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A franchise consists of a business model in which a natural or legal person grants the right to a third party to use its brand and work under the same commercial system. Although its origins can be traced back to the Middle Ages, the franchise as we know it today was born in America, in the second half of the 19th century.
By those times Isaac Singer, a manufacturer of sewing machines, realised that he did not have enough capital to manufacture his product on a large scale. Given this situation, Singer decided to grant franchises to several local businesses, which would be responsible for covering the costs of production themselves. As a result, sales of the sewing machines increased and Singer made large profits from the sale of rights.
Almost a century later, the franchise model would be replicated by various companies around the world. Some famous cases are McDonald’s, KFC, Subway, Dunkin ‘Donuts and Pizza Hut.
When a franchise agreement is made, there are two parts that can be clearly distinguished: the franchisor (the company that gives away the rights to market its product) and the franchisee (the investor that acquires the rights). Through this contract, both obligations and rights are established for both parties.
The franchisor is entitled to receive payments corresponding to the right of entry and a periodic royalty agreed upon.
It also has the power:
In return, the franchisor must provide the know-how, patents, supplies and all the necessary elements for the operation of the business.
On the other hand, the franchisee has the right to receive the preparation and technical training required to manage the operations of the company. Their obligations are to pay the right and royalties, maintain constant coordination with the franchisor and respect the established policies regarding quality, price, customer service, among others.
What are the advantages?
Sometimes known as a ‘business-in-a-box’, a franchise is founded upon an established model, offering products or services that have been tested in the market already. In some circumstances, the franchisor will make available instructions to help:
The older a franchise is, the more data there is for them to use and share. The franchisor will no doubt have lived through successful franchisees, and some not so – and consequently, they will get the chance to share these important lessons with you. From this, you should gather a few key performance indicators (KPIs) on which to focus on when handling the business. The result of which should make your life a lot easier.
Other advantages? You’ll most likely take advantage of the brand recognition right from the outset; you might acquire discounted stock, and there’ll also probably be systems in place already that make admin tasks streamlined.
And the disadvantages?
Being driven along by the confidence of what makes a franchise so appealing should be cautioned by some of the varied risks associated, that aren’t encountered by running a traditional business.
What are the aims of franchise accounting?
nderstandably, you’ll look to regulate many of these risks, and even try to eliminate some of the more pertinent ones associated with belonging to a franchise. At the same time, you should aim to make the most of the frequent advantages to being a franchisee too. This means you’ll want to figure out strategies for:
How to best manage employees?
Nearly all franchises are founded upon customer service activities. What does this mean? It means you’re going to need a staff team who won’t let you down. You’ll have to:
Just when everything seems to be going along swimmingly, your top employee decides to take a new job elsewhere and you need to find someone else fast. Sometimes, there may not be the need. There are lots of business software and systems that automate much of the workload, such as:
What are the key performance indicators?
If you’ve got a quality franchisor, then the ingredients to success should be there in front of you. They would have shared with you the few core elements that distinguish their most effective franchisees from the others. These are what is known as the key performance indicators and may fall under things like:
The amount of possible KPIs can number in the hundreds, but a canny franchisor will teach you the right areas in which to focus. Get those metrics right, and you’re success will be all the more likely. As a result, franchise accounting and business management become a lot more straightforward.
If your franchisor isn’t able to advise on the right KPIs to action, speak to some other franchisees within the network, or check with a franchise accountant. It’s vital you know exactly where your energies are going to be invested.
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