The idea of franchising, its conditions and stages

Those wishing to invest were and are still looking for franchise ideas offered in Western countries, and America in particular, to transfer them to our country where we live, to be within the system that the franchise-owning company has been working on, but recently there have become many ideas and very important local innovations that are suitable to launch to the global, and to take the direction of development and expansion through the principle of franchising.

In his book “My Experience for a Better Life”, author Ziad Al-Rais says: There are many ideas that can be franchised (restaurants, maintenance services, real estate development services, vocational and educational training, etc.), so I would like to talk and shed light on this idea from several aspects, positive and negative because it is one of the most important ways to spread globally.

Definition of franchises:

Franchise or commercial franchise is a way to develop new markets for a successful business model; by entrusting others to invest in it and repeating it elsewhere within specific criteria and controls; so that the investor commits to the “franchise” and maintains all the elements of the original business in terms of marketing, operational, commercial and production, and then:

The original employer is called a franchisor.

The agent for the asset is called the franchisee.

Types of franchises:

There are two types of franchise relationships:

  1. A single franchise (which is for one site only).
  2. Multiple franchises (which are for a specific geographical area that includes a group of locations that may be within one or several countries).

Franchise verification conditions:

Not every business can be applied to the idea of franchising; a set of conditions must be met according to the following:

  1. The existence of the first model (concept) of the franchise, and that it is under Operation, provides service, and has a clear financial position.
  2. The “concept-franchise” work should be replicable in another region, or for another segment of customers.
  3. The business (concept – franchise) must be financially profitable, and have a sufficient profit margin to be able to share in specified proportions between the franchisor and franchisee.
  4. Be able to train others to operate the idea (concept-franchise), and provide the same service or product.
  5. Ensure that all elements of the raw materials can be secured to provide the final product or service to the customer.
  6. The presence of a detailed operational catalog (operation manual) and a monitoring and monitoring system that controls the relationship between the franchisor and the franchisee.

Stages of completion of the franchise contractual relationship:

The first stage:

A preliminary study of the possibility of applying the idea in the new market, and compiling all the information required for this from an operational and financial point of view.

The second stage:

Sign a confidentiality agreement, and Exchange the information required to complete the economic feasibility study of the project.

The third stage:

With the completion of the initial study of the idea, and the possibility of its application in the new geographical area, and after the signing of the franchise agreement, and on all the items therein, including the financial obligations of the franchisee for the benefit of the franchisor, the following is being worked on:

1. The franchisee establishes the branch or company legally and provides the necessary procedures for this.

2. Supervision and participation in the financial study of the establishment requirements as follows:

  1. The capital required to purchase assets.
  2. The required operating capital.
  3. Make an estimated financial study for the coming years (projection) through the estimated income statement for the first, second, and third years at a minimum.
  4. Participate in the development of the administrative structure (organization chart) of the branch (company management, financial management, marketing team, maintenance team), and assist in securing the required employees taking into account the required specifications.
  5. Training of employees “training” for three months on the tasks required from an administrative, operational, and financial point of view.

The fourth stage:

It is the Post-Establishment stage, and it is supervised by the company’s management in the following aspects and features:

  1. Supervising the operation and compliance with the contract controls.
  2. Supervision of the financial report.
  3. Exchange information and take advantage of the network of relations belonging to the franchisor in securing sales for the franchise.
  4. Take advantage of the network of relations and suppliers of the franchisor, to serve the franchisee in procurement and sourcing.
  5. Take advantage of the conversion of sales orders for franchisees, otherwise, the largest customer segment is indeed satisfied.
  6. Take advantage of advertising campaigns in social networks indirectly.
  7. Take advantage of all the monitoring, quality, and operational follow-up programs used by the franchisor.
  8. Benefit from the value of the shares in a proportion to be agreed upon in the event of a full or partial sale of the parent company or branch.

Fees agreed upon in the franchise contract:

The idea of developing a business through franchising is one of the fastest ways to develop, expand, and spread the business, and by investing others with the idea that you have, which has been established and made successful, the franchise idea secures a material return to the owner of the idea through the fees agreed upon in the franchise contract.

It is divided as follows:

  • The “franchise fees” fee is paid one-time and is for a specific contractual period (for example, 10-15 years).
  • The “franchise royalty” fees are periodic and are linked to a percentage of sales.
  • Other fees such as participation in joint advertising campaigns and “marketing fees”.
  • Another benefit is provided by purchases of raw materials made through the franchisor.
  • Cons of franchises:

On the other hand, some negative aspects can appear by working with the idea of franchising; including:

  • The probability of providing the final product or service to the customer with a lower quality for several reasons.
  • Any defect or default in one of the sites of the franchise of the same name “Brand”; will affect the entire chain.
  • Quality control or financial control, the further away from the center, the more challenging it becomes.