The average city dweller encounters a franchise on a daily basis. Many popular catering, retail and service businesses work under franchises: restaurants, supermarkets, gas stations, coffee shops, beauty salons, sports clubs. So you probably already have a general idea of what a franchise is. Let’s break down the basic definitions that are closely related to this concept.
Franchising is a business concept based on the sale and purchase of franchises. Also franchising is a system of legal and economic relationships between the franchisor and the franchisee.
Franchisor or franchisor (both variants of spelling are used) – a company that sells a franchise, thus providing an opportunity for other entrepreneurs to open a sales/service point under its brand, to use the developed business technologies and partner support.
A franchisee buys a franchise – an individual entrepreneur or organization that wants to sell goods or provide services under the brand name of a large company and is willing to pay for it.
When buying a franchise, the franchisee pays a lump sum – a one-time payment to the franchisor for the right to join a network of businesses.
In addition to the lump sum fee, the franchise agreement may provide for royalties – permanent payments for the use of the franchise at intervals of once a month, quarter or year. In essence, royalty is a subscription fee for the use of the brand and business support.
The royalty may have a fixed amount or be calculated as a percentage of the franchisee’s profits. The International Franchise Association defines an average royalty of 6.5%, but the figure may vary depending on the area of business. For example, in the hotel and restaurant business royalty is usually lower – 4-4,5%, and in educational services and fast food can reach 9-10%.
There is also a mixed type of royalty, where the franchisor takes a percentage of profit, but not less than a fixed minimum amount.
