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Franchising as a business model



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What is a franchise and how exactly does it work? 

A franchise is a license agreement that allows the franchisee to access the franchisor’s internal business operations such as: intellectual business operational knowledge, trademarks, systems, etc. allowing the franchisee to operate sales through the franchisor’s already existing business name. There are usually mutual grounds on which a franchise agreement is based and the franchisor usually requires a capital start-up fee and yearly license fees in exchange for the franchisee to obtain rights to owning the franchise in the designated location. Businesses usually head into the franchising business model when it feels the need to expand its share in the market or have a bigger reach geographically while remaining lower cost operations. The franchise license agreement joins the franchisor (original business owner) with the franchisee (entrepreneur interested in expanding the business). Thus, the franchisee purchases the rights to permission to sell products or services under the franchisor’s established business model and trademark. This business model is most appealing for starting entrepreneurs especially in bigger industries where competition is usually very high, for e.g: the fast food industry. Franchises usually have three payment sources to the franchisor. Trademark or the rights to use an existing brand is the first upfront payment that needs to be considered. Secondly, the franchisee is usually liable to pay for any training, facilities and any other business related services that the franchisor provides. And thirdly, the license agreement usually includes continuous royalties or commission that are liable to be paid to the original franchisor. 

 

Pros and cons of franchises

 

“Ideas are cheap, the hard part is implementing them” 

 

Franchising is not a suitable model for every entrepreneur out there, but it can also be the exact thing that you are looking for. Let’s take a look at the possible pros and cons of opening a franchise. 

Pros:

  • Functioning idea: The idea is already implemented and proven to work, meaning your investment will be in a company that has already reached success to some extent. Statistics and insights from the existing franchise can be provided to support the company’s legitimacy, helping you to understand the company’s internal operations. 
  • Brand awareness: The brand is already established, meaning that you as the franchisee do not need to spend excess money on product and brand design. Customers might already know who you are, increasing your customer loyalty in different locations.
  • Easy entry to an unfamiliar industry: All the training and education you need about the industry you are franchising in can easily be provided without you needing to get a degree. The franchisor carries the responsibility to teach you everything you need to know about this industry. 
  • A helping hand is always around: Support is one of the biggest positives of franchising. For an entry level entrepreneur who is still a bit uncertain about all the business elements, support from the franchisor might be the last push of confidence in their ideas that they need. 
  • Corporate collaborations: Franchisors usually have already established collaborations with business organizations, giving the franchisee a huge networking and partnership benefit. 
  • Lower risk: The risk of not succeeding is minimized through franchising, since it is easier to predict certain outcomes based on previous experiences. 
  • Automatically creating a network: Franchise owners are usually interconnected in the industry and therefore a strong community seems to form more naturally than within startups. 

Cons:

  • Initial starting fees: This fee is usually regulated by the government and it officially allows the franchisee to run business operations through the franchisor’s already existing name for a specific number of years and support during the starting phase. 
  • Royalties: Royalties work differently in different franchising cases, but usually they are worked out through a percentage of the franchise’s turnover and they normally range between 4%-12%. The idea is for both the franchisor and franchisee to succeed in the business. In some cases royalties are paid as fixed fees and come with additional fees such as marketing or advertising fees. 
  • Decreases creativity and independence.  A major reason why some franchises fail is due to entrepreneurs not following the already existing systems. A franchisee needs to be the type of person that is okay with not having a say in the product or service itself. Self-initiated marketing schemes and product development does not belong to the franchising business model. 
  • Restricted property: The franchisor has a lot of say when it comes to deciding the location of the franchise and this can affect decisions of potential investors and stakeholders.
  • Media travels fast, even negative media: Whatever happens within your franchise, even if it is across borders, it has the power to negatively affect your name as well. Things like food hygiene, underpaid labor, etc. can all play a role in your franchise’s reputation, even if it wasn’t caused by your branch. 

 

Franchising in Finland

In Finland, franchising takes quite a few detailed steps before the business side of it can officially start. Once you have decided on an industry that you are interested in, you need to contact the Finnish Franchising Association to research chains in the same line of business, then you can choose the chain that aligns most with your values, professional skills and personality. After picking a chain, you need to look into the franchise package, do research on what is included in the concept, the competitive advantages and how developed the chain is. Next it is time to reach out to the franchisor and discuss how work will be effectively divided, ask necessary questions about the business operations and try to get as much internal information as possible. After this, compare the information and the franchising agreement with the Code of Ethics of the Finnish Franchising Association to see if they align. (https://franchising.fi/franchisingtietoa/franchising-yhdistys/eettiset-saannot/) .After this you need to establish a predicted financial balance sheet. Find out the costs of being a franchisee: start up investments, franchising fees and royalties. You need to follow a similar application process for opening a franchise that you would when applying for a job. An important aspect of applying and signing the franchise agreement, is a mutual agreement on a long-term partnership, usually over a period of a few years. Finland offers a lot of assistance for franchises. You can contact the Finnish Franchising Association directly, franchising specialists, Enterprise Finland and you can always attend events where franchising is a main discussion topic. According to “Franchise news daily, 2019” The franchising market in Finland is predicted to be over $6 billion. Since 2018, Franchises in Finland have been divided domestically and internationally by a ratio of 1:4. The franchising business model in Finland runs 250-300 systems in 7 000 units domestically.n In 2018, the most popular franchising market sectors in Finland were: 55% service based, 22% retail and 23% restaurants. (Take note: these statistics were released before COVID-19). There is not too strict legislation that covers franchising in Finland, but a few acts worth looking into are: the Contracts Act, the Unfair Business Practices Act, the Trademarks Act, and the Competition Restrictions Act. 

 

Conclusion
Franchising is a safer option for entrepreneurs and might be an easier way to enter the market with lowered risk and higher support, than starting to implement an idea from scratch. The franchising business model works for certain products and services and for some it doesn’t work at all. It is important to do thorough research before jumping into a franchise without enough knowledge and understanding. Finland is a very good and supporting economy when it comes to franchising, there is a lot of support and clear legal guidelines that will assist entrepreneurs during the process. 

 

References 

Hayes, A. 2021. What Is a Franchise, and How Does It Work? Read on 5 March 2023. 

https://www.investopedia.com/terms/f/franchise.asp

 

Daszkowski, D. 2021. The Pros and Cons of Buying a Franchise. Read on 5 March 2023.https://www.forbes.com/sites/forbesbusinesscouncil/2021/07/20/the-pros-and-cons-of-buying-a-franchise/?sh=4764827e28a4 

 

Event. 2019. Franchise News Daily. Read on 5 March 2023. https://www.privacyshield.gov/article?id=Finland-Franchising#:~:text=The%20Finnish%20franchising%20market%20is%20estimated%20to%20be,Finland%20were%20domestic%20and%2025%20percent%20were%20foreign

 

Finnish Franchising Association. 2019. Code of Ethics. Read on 5 March 2023. https://franchising.fi/franchisingtietoa/franchising-yhdistys/eettiset-saannot/ 

https://www.suomi.fi/company/starting-a-business/planning-business-activities/guide/simpler-ways-of-becoming-entrepreneur/franchising_en

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