How it works?
Think of franchising as paying someone for his or her business concept, marketing strategy, managerial know-how, and the use of his or her name.
That's pretty much what franchising is -- you are establishing a relationship with a successful business so you can use its systems and capitalize on its existing brand awareness in order to get a quicker return on your own investment. You are using its proven system and name, and running it by its rules.
There are two groups involved in a franchise, the franchiser (the person or company leasing the rights to the business name and system) and the franchisee (the person who purchases it).
The right to the franchise is sold by the franchiser to the franchisee for an initial sum of money, often called the up-front entry fee, or franchise fee. This money will be paid once the contract has been signed. The contract (franchise agreement) details the responsibilities of both the franchiser and the franchisee, and is usually for a specific length of time (typically several years). Once the contract expires, it must be renewed.
This initial franchise fee doesn't include anything except the rights to use the name and system, and sometimes training, procedures, manuals, and other assistance-like site selection. It doesn't include any of the necessary inventory, equipment, furniture or real estate.
In addition to the franchise fee, the franchisee must pay the franchiser royalty fees, or other on-going payments. These payments are usually taken as a percentage of sales, but can also be set up as a fixed amount or on a sliding scale. The terms of these fees will be spelled out in the franchise agreement. These payments are for the on-going services and support that the franchiser provides. Franchisers may also sell supplies directly to their franchisees. Advertising funds are also paid periodically. These funds are usually put into a general account and used for national and regional promotion for the entire chain.
Advantages of Franchising
The biggest advantage of franchising appears to be the reduction of risk you will be taking for your investment. This is because franchises typically get up and running faster, and are profitable more quickly. This can be a result of better management as well as a well-known name. According to the US Small Business Administration (SBA), most small businesses fail because of weak management. It is in this area that the franchising option shines the most. When you lease a franchise, you are leasing that managerial know-how.
You also usually get better deals on supplies because the franchise company can purchase goods and supplies in bulk for the entire chain, and then pass that saving on to you and the other franchise units.
The often instant recognition from customers is also a big plus. Customers are dealing with a "known" rather than an "unknown."
For the customer, the advantages of a franchise include the comfort of knowing what you are getting. You know that the quality of the product or service at one location will be comparable to that of another location. You know what they have and you already know what you like about it. The questions for you as a potential franchisee are: Are you looking for something that is uniquely yours? Or do you simply want to run the show, regardless if it's by someone else's rules?
Before you answer those questions, let's go into a little more detail about how the franchise actually works.
Franchising in Israel
The Israel Franchise Promotion Center (IFPC), is a non-profit organization (NPO), set up jointly by the Israel Small and Medium Enterprises Authority (ISMEA) and MATI – the Jerusalem Business Development Center.
The IFPC offers a wide variety of services for potential franchisees, including:
chain location, negotiation assistance, economic feasibility assessment, access to premium business databases, financing assistance and professional business mentoring.
Among Israel’s best known franchisers are: Aroma and Mike’s Place (Coffee shops), Anglo-Saxon and Remax (Realtors), Sbarro (Italian fast food), ZER4U (Flowers shops), Shenkin Candles, Keshet Laundries, Kfar Hashashium (toys), Sheshet (tableware), and more.
The Israel Franchise Promotion Center
9 Ha’Uman Street (second floor, suite 208)
P.O.Box 52169, Jerusalem 91521
Talpiot Industrial Zone
More info on the IFPC website