How does a franchise work?

Franchising is an entrepreneurial model in which a franchisor, the owner of a brand, authorizes an independent entrepreneur, the franchisee, to use its concept and know-how in exchange for financial compensation.


To understand franchising, we need to define organized commerce. This is a networked way of marketing a product or service.

This model relies on a number of independent retailers selling a product or service under a single banner. This is in contrast to integrated commerce, which also operates as a network but relies on brand employees. Each outlet is then a branch and 100% owned by the parent company.

There are several types of organized businesses. Close to the franchise, they are sometimes confused. However, they are not based on the same contract and do not follow the same rules. Without going into detail, these types of business include concessions, commission-affiliations and brand licenses. Other forms of hybrid contract also exist: lease management, management agency and participative franchising.

Franchising is the most complete and engaging form of organized commerce. The image of marriage is often used by franchisors and franchisees to describe the agreement between them. The franchise contract signed between the owner of a concept (franchisor) and a legally and financially independent entrepreneur (franchisee) implies a strong commitment on both sides.

It authorizes the franchisee to use the network head’s brand and know-how, and to sell its products or services. This enables him to launch his business with the benefit of an established reputation and a tried-and-tested turnkey concept. In exchange, he pays the retailer a percentage of his sales, royalties and an entry fee. It also meets certain obligations to ensure the successful implementation of the concept. Like a marriage contract, a franchise is a win-win agreement: both parties have an equal interest in the success of the alliance.

The franchise contract enables the brand to develop its business more rapidly, and the entrepreneur to get a headstart in setting up his or her own business. By signing this contract, the franchise network undertakes to make its entire know-how available to its partner, to provide initial training and assistance, in exchange for royalties in the form of a percentage of sales. The latter should not be confused with the entry fee, or fixed, one-off initial fee, which is often requested when the agreement is signed.

In addition, the contract includes certain mandatory clauses: the Pre-contractual Information Document (DIP), brand licensing, technical and commercial assistance from the franchisor, transmission of know-how and brand identity, obligations to respect the concept and payment of royalties by the franchisee.

There are other clauses that can be added to the contract, such as the non-competition clause, which prohibits the franchisee from carrying on a business that competes with that of the brand. However, this is not mandatory. The same applies to the territorial exclusivity clause, which commits the franchisor to reserving a geographical area for the franchisee.

Distribution, textiles, sports and leisure, home furnishings, personal services, food, catering, real estate and the hotel industry: all sectors of activity are suitable for franchising.

Some are highly represented, such as the food sector which, in 2021, had the highest number of franchisees (15,162) and generated the highest sales (around 24 billion euros), according to the French Franchise Federation.

Next come the personal goods (9,197 franchisees) and automotive services (8,607 franchisees) sectors. Other sectors are booming, such as home furnishings, which alone generate sales of around 8 billion euros. So any business or service can be developed within a franchise network, whatever the sector.

Summary

  1. Franchising is the most complete and engaging form of organized commerce.
  2. The franchise contract enables the franchisor to develop his business more rapidly, and the franchisee to benefit from a helping hand in setting up his business.
  3. All business sectors are suitable for franchising.

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