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You've certainly heard the term “franchise” , but do you know the details that accompany the term?
A franchise is a business model in which one company (franchisor) grants another (franchisee) the right to use its brand, products and know-how in exchange for an initial fee and recurring payments.
It is something that can be applied in different segments that can range from food and entertainment to various services, covering a wide range of opportunities. Therefore, it is a well-established sector in the country.
According to recent studies by the Brazilian Franchising Association (ABF) , the sector remains stable and in constant recovery after the pandemic years, registering growth of 14.3% in 2022 and 17.2% in the 1st quarter of 2023
Investing in a franchise can be an excellent business opportunity, but for its success, planning and knowledge on the subject are necessary.
Anyone looking to enter this market needs to understand the laws that govern franchising in Brazil and explore the opportunities available.
Therefore, in this article, we will demystify the world of franchises, covering everything from their definition to the essential steps for choosing the ideal franchise and achieving success.
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What is a franchise and how does it work?
It is a business model where a company allows another person or company to use its brand and operating system under a contract. Let's see how this happens in practice?
Definition and structure
In the franchise model , the franchisor grants the franchisee the right to use its brand, products, services and operating system.
This relationship is governed by a contract , in which the franchisee pays an initial franchise fee and other periodic fees ( royalties ) for continued use of the brand and support provided by the franchisor.
Another component can be the advertising fee , used to promote the brand in a unified way.
Franchisors often provide ongoing training and support to franchisees to ensure the business operates to established standards. This training may include aspects of management, operations, marketing and customer service.
In summary, the structure of a franchise generally includes:
- Brand: The name, logo and visual identity of the company.
- Products or services: The line of products or services offered by the franchisor.
- Operation system: The processes, methods and techniques used by the franchisor.
- Support: Assistance offered by the franchisor to the franchisee, such as training, marketing and technical assistance.
Advantages and disadvantages of the franchise model
Like every business model, franchises also have their advantages and disadvantages.
Let's start with the good part. Among the main advantages of this model is the fact that it is an established business, with a recognized brand and a pre-existing customer base.
This significantly reduces the risks associated with starting a new business. In addition, the franchisee also benefits from ongoing support and a network of other franchisees.
On the other hand, a significant disadvantage is the lower degree of autonomy . The franchisee must follow the guidelines and standards established by the franchisor, which may limit the business's ability to adapt and personalize.
Furthermore, the initial investment to acquire one can be high and fees and royalties can represent a considerable part of profits, which can affect the company's profitability.
Types of franchises available on the market
There are different types of franchises available on the market, each with its own characteristics and adapting to different entrepreneur profiles. Franchises can be classified into two large groups: products and services. Check out the differences between them below.
Products vs. services
Product franchising , as the name suggests, involves the sale of physical goods such as clothing, food, and electronic products.
This type can benefit from a broader market , as products can be sold both in physical stores and online.
On the other hand, service franchises offer activities such as consultancy, education, among others. They require no inventory and often have lower operating costs.
This way, they can be more flexible in terms of location, allowing business models based on home office or personalized service at the customer's location.
When we talk about franchising , an important point to consider is the initial investment. In this regard, there are also different types of franchises, so it is important to know the differences to choose the best option.
Low-cost franchises are excellent options for beginning entrepreneurs or those with limited financial resources. This is because these franchises generally involve smaller initial investments and reduced operating costs.
Common examples include kiosks, food carts, and microfranchises : businesses with a small number of employees and reduced need for physical space.
Premium franchises, on the other hand, require a higher investment, as they offer a potentially greater return. These businesses have an established brand, extensive support, and a proven operating model.
Sectors such as hospitality, high-end restaurants, and luxury gyms generally fall into this category, providing greater revenue expectations and brand recognition.
Essential steps before investing in a franchise
Investing in a franchise can be an interesting business strategy, but to be a successful venture, a lot of preparation . Therefore, to make the best decision, it is necessary to carry out careful market research, evaluate the financial viability of the entire operation and the return on investment.
Market research and franchise selection
The first step before putting your money into a franchise is to carry out research to understand the market you want to enter.
A detailed study is essential to understand the target audience and identify competitors and industry trends. At this point, use market analysis tools to obtain accurate data.
Another essential point is to understand the brand you want to franchise and understand its business model.
Talk to current franchisees of the target company to get real insights into the support the franchise offers. Additionally, visit franchised establishments to get a practical view of how the business operates.
Financial evaluation and return on investment
After research and studies on the brand and market, it is time to look at your pocket, researching the necessary investment and the possible returns on the possible franchise.
To do this, it is necessary to carry out a financial analysis, which involves calculating the capital required for the initial investment and the cost to keep the business operating until it becomes self-sustainable.
In this analysis it is necessary to consider all expenses , from the initial contribution, through franchise fees to operational expenses.
Finally, the return on investment (ROI) must be projected. This requires a clear understanding of profit margins and estimated payback period. Therefore, turning to an accountant or financial advisor to obtain an accurate assessment may be interesting.
But it doesn't stop there! Investing in a franchise requires robust financial planning, which must include emergency funds to deal with potential unforeseen events.
Additionally, financial details include analysis of projected sales, profitability, and cash flow .
Knowing these aspects, it is possible to make necessary adjustments and optimize resources to achieve success in the enterprise.
Legal and contractual aspects in franchising
Like every commercial relationship, franchises are also involved in legal and contractual aspects that need to be understood to establish a clear and fair relationship between franchisor and franchisee. Look:
The Importance of the Franchise Offer Circular (COF)
The Franchise Offer Circular (COF) is a mandatory document that must be provided by the franchisor to the potential franchisee, at least 10 working days before signing the contract.
The COF has the function of ensuring transparency , detailing essential information about the business, including the company's history, legal disputes, and financial statements, as well as details such as the necessary initial investments, ongoing fees, the type of support offered by the franchisor and the detailed description of the business.
The franchisee has the right to demand the return of all amounts paid to the franchisor as membership or royalties if this document is not delivered in accordance with the requirements set out by law .
Main clauses of the franchise agreement
There are many clauses within a franchise , including:
Grant of rights : The terms that allow the franchisee to use the brand and business model must be clear in the document.
Territory of operation: geographic area where the franchisee can operate.
Duration period: time during which the franchisee can operate under the brand. Contract renewal and termination are also covered, along with associated conditions.
Fees and royalties: amounts and payment periods. The franchisor must offer ongoing support to the franchisee, the nature and extent of which must be detailed in the contract.
These clauses help avoid disputes and ensure that both parties are aware of their obligations and rights, facilitating a fair and profitable business relationship.
Tips for success when managing a franchise
Now that you're familiar with what franchises are, how about more tips to ensure the success of yours?
If you want to be a franchisee of a brand, in addition to understanding all the legal and financial issues, it is important to:
Follow the operating manual: respect the franchisor's rules and procedures.
Invest in training: participate in training offered by the franchisor.
Maintain good communication: maintain a good relationship with the franchisor and its customers.
Adapt to changes: always be aware of market news and changes in the franchisor's strategies.
If you are on the franchisor side or want to be, here are some suggestions:
Establish an efficient governance structure: This includes creating clear policies and strict procedures that everyone must follow.
Select franchisees carefully: carefully evaluate candidates' skills, experience and commitment to ensure they are aligned with the brand's objectives.
Implement Effective Communication: maintain open communication channels with franchisees. Regular meetings and frequent updates can help resolve issues quickly.
Standardize Processes: uniformity in operations ensures that the customer experience is consistent across all units. To do this, include training, operating manuals and regular audits for franchisees.
Monitor performance indicators: metrics and KPIs must be constantly reviewed to evaluate the performance of the units. This allows for quick adjustments and the identification of areas for improvement.
Become a Skyone franchisee
Throughout the text we saw a lot about the world of franchises, but did you know that it is possible to be a Skyone ?
Join the Skyone Franchise and expand your horizons with us. We offer support for visual merchandising, access to relationship systems, CRM and the Skyone platform, providing a complete experience for you.
End-to-end benefits to boost your business!
Conclusion
Franchising is a very popular business model around the world. This is because it can be applied in different segments. Regardless of which side you are on (franchisee or franchisor), this model is an effective way to expand business.
For large companies, a franchise is the chance to reach new horizons, strengthen the brand and win over other audiences. For those who want to undertake, it is an opportunity to start with lower risks and the continuous support of an established brand.
However, it is crucial to understand all aspects involved , from choosing the franchise, through the necessary investments, to the daily management of the business.
But, with the right information and adequate preparation , it is possible to achieve success and prosperity!
