Franchising

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Franchising (from the French for honesty or freedom [citation needed]) is a method of doing business wherein a franchisor licenses trademarks and tried and proven methods of doing business to a franchisee in exchange for a recurring payment, and usually a percentage piece of gross sales or gross profits as well as the annual fees. 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.

According to Financial Times, if sales by US franchise businesses were translated into national product, they would qualify as the 7th largest economy in the world.[citation needed]

Contents

[edit] Overview

The term "franchising" is used to describe business systems which may or may not fall into the legal definition provided above. 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.

A franchise agreement will usually specify the given territory the franchisee retains exclusive control over (the area protection), as well as the extent to which the franchisee will be supported by the franchisor (e.g. training and marketing campaigns).

[edit] 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.

As long as their brand and formula are carefully designed and properly executed, franchisors are able to expand their brand very rapidly across countries and continents, and can reap enormous profits in the process, while the franchisees do all the hard work of dealing with customers face-to-face. Additionally, the franchisor is able to build a captive distribution network, with little financial commitment.

For some consumers, having franchises offer a consistent product or service makes life easier. They know what to expect when entering a franchised establishment. See franchise validation.

[edit] 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. Because of standards set by the franchiser, the franchisee often has no choice as to signage, shop fitting, uniforms etc. 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 franchiser 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." [1]

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.

[edit] Legal aspects

In the United States, franchising falls under the jurisdiction of a number of state and federal laws. Franchisors are required by the Federal Trade Commission to have a Uniform Franchise Offering Circular "UFOC" to disclose potential franchisees about their purchase. This disclosure must take place 10 day prior to solicitation. Each state may require the UFOC to contain specific requirements. This means that many franchisors have a unique UFOC for each state or sometimes are able to include all state specific requirements into one document. FRANDATA[2] estimates that on average, 100 documents are distributed per franchisor per year. This represents 200,000 UFOCs distributed each year in the US alone. FRANDATA also estimates the cost of each UFOC to be near $100.[3]

There is no federal registry of franchising or any federal filing requirements for information, rather, states are the primary collectors of data on franchising companies, and enforce laws and regulations regarding their spread.

In Russia, under ch. 54 of the Civil Code (passed 1996), franchise agreements are invalid unless written and registered, and franchisors cannot set standards or limits on the prices of the franchisee’s goods. Enforcement of laws and resolution of contractual disputes is a problem: Dunkin' Donuts chose to terminate its contract with Russian franchisees that were selling vodka and meat patties contrary to their contracts, rather than pursue legal remedies.[citation needed]

Because litigation is expensive, the majority of franchisors have inserted mandatory arbitration clauses into their agreements with their franchisees. Since 1980, the U.S. Supreme Court has dealt with cases involving direct franchisor/franchisee conflicts at least four times, and three of those cases involved a franchisee who was resisting the franchisor's motion to compel arbitration. Two of the latter cases involved large, well-known restaurant chains (Burger King and Subway); the third involved Southland Corporation, the parent of 7-Eleven.

[edit] History

Franchising dates back to at least the 1850s; Isaac Singer, who made improvements to an existing model of a sewing machine, 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 U.S. A slightly later, yet much more successful, example of franchising was John S. Pemberton's franchising of Coca-Cola.[4] Early American examples include the telegraph system, which was operated by various railroad companies but controlled by Western Union[5], and exclusive agreements between automobile manufacturers and operators of local dealerships[6].

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[7]. In 1935, Howard Deering Johnson teamed up with Reginald Sprague to establish the first modern restaurant franchise [8] [9]. 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[10]. The 1950s saw a boom of franchise chains in conjunction with the development of America's Interstate Highway System [11]. Fast food restaurants, diners and motel chains exploded. In regards to contemporary franchise chains, McDonalds is arguably the most successful worldwide with more restaurant units than any other franchise network.

[edit] Social franchising

In recent years, the idea of franchising has been picked up by the social enterprise sector, who hope to simplify and expedite the process of setting up new businesses. A number of business ideas, such as soap making, wholefood retailing, aquarium maintenance and hotel operation, have been identified as suitable for adoption by social firms employing disabled and disadvantaged people.

The most successful example is probably the CAP Märkte, a steadily growing chain of some 40 neighborhood supermarkets in Germany.

Other examples are the St. Mary's Place hotel in Edinburgh and the Hotel Tritone in Trieste.

[edit] References

  1. ^ New Rules Website
  2. ^ FRANDATA Information for the Franchise World
  3. ^ PrivaSign: Complying with FTC Franchise Rule
  4. ^ http://www.referenceforbusiness.com/encyclopedia/For-Gol/Franchising.html
  5. ^ http://invention.smithsonian.org/resources/fa_wu_index.aspx#series2
  6. ^ http://findarticles.com/p/articles/mi_m0FJN/is_n8_v30/ai_18728418
  7. ^ http://www.aw-drivein.com/About_Us.cfm
  8. ^ Allen, R. (1998). Foodservice’s theory of evolution: Survival of the fittest. Nation’s Restaurant News, 32(4), pp. 14 -17.
  9. ^ Howard, T. (1996). Howard Johnson: Initiator of franchised restaurants. Nation’s Restaurant News, 30 (2), pp. 85-86.
  10. ^ http://www.wdfi.org/fi/securities/franchise/history.htm
  11. ^ http://www.pubs.asce.org/ceonline/ceonline06/0606feat.html

[edit] External links

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