Theoretical principles of the essence of the concept "franchising"

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Lviv Polytechnic National University

Theoretical principles of the essence of the concept "franchising"

Drymalovska Kh.V.

Introduction

The general process of the evolution of the national economy in the direction of the formation of market relations was affected by the search for optimal tools for business development based on the study of the experience of the leading countries of the world. A positive shift in the research and analysis of foreign experience was the discovery of new forms of ownership, which marked the beginning of the establishment of relationships between all subjects of economic activity, that is, the public and private sectors. Thus, franchising is considered one of the most effective tools for starting, operating, and expanding a business. It is this form of conducting business that creates opportunities for the creation and expansion of small and large businesses in the fields of the production of goods and the provision of services, ensuring the well-being of the population and the state as a whole.

Presentation of the main material

Franchising is considered one of the models for ensuring the development of small businesses. That is, it is the implementation of entrepreneurial activity on the basis of obtaining a permit. The main participants in this model of cooperation are the owners of small and large enterprises based on the interaction of production, economic, and market components. The use of the franchise model creates favorable conditions for starting one's own business without significant financial investments, minimizing the probable risks of bankruptcy at the initial stage of business creation, gaining advanced experience in the use of modern management methods, gaining professionalism, and improving the qualifications of personnel in a certain field of activity. Despite the above positive aspects, the franchising model also has certain disadvantages that relate directly to the franchise buyer. That is, the franchise user becomes dependent on the main company, which determines the range of products and sales volumes, requires compliance with the terms of the agreement, making regular payments for the use of the permit, limits independence during the conduct of business activities [1].

According to the positions of Hessen A.E., Zhuravel M.O. and Stakhanova V.V. franchising is "a form of granting business rights in which the founder sells the opportunity to use his own brand and company name with clear rules for its operation. That is, a company that is already known for its high-quality work and high profitability indicators can sell for a certain time the opportunity to use the company's name and secrets, production technologies, and marketing tricks to another company for a price specified in the contract" [2].

Martynenko O.O. and Shuba M.V. claim that franchising is a method of building a business model for expanding the sale of goods or providing services by obtaining permission from the owner company in exchange for compliance with the terms of the agreement on the part of the buyer company, i.e., to ensure the volume of sales of products or provide services according to the stipulated plan, with the corresponding level of quality characteristics, and the use of technologies used under the specified trademark [3].

In the context of strengthening integration processes, franchising is considered an effective way for a large company with a well-known trademark, new technologies, management methods, and high-quality products to enter new foreign markets. This way of entering the foreign market does not require additional costs and allows you to quickly develop a network of franchises, thereby creating favorable conditions for the integration of the world's economies [4].

Momot L.V. emphasizes that franchising is aimed at organizing business between large companies and entrepreneurs, while each of them pursues their own goals. Large companies expand their businesses, and entrepreneurs get practical skills to ensure the profitability of cooperation. Also, the author of the scientific work gives an interpretation of such concepts as franchisor and franchisee. A franchisor is a company that is ready to issue a license or transfer the right to use the results of its successful business concept. In turn, the franchisee can be a person or an organization that is ready to make financial investments in opening a business case and undertakes the responsibility for monthly payments for the use of the franchisor's business concept (trademark, business system, support, training, consulting, etc.) [5].

Lazorenko T. and Frolova A. formed a general definition of the studied economic category: "a form of long-term business cooperation, in the process of which a large company--a franchisor (right holder)--grants a little-known company--a franchisee (user)--a license (franchise) for the production of products, trade in goods, or providing services under the trademark of the right holder in a limited territory for the term and conditions specified in the franchise agreement. In order to obtain these rights, the franchisee makes an initial contribution to the franchisor and then pays monthly installments. A franchisee who does not have experience in this field can still conduct business successfully with the help of a franchise package" [6].

Zenkler N.I. and Nemesh M. offer a general interpretation of franchising as a certain agreement or a set of agreements formed on the basis of licensing and also consider it from an accounting point of view. Therefore, from the point of view of

carrying out accounting operations, franchising refers to the set of services provided by the franchisor regarding the transfer of the right to sell goods and provide services to the franchisee [7].

According to the European Code of Ethics of Franchising, the economic category is identified as a system of marketing goods, services, and technologies that is based on cooperation between legally and financially separate business entities, the franchisor and its franchisees. As a result of such cooperation, the franchisee will receive from the franchisor the right to use the trade name, trademark or service mark, know-how, commercial and technical methods, procedural systems, and other industrial or intellectual property rights in exchange for direct or indirect financial remuneration, which is determined by the agreement on franchise. The specified code contains values, norms, and rules of conduct for independent participating parties in order to ensure a profitable partnership in the field of implementation of franchise agreements in a dynamic global environment [8].

Danylovych-Kropyvnytska M. L. describes regional franchise networks as channels for transferring innovations from the developer to the implementer, ensuring regional development. In addition, the author cites the positive features of the introduction of franchise networks into the regional business environment. Placing large franchisors in the regions contributes to their economic strengthening due to an increase in the volume of foreign investments, the use of innovative methods of implementing business projects, the use of the latest business technologies, raising the awareness of business communities, etc. The researcher also presents possible prerequisites for the development of regional franchising, namely: global, economic, organizational, social, marketing, legal, financial, and regional. The stated prerequisites are explained through the implementation of development factors. That is, the main influencing factors on the development of franchising can be the following: the influence of the global NTP on the development of science, technology, and production; intensifying global competition; change in personal, industrial, social needs; strengthening the role of ensuring the production of products and providing services of appropriate quality; directing financial resources to conduct research; formation of contractual relations based on compliance with laws, norms, rules of conduct, values; increase in the number of small business representatives joining large corporations; taking into account regional features of the development of industry, trade, provision of services, etc. [9].

In his scientific work, Goncharenko M.L. researched the concept of franchising based on the combination of two different business models: product franchising and business format franchising. The product franchising model consists of the formation of contractual relations and the transfer of the right to use only the franchisee's brand. While the business format model assumes that the franchisor transfers to the franchisee the right to use the brand and the operating system of doing business [10].

According to the position of Fedun Yu.B. and Golubka D.S. franchising is "a special form of business organization, the activity of which is based on the interaction of two or more business entities, based on cooperation, regulated by contracts, respectively, and requires the effective formation of regulatory and legal support" [11]. As we can see from the given interpretation, scientists emphasize the important role played by the presence of regulatory and legal support for the implementation of activities related to franchising. The authors of the scientific publication, analyzing the level of development of Ukrainian legislation in the field of franchising business, claim that the studied economic category is based on a commercial concession contract. This agreement provides for the transfer of the rights to intellectual property objects, commercial experience, and business reputation. Objects of intellectual property can be trademarks, inventions, trade secrets, know-how, industrial designs, works of art, etc. Normative and legal regulation of the formation of contractual relations between participants in franchise businesses should be based on legislative support for the development of small and large entrepreneurship [11].

As a result of the study of scientific works [1-11], the theoretical foundations of a complete franchising system are schematically presented (Fig. 1). A comprehensive system of franchising involves a combination of the main constituent elements of ensuring the conduct of business activities and stimulating the development of the domestic economy.

Fig.1. The theoretical foundations of a complete franchising system [1-11]

From the given diagram, we can see that the franchisor and the franchisee are the main participants in the franchising process, between whom contractual relations are formed through the franchise. A franchise is "a contract under which one party (the franchisor) grants another party, the franchisee (the "user"), a set of rights. The party that has received these rights can engage in the production, sale of certain goods, and provision of services in accordance with the franchise agreement" [7].

Each of the participants in such cooperation seeks to achieve certain goals. For a franchisor, the goals may be the following: penetration into new foreign markets without additional costs; increasing the number of networks of the company's presence in the domestic market due to the coverage of different regions of the country; ensuring recognition of your own brand; searching for new opportunities to obtain an additional source of funds to direct them to further business development based on the development of original ideas, etc. A franchisee can set the following goals: to start a business without significant capital investments at the initial stage; to acquire practical skills and abilities to ensure effective business management; to increase income through the use of a well-known brand or trademark; to receive support from the franchisor in the fields of information, marketing, advertising, sales, etc. [10].

Based on the conclusion of the franchise agreement, the objects of the franchise model are business principles, trademarks, brands, logos, management methods, etc. As a result of obtaining the right to use the objects of the franchise agreement, the franchisee is obliged to pay two types of payments: a lump sum payment and a royalty. Lump-sum payment means a one-time contribution as a result of joining the franchise network, while royalty involves periodic, regular payments for the right to use objects of industrial or intellectual property of the developer company [12].

According to the European Franchising Code of Ethics, the joint obligations of both participants in this model are as follows [8]:

common interests in protecting the image and reputation of the network during business activities;

the presence of good faith and honesty in relations;

ensuring the confidentiality of information materials related to the franchise concept; franchising information confidentiality

resolution of complaints, claims, and disputes through negotiations.

The conclusion of a franchise agreement should be based on taking into account and protecting the interests of both parties, guided by the fundamental principles of forming legal and economically beneficial legal relations. As a result, the following principles of drafting and execution of franchise agreements are distinguished: good faith (ensuring mutually beneficial cooperation, compliance with honest norms and rules of conduct by participants), keeping secret confidential information (when concluding an agreement with a potential franchisee, the clause on non-disclosure of confidential information must be taken into account), honest and bona fide business relations (building relationships between the parties to the contract, based on the protection of mutual interests as a result of the possible termination of the agreement, setting the deadline for its implementation, etc.), pre-contractual disclosure of information about the subject of the future contract (the obligation of the franchisor to provide information about the financial condition, probable franchise payments, the total amount of investment at the initial stage of entering the business, the main characteristic features of the object of the agreement, etc. in order to minimize the risks of the franchisee), freedom of competition (vertical division of labor between the franchisor and the franchisee in order to eliminate the requirements for the application of antimonopoly legislation), dispute resolution (in case of serious

violation of the terms of the contract - the franchisor is obliged to make a quick and effective decision, and in the case of minor violations, the negotiation format is used) [13].

Conclusions

Based on the study of the above-mentioned scientific works, it can be argued that franchising is an effective model of business development based on the conclusion and execution of an agreement between the participants (franchisor and franchisee) regarding the transfer of the right to use an object of industrial or intellectual activity in order to achieve the goals defined by them, guided by the fundamental principles of forming legal and economically beneficial legal relations. The successful implementation of the franchising model of cooperation will contribute to laying the foundation for mutually beneficial relations between domestic large and small businesses through the attraction of investments, the introduction of innovations, the use of the latest business technologies, etc.

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