BASIC KNOWLEDGE ABOUT FRANCHISING

In this article, we’ll explore the key principles and essential considerations for both franchisors and franchisees, providing a balanced look from both sides of this dynamic partnership.

I.            GENERAL INTRODUCTION

1.           Overview of Franchising:

Franchising is a business model in which a brand owner (franchisor) grants a partner (franchisee) the right to use its trademark, business model, and operational knowledge to open and operate a store.

2.           Benefits of Franchising:

• Rapid Expansion: Franchising allows brands to expand their market quickly without having to invest directly in each location.

• Reduced Financial Risk: The franchisee bears most of the investment costs, minimizing financial risk for the franchisor.

• Comprehensive Support: The franchisor provides support from site selection, setup, marketing, to daily operations.

II.          RESPONSIBILITIES OF THE FRANCHISOR

Please note that the following content is for informational and reference purposes only, and does not include all responsibilities of the Franchisor during operation.

1.           Providing Complete and Accurate Information

• Franchise Disclosure Document: The franchisor must provide the franchisee with a complete, accurate, and truthful franchise disclosure document. This document includes information about the business, business model, costs, franchisee responsibilities, and franchise terms. This helps the franchisee have full information before deciding to sign the contract.

• Brand and Intellectual Property Information: The franchisor needs to provide detailed information about intellectual property rights related to the brand, including trademarks, trade names, business secrets, and other licensed rights.

2.           Initial Support and Training

• Training: The franchisor is obligated to train the franchisee and their staff on how to operate the business, management processes, service standards, and how to use related systems and equipment. This training must be conducted before the official business operation begins.

• Technical Support: Provide technical support throughout the operation process, including installation, operation of management systems, equipment, and sales management software. This support may include periodic maintenance and repair when needed.

3.           Marketing and Brand Promotion Support

• Marketing Campaigns: The franchisor must implement marketing and brand promotion campaigns to support the franchisee in attracting customers. These campaigns are usually planned and implemented at the national or regional level.

• Providing Marketing Materials: The franchisor must provide advertising materials, signage, images, and other materials related to the unified marketing strategy that the franchisee will use.

4.           Quality Monitoring and Control

• Operation Monitoring: The franchisor has the right and obligation to monitor the franchisee's operations to ensure that business standards and processes are followed in accordance with the agreements in the franchise contract. This monitoring can be done through periodic inspections, revenue reports, and other performance indicators.

• Product/Service Quality Assurance: The franchisor must ensure that the products and services provided by the franchisee meet the brand's quality standards. This may include providing sources of goods, materials, or pre-approved suppliers.

5.           Business Model Updates and Improvements

• Continuous Improvement: The franchisor is obligated to update and improve the business model, products, services, and operational processes to adapt to market changes and maintain competitiveness. These improvements should be communicated and implemented with support provided to the franchisee.

• Providing Information on Improvements: When changes or improvements occur, the franchisor must inform and provide the franchisee with complete information about these changes, as well as guidance on implementation.

6.           Legal Support

• Legal Compliance: The franchisor must ensure that all activities related to franchising, including contract signing, franchise registration, and other business operations, comply with the current laws of Vietnam. This includes protecting intellectual property rights and other rights related to the brand.

• Dispute Support: In the event of a dispute between the franchisor and the franchisee, the franchisor is obligated to cooperate in resolving the dispute in accordance with the provisions of the law and the franchise agreement.

7.           Expansion and Development Support

• Market Expansion: The franchisor can support the franchisee in expanding the market, including finding new locations, conducting market analysis, and developing long-term development plans.

• Financial Support: Some franchisors may offer financial support programs, such as preferential loans, to help franchisees expand their business operations.

III.        RESPONSIBILITIES OF THE FRANCHISEE

Please note that the contents below are for informational and reference purposes only and do not include all responsibilities of the Franchisee during operation.

1.           Adherence to the Business Model and Operational Processes

• Process Compliance: The franchisee must strictly adhere to the operational processes established by the franchisor, including management methods, daily operations, marketing, and customer service. The goal is to ensure that all franchise stores or units operate consistently with the brand's standards.

• No Changes to the Business Model: The franchisee is not allowed to arbitrarily change or adjust the business model without the consent of the franchisor. Any changes must be approved in advance to ensure that they do not affect the brand image.

2.           Payment of Contractual Fees

• Initial Franchise Fee: The franchisee must pay the initial franchise fee as agreed upon in the contract. This fee typically includes the right to use the brand and business model.

• Periodic Maintenance Fees: The franchisee is required to pay monthly or quarterly recurring fees, including royalty fees and marketing fees, usually calculated as a percentage of the store's revenue or sales.

• Other Costs: In addition to the main fees, the franchisee may have to pay additional costs such as training fees, facility upgrade costs, and equipment purchase costs as required by the franchisor.

3.           Brand Protection and Maintenance

• Brand Protection: The franchisee is responsible for maintaining and protecting the brand image in their area of operation. This includes complying with regulations on the use of the brand's logo, colors, and marketing materials.

• Product and Service Quality: The franchisee must ensure that all products and services provided meet the quality standards set by the franchisor. Any decline in quality can damage the overall brand.

4.           Compliance with Legal and Management Regulations

• Licensing and Legal Compliance: The franchisee must ensure that all its business operations fully comply with applicable laws and regulations, including obtaining necessary business licenses, food safety and hygiene permits, and labor regulations.

• Financial and Operational Reporting: The franchisee is required to submit periodic reports to the franchisor on the business situation, including revenue, profits, expenses, and promotional activities. These reports help the franchisor monitor and provide timely support.

5.           Cooperation with the Franchisor

• Cooperation in Training and Support: The franchisee needs to work closely with the franchisor in initial and advanced training programs. This includes participating in mandatory training courses and adhering to guidelines and regulations from the franchisor.

• Compliance with Inspection and Supervision Requirements: The franchisee needs to be prepared for periodic inspections from the franchisor to ensure that all processes and standards are being strictly adhered to. If there are any errors, the franchisee must promptly rectify them.

6.           Implementing Marketing and Promotion Strategies

• Marketing in Accordance with the Franchisor's Strategy: The franchisee is obligated to carry out marketing and promotion campaigns in line with the brand's overall strategy. This includes participating in national marketing programs, using approved advertising materials, and adhering to established sales strategies.

• Reporting and Feedback on Results: After implementing marketing strategies, the franchisee needs to report the results to the franchisor and provide feedback on the effectiveness of the campaigns for appropriate adjustments if necessary.

7.           Confidentiality of Information

• Confidentiality of Business Information: The franchisee must keep confidential all information related to the business model, operating procedures, and other trade secrets they receive from the franchisor. Disclosure of this information may result in a breach of contract and damage to the brand.

• Customer Data Management: The franchisee needs to comply with regulations on customer information security, ensuring that customer data is protected and not misused.

8.           Business Development and Expansion

• Business Development in Accordance with the Agreement: The franchisee is responsible for developing and expanding the business in accordance with the terms agreed upon in the contract. This may include opening new stores in the authorized area.

• Adherence to Long-Term Development Strategy: The franchisee must adhere to the long-term development strategy set forth by the franchisor, including expanding the network, enhancing customer service, and improving product quality.

IV.         COSTS PAID BY THE FRANCHISEE TO THE FRANCHISOR

Please note that the cost details below are for informational and reference purposes only. For each industry, field, and geographical area, the fees will vary and should be consulted with experts and market practices.

1.           Initial Franchise Fee

• Description: This is the fee that the franchisee must pay upfront to have the right to use the brand, business model, and guidance materials from the franchisor. This fee is a fixed, non-refundable amount, and is usually paid upon signing the franchise agreement.

• Fee Level: This fee can range from tens of thousands to hundreds of thousands of USD, depending on the value of the brand and the scale of the franchise.

• What does it include?: This fee typically covers initial training costs, launch support, and the right to use proven business processes.

2.           Royalty Fee

• Description: This is a fee that the franchisee pays periodically (usually monthly or quarterly) to the franchisor. This fee is usually calculated as a percentage of the franchisee's revenue or sales.

• Fee level: Royalty fees typically range from 4% to 8% of the franchisee's monthly revenue.

• Purpose: This fee is used to maintain the operation of the franchise system, including technical support, quality monitoring, and new product/service development.

3.           Marketing/Advertising Fee

• Description: Franchisees are often required to contribute to the brand's common marketing fund. This fund is used to finance national or regional advertising and marketing campaigns to increase brand awareness and attract customers.

• Fee level: This fee is usually calculated at 1% to 3% of the franchisee's monthly revenue.

• Benefits: Franchisees will benefit from national or regional marketing campaigns, helping to increase customer base and revenue.

4.           Training Fee

• Description: While initial training costs are usually included in the initial franchise fee, if there are subsequent advanced or supplemental training programs, the franchisee may have to pay these fees.

• Fee level: This cost may vary depending on the training program and the number of employees participating.

• Benefits: Ongoing training ensures that franchisees and their employees are kept up-to-date with new skills and processes, thereby increasing business efficiency.

5.           Transfer Fee

• Description: If a franchisee wishes to resell their franchise to another person, they will have to pay a transfer fee to the franchisor. This fee covers administrative costs and due diligence costs to ensure the new buyer meets the franchisor's standards.

• Fee level: This fee is usually a fixed amount, which can range from a few thousand to tens of thousands of USD.

6.           Renewal Fee

• Description: When a franchise agreement expires and the franchisee wishes to continue the agreement, they will have to pay a renewal fee. This fee is usually lower than the initial franchise fee but is still a significant expense.

• Fee level: Renewal fees typically range from 10% to 50% of the initial franchise fee.

• Conditions: The renewal of the contract may also be subject to certain conditions, such as upgrading facilities or complying with new brand standards.

7.           Development Fee

• Description: For franchisees tasked with developing a certain area, they may have to pay an area development fee. This fee allows them to open multiple stores in that area and retain exclusive franchise rights in that area.

• Fee level: Area development fees are usually based on the number of stores expected to open and the size of the area.

V.           SOME ISSUES THAT THE FRANCHISOR SHOULD CONSIDER AND PAY ATTENTION TO

Note that the following content is for informational and reference purposes only, and does not include all issues that the Franchisor needs to consider and pay attention to during the course of operation.

1.           Choosing a franchise partner

• Checking financial capacity: The franchisor needs to ensure that the franchise partner has sufficient financial capacity to maintain business operations in accordance with the brand's standards. This includes reviewing the franchisee's financial statements, cash flow, and other financial commitments.

• Assessing management capabilities: Beyond financial capacity, the franchisor should evaluate the partner's management capabilities. This includes business experience, leadership skills, and commitment to adhering to the brand's operating procedures.

2.           Protecting intellectual property rights

• Registering trademarks and intellectual property rights: Before proceeding with franchising, the franchisor needs to ensure that intellectual property rights such as trademarks, logos, and patents are registered for protection in the countries where they intend to franchise. This helps protect the brand from infringements or legal disputes.

• Monitoring brand usage: The franchisor needs to closely monitor the franchisee's use of the brand to ensure that the brand is being used for its intended purpose and is not harming the overall brand image.

3.           Building support and training systems

• Comprehensive training program: The franchisor needs to develop and provide comprehensive training programs for franchisees. This program must cover all aspects of business operations from management, operations, to customer care and marketing.

• Technical and operational support: A strong technical and operational support system is needed to help franchisees resolve issues that arise during the course of business. This may include support in information technology, supply chain, and human resource management.

4.           Monitoring and maintaining quality

• Periodic inspections: The franchisor needs to conduct periodic inspections of franchised outlets to ensure that quality and service standards are being met. This inspection may include reviewing operating procedures, product quality, and customer service.

• Handling violations: If any violations of brand standards are found, the franchisor needs to take timely action. This may include requiring improvements, imposing fines, or in serious cases, terminating the franchise agreement.

5.           Managing relationships with franchisees

• Effective communication: Building a clear and transparent communication system with franchisees is essential. The franchisor needs to listen to feedback from franchisees and provide appropriate support or adjustments to maintain a long-term partnership.

• Legal support: Provide legal support to franchisees in matters related to contracts, intellectual property, and other disputes. The franchisor needs to have a strong legal team to effectively address these issues.

6.           Managing finances and profits

• Tracking cash flow: The franchisor needs to closely monitor the flow of funds from fees received from franchisees, including franchise fees, royalties, and other fees. This helps ensure that the franchise model is generating profits as expected.

• Investing in system development: A portion of the profits from franchising needs to be reinvested in system development, product and service improvements, and market expansion.

7.           Risk management

• Identifying and assessing risks: The franchisor needs to identify potential risks in the franchising process, including legal risks, financial risks, and brand reputation risks. This assessment helps to develop effective preventive measures and response plans.

• Insurance: Consider insurance solutions to mitigate risks, including liability insurance, property insurance, and insurance for intellectual property issues.

8.           Develop and expand the franchise model.

• Research new markets: Franchisors need to conduct thorough market research before expanding their franchises into new areas, including analyzing market demand, competition, and the adaptability of the business model.

• Adjust the model: During the expansion process, the franchisor may need to adjust the business model to suit the cultural and economic characteristics of the new market.

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