 2005
Ottas, Marleen. Development Opportunities for EKLT LCC as a Franchisee. University of Tartu, 2012