Franchising

Franchising is the act of allowing a dealer the rights to sell products from a company in exchange for revenue and cooperation. Franchising has become a very popular business move and its reach has rapidly increased over the last half of a century. There are different franchise agreements for different companies, but each agreement adheres to certain franchising rules and the rules of the country the franchise is situated in, regardless of country of origin. Different types of franchising over the years has led to different ways in which the system works.

As with most business moves, there are advantages and disadvantages to franchising. The loss of control over the business may not be apparent to the franchisee from the onset, but when they discover the strict practices they have to follow it may come as a blow that they are not as in control of their business as they want to be. Even with these problems franchising has gained global acceptance. Many countries around the world have their own international franchises, and expanding into the global community has become a new way to invest in and discover business opportunities in foreign markets.

Overview

Franchising is an arrangement whereby a supplier, or franchiser, grants a dealer, or franchisee, the right to sell products in exchange for some type of consideration. It is a business arrangement involving a contract between a manufacturer or another supplier and a dealer that specifies the methods to be used in marketing a good or service. Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor, and may indeed be required by the franchisor, which generally requires audited books, and may subject the franchisee or the outlet to periodic and surprise spot checks. Failure of such tests typically involve non-renewal or cancellation of franchise rights. A business operated under a franchise arrangement is often called a chain store, franchise outlet, or simply franchise. Franchising represents the small entrepreneur's best chance to compete with the giant companies that dominate the marketplace. Without franchising, thousands of businesspeople would never have had the opportunity to own their own businesses.

There are different types of franchising commonly discussed in association with businesses. In the first arrangement, a manufacturer arranges their product to be sold in various stores. This is one of the oldest practices of franchising. The next arrangement has a producer licensing their products to distributors, who in turn sell their product to retailers. An example of this would be soft drink companies licensing their products to bottlers, who in turn supply stores. A third franchising arrangement involves a franchiser supplying incomplete products, such as brand names or techniques, to retailers. This allows the franchisor careful control of marketing strategies. The term "franchising" can also be used to describe business systems which may differ from the normal parameters of businesses and chain stores. For example, a vending machine operator may receive a franchise for a particular kind of vending machine, including a trademark and a royalty, but no method of doing business. This is called product franchising or trade name franchising.

The Franchise Agreement is the written contract that governs the relationship between the franchisor and the franchisee. The Franchise Agreement is more specific about the terms of the relationship than the UFOC. Every Franchise Agreement is different, but they all have similar provisions.

There are certain key clauses that most franchise agreements have in common. Identifying information as to franchisor, business experience of franchisor's directors and executive officers, business experience of the franchisor, litigation history, and bankruptcy history all give a background of the franchisor to the franchisee in order to ensure that the franchisee knows what kind of business they are getting involved. The next stipulations describe the ability of the franchisee to financially support his or her goal of franchising, such as the description of the franchise, initial funds required to be paid by a franchisor, recurring funds required to be paid by a franchisor, and affiliated persons the franchisee is required or advised to do business with by the franchisor. Financing arrangements need to be considered to make sure the franchise does not fail from the outset, as well as how much participation will be required of the franchisor in the operation of the franchise. How the franchise will be run is also important, and concerns such as location, training programs, and public figure involvement in the franchise all become important as to how the franchise will operate. Issues concerning contract renewal, termination, and suspension are also discussed as part of the agreement.

History

Early instances of franchising can be seen in Germany in the 1840s, where major ale brewers granted permission for different taverns to sell their own brew. The first true franchising contract and agreement in the 1850s with Isaac Singer, who made improvements to an existing model of a sewing machine, and wanted to increase the distribution of his sewing machines. His effort, though unsuccessful in the long run, was among the first franchising efforts in the United States. Many of the stipulations agreed on in the contract are still used today. Franchising was proven successful with John S. Pemberton's franchising of Coca-Cola. Early American examples include the telegraph system, which was operated by various railroad companies but controlled by Western Union , and exclusive agreements between automobile manufacturers and operators of local dealerships.

Modern franchising came to prominence with the rise of franchise-based food service establishments. This trend started as early as 1919 with quick service restaurants such as A&W Root Beer . In 1935, Howard Deering Johnson teamed up with Reginald Sprague to establish the first modern restaurant franchise . The idea was to let independent operators use the same name, food, supplies, logo and even building design in exchange for a fee.

The growth in franchises picked up steam in the 1930s when such chains as Howard Johnson's started franchising motels . The 1950s saw a boom of franchise chains in conjunction with the development of America's Interstate Highway System. Prior to the 1950s and 1960s, few restaurant chains existed, most franchises were automobile, gasoline, and soda pop related. In the fifties and sixties, fast food restaurants, diners and motel chains exploded. From these two decades and onward, franchises took a huge leap forward and increased dramatically with every successive decade.

Advantages and Disadvantages

Advantages

As practiced in retailing, franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators). A well run franchise would offer a turnkey business: from site selection to lease negotiation, training, mentoring and ongoing support as well as statutory requirements and troubleshooting. After their brand and formula are carefully designed and properly executed, franchisors are able to expand rapidly across countries and continents, and can earn profits commensurate with their contribution to those societies. Additionally, the franchisor may choose to leverage the franchisee to build a distribution network. Franchisors often offer franchisees significant training, which is not available for free to individuals starting up their own business. For some consumers, having franchises offer a consistent product or service makes life easier. They know what to expect when entering a franchised establishment.

Disadvantages

For franchisees, the main disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, and marketing, the franchisee is required to follow the system and get approval for changes from the franchisor. For these reasons, franchisees and entrepreneurs are very different. It can be expensive, mainly because of standards set by the franchisor. The franchisee often has no choice as to signage, shop fitting, or uniforms, and may not be allowed to source less expensive alternatives. Added to that is the franchise fee and ongoing royalties and advertising contributions. The franchisee may also be contractually bound to spend money on upgrading or alterations as demanded by the franchisor from time to time. In response to the soaring popularity of franchising, an increasing number of communities are taking steps to limit these chain businesses and reduce displacement of independent businesses through limits on "formula businesses." Another problem is that the franchisor/franchisee relationship can easily cause conflict if either side is incompetent (or not acting in good faith). For example, an incompetent franchisee can easily damage the public's goodwill towards the franchisor's brand by providing inferior goods and services, and an incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits.

Contemporary Franchising

Franchising has expanded greatly in the international community. Outside of the United States, more than three hundred and seventy franchise companies are in operation in forty thousand outlets. Canada, Japan, Europe, the United Kingdom, and Australia are all the biggest beneficiaries of franchises. Franchising has become an important way of entering foreign markets that may have been closed off otherwise. By tailoring the franchise for each new market in accordance with local tastes, customs, and traditions, most franchises are able to flourish in markets marginally different than their country of origin.

The biggest issues facing global franchising is the adjustment in business practices in the new market. For example, local contract law, antitrust law, trademark law, child labor laws, and employee laws vary from country to country, and businesses found in violation of these laws are shut down.

Global franchising is flourishing and the current trend points to an increase in franchising at all corners of the map. This continuing franchising ensures growth of the franchises and the chance for new business investments and opportunities. The importance of franchising is beginning to be discovered, as high schools and colleges all over the world are implementing new business curriculums that many students are required to take for graduation. New technology demonstrates new ways to deliver and experience franchised products, and many businesses are beginning to take advantage of this. These developments suggest that franchising will be the most popular method of doing business in all markets in the coming years.

Current Franchises

Here is a short list of some currently active franchises:

• Best Buy, active in the United States and Canada.
• Target, active in the United States and recently India.
• Trans World Entertainment, active in many countries around the world, including Europe and Asia.
• Walmart, active in North and South America, Europe, Asia, and Australia.
• Molly Maid, active in North and South America, Japan, and the United Kingdom.
• McDonald's, active on nearly every continent.
• Subway Restaurants, active in eighty six different countries.

References

ISBN links support NWE through referral fees

• Barkoff, Rupert. 2005. Fundamentals of Franchising. American Bar Association. ISBN 978-1590314098.
• Blair, Roger. Lafontaine, Francine. 2005. The Economics of Franchising. Cambridge University Press. ISBN 978-0521772525.
• Ferrell, O.C. Pride, William. 2006. Marketing Concepts and Strategies. Houghton Mifflin Company. ISBN 978-0618474455
• Khan, Mahmood. 1999. Restaurant Franchising. Wiley. ISBN 978-0471291947.
• Norman, Jan. 2006. What No One Ever Tells You About Franchising: Real-Life Franchising Advice from 101 Successful Franchisors and Franchisees. Kaplan Business. ISBN 978-1419506130.

External links

• United States Federal Trade Commission - Disclosure requirements and prohibitions concerning franchising and business opportunity ventures.
• How Stuff Works: How to Become a Franchisee
• Francorp
• Franchising: For Serious Franchise Buyers
• Franchise Zone
• Franchise Opportunities Business For Sale

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