Creating a franchise: steps and particularities

Franchising is a model for growing a networked business.

This system originated in the 1930s in the United States and developed from the 1980s onwards, enabling a franchisor to distribute a brand or concept to a legally independent individual or legal entity, who in turn is responsible for exploiting it.

Since then, many large groups have adopted this growth strategy, such as the famous fast-food chain McDonald's, or ready-to-wear brands like Zara.

Above all, this model enables the brand's management to expand without taking on the investment and responsibility, since it entrusts an independent company with the task of operating its brand. The two companies are bound by a franchise agreement, also known as a delegation of operations.

In return for the right to operate, the franchisee pays a royalty to the franchisor.

Here's how you can benefit from this system, which offers many advantages

How do I open a franchise?

The first step before opening a franchise is to check the profitability of your franchisor's concept. One of the disadvantages for the franchisee is that he or she is dependent on the franchisor's image, and on his or her strategic decisions for the brand's growth, for example.

He must base his decision on a business plan setting out the strategy he intends to apply to develop his franchise, and a set of directly operational rules to reproduce the franchisor's policy.

Before the final signature, the franchisee must be given a pre-contractual information document, which provides a complete overview of the company he or she will be working for.

The following items are mandatory:

• The franchisor's legal identity and key data;
• The franchisor's certificate of domiciliation ;
• The franchisor's financial performance and annual accounts for at least the last 2 years;
• A presentation and analysis of the target market;
• The status of the existing franchise network, with the number of outlets, their location, the update of new franchisees and the duration of contracts;
• Commercial policies to be applied.

The franchise relationship is formalized by the signing of a franchise contract, which sets out the specific terms of collaboration between the pilot unit and the franchise: know-how, training rights, assistance, confidentiality, etc.

If you need to create a company in order to set up a franchise, you must follow the usual procedure of drawing up the articles of association, publishing an announcement in a legal gazette, and filing the entire dossier with the Registrar of the relevant Commercial Court.

France had nearly 2,000 franchise networks in 2017, compared with 34 in 1971!

What are the current regulations?

To become a franchisor, the pilot unit must prove its profitability by providing complete and transparent information to future franchisors.

Franchise agreements are mutually binding on both parties.

The franchisor undertakes to :

• Guarantee exclusive rights to operate within a given perimeter;
• Provide the franchisee with financial and commercial information about the brand or concept;
• Accompany the franchisee faithfully throughout the franchise contract.

In return, the franchisee undertakes to :

• Respect the terms set out in the franchise contract, with regard to the brand's image or commercial policies, for example;
• Pay all royalties agreed in the franchise contract.

French law distinguishes between three types of franchise:

• If a franchisee distributes the products of a given brand in a sales outlet he or she has created, this is known as a distribution franchise;
• If a franchisee provides services on behalf of a franchisor, this is called a service franchise;
• If a franchisee manufactures industrial products on behalf of a franchisor, this is known as industrial franchising. In particular, this method enables a franchisor to own several production outlets and to bring its production units closer to its distribution outlets.

What are the limits of this model?

Despite the many advantages listed above, opening a franchise can present several disadvantages for the franchisee that are important to consider before launching any project:

• The franchisee is dependent on the franchisor and must apply the franchisor's business policies to the letter, in accordance with the terms of the franchise agreement;
• In order to meet the franchisor's requirements and pay his royalties, the franchisee must provide more funds to finance his project than a traditional outlet;
• The franchisee must obtain thefranchisor's agreement if he wishes to sell his business while continuing the franchise contract.

Franchisors must also accept the principle of marketing their products at lower profitability than their direct sales outlets.

It also faces the risk of leaking its know-how and corporate strategies to all its franchisees, who could use them for their own purposes and become emancipated.

Finally, meeting the requirements of a network structure means adapting the pilot unit's services and ensuring the proper distribution of its products in outlets over which it has no complete control.

Franchising can therefore be an attractive option for both parties, as long as you target efficient, profitable projects.

Cooperation between the two parties is an additional asset to encourage the success of the project.

Profitable franchises include major names in all sectors of activity: beauty, health, personal services, real estate, specialist shops, hotels, restaurants, fashion and home furnishings are just some of the examples we see on a daily basis.