Resourceful businessmen at the end of the 19th century realized that a successful business model could be replicated, and goods in demand could be sold under contract with the manufacturer.
The first franchise system appeared at the American Singer Sewing machine company. Isaac Singer brought his company to an unprecedented level of mass production and sales for that time: sewing machines were successfully sold throughout the United States and were in constant demand. However, there was the problem of servicing machines in other states, which had to be solved somehow.
As a result, Singer began to enter into agreements with other entrepreneurs. They became exclusive sellers of popular products in a certain territory of the United States and were supported by the company. In return, the partners had to arrange for the servicing of equipment that met Singer Sewing machine company standards, and share part of the profits.
This scheme became the basis of modern franchising. To better understand how a franchise works, let us look at the classic system of interaction between the parent company and the network enterprises of the franchise network.
An entrepreneur who has successfully implemented a business idea, created a recognizable brand and taken a stable position in the market, decides to replicate his business model and become a franchisor.
He develops an offer for other entrepreneurs to join his profitable business on favorable conditions for both parties, that is, to buy a franchise. Most often, along with a recognizable trademark, the franchisor offers the franchisee a ready-made business plan, assistance in mastering production technology / sales organization / customer service, a database of proven suppliers and instructions for staff training, legal assistance at the business start-up stage, a developed marketing strategy, etc.
In return, the franchisor asks to make a lump sum payment in a certain amount and to make periodic payments for his partner support. In addition, the franchisor has the right to require the partner to meet certain standards, which are spelled out in the contract.
Entrepreneurs who accept the franchisor’s offer become full partners of the firm after making a lump sum payment and signing a franchise agreement. From that moment they become entitled to the franchise privileges.
Franchisees themselves bear all expenses related to the launch and further operation of their outlets, ensure compliance with the franchisor’s business organization requirements.
Mutual obligations of the parties are effective throughout the term of the agreement: the franchisor receives dividends for the use of its name and business concept, the franchisee enjoys the support of a major partner and avoids many of the risks and mistakes that “sink” startups.
