Chapter 10: UNDERSTANDING FRANCHISING

Franchising

Franchising is the practice of using another firm's successful business model.

The word 'franchise' is of Anglo-French derivation - from franc- meaning free, and is used both as a noun and as a (transitive) verb.

For the franchiser  the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. 

The franchiser's success is the success of the franchisees.

The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

Where there is no specific law, franchise is considered a distribution system, whose laws apply, with the trademark (of the franchise system) covered by specific covenants.

Businesses for which franchising works best have the following characteristics:

Businesses with a good track record of profitability.

Businesses which are easily duplicated.

As practiced in Hotels, franchising offers franchisees the advantage of starting up quickly based on a proven trademark, and the tooling and infrastructure as opposed to developing them.

There is, it can be said, [by whom?] three types of franchise: the small, medium and very large franchises. Although there are franchises around products – Hotels and its facilities, to name the prominent – by and large, the franchises revolve around service firms. These allow a business, combined with family time and a location not far from home.

For Example:

The following listing tabulates the early 2010 ranking of major franchises along with the number of sub-franchisees (or partners) from data available for 2004. It will also be seen from the names of the franchise that the US is a leader in franchising innovations, a position it has held since the 1930s when it took the major form of fast-food restaurants, food inns and, slightly later, the motels during the first depression. Establishment owned by franchisees and establishments owned by franchisors:

1. Subway (Sandwiches and Salads | Startup costs $84,300 – $258,300 (22000 partners worldwide in 2004).

2. McDonald's | Startup costs in 2010, $995,900 – $1,842,700 (30,300 partners in 2004)

3. 7-Eleven Inc. (Convenience Stores) |Startup Costs $40,500- 775,300 in 2010,(28,200 partners in 2004)

4.' Hampton Inns & Suites (Midprice Hotels) |Startup costs $3,716,000 – $13,148,800 in 2010

The midi-franchises like restaurants, hotels which involve substantial investment and require all the attention of a business.

There are also the large franchises - hotels, spas, etc. - which are discussed further in Technological Alliances.

Two important payments are made to a franchiser: 

(a) a royalty for the trade-mark and (b) the training and advisory services given to the franchisee. The two fees may be combined in a single 'management' fee. The fee for the "Disclosure" is separate and is always a "front-end fee".

The franchise is usually for a fixed period (broken down into shorter periods, which need renewal) and are for a specific "territory" or miles from location. There may be several such locations. 

A franchise is merely a temporary business investment, involving renting or leasing an opportunity, not buying a business for the purpose of ownership. It is classified as a wasting asset due to the finite term of the license.

The franchise can be an exclusive, non-exclusive or 'sole and exclusive'.

Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor. 

 There are also the main 'master franchisors' who obtain the rights to sub-franchise in a territory.

Franchising is one of the only means available to access venture investment capital without the need to give up control of the operation of the chain and build a distribution system for their services. 

After the brand and formula are carefully designed, and properly executed, franchisors are able to sell franchises and expand rapidly across countries and continents using the capital and resources of their 'franchisees' while reducing risk.

Franchisor rules imposed by the franchising authority are usually very strict and important in most countries need to study them to help the small or start-up franchisee in their countries to protect them.Besides the trademark, there are proprietary service marks which may be copyright - and corresponding regulations.

Obligations of the Parties

Each party to a franchise has several interests to protect. The franchiser is most involved in securing protection for his trademark, controlling the business concept and securing his know-how. This requires the franchisee to carry out the services for which the trademark has been made prominent or famous. There is a great deal of standardization proposed. The place of service has to carry the franchiser's signs, logos and trademark in a prominent place. The uniforms worn by the staff of the franchisee have to be of a particular shade and colour. The service has to be in accordance to the pattern followed by the franchiser in his successful operations. Thus, for the franchisee he is not in full control of the business as he would be in retailing.

The franchisee must carefully negotiate the license. He, along with the franchiser must develop a marketing plan or business plan. The fees must be fully disclosed and there should not be any hidden fees. The start-up and costs and working capital must be known before taking the license. There must be assurance that additional licensees not crowd the "territory" if the franchise is worked to plan. The franchisee must be seen as an independent merchant. He must be protected by the franchiser from any trademark infringement by third-parties. A franchise attorney is required to assist the franchisee during negotiations.

It should also be noted that franchise agreements carry no guarantees or warranties and the franchisee has little or no recourse to legal intervention in the event of a dispute .

Franchise contracts tend to be unilateral contracts in favor of the franchiser  they are generally protected from lawsuits from their franchisee because of the non-negotiable contracts that require franchisees to acknowledge, in effect, that they are buying the franchise knowing that there is risk, and that they have not been promised success or profits by the franchiser. 

Types of franchising

The four types of franchising that are available in India

.

Single-Unit

A single-unit franchise is the most common type of franchise available. It is a franchise that the franchisee purchases directly from the franchiser or an appointed agent of the franchiser, and is for a single business unit in one physical location. The franchisee is sometimes assigned a territory by the franchiser, or the franchisee may already have a location in mind that will require approval from the franchiser. In many cases, the franchiser will protect a territory for a franchisee within a certain radius to avoid inter-company competition.

To become a single-unit franchisee, it is recommended that you have a basic understanding of how business works or that you have strong team in place to advise you. A franchisee is expected to be very hands-on with running his or her business unit.

Multi-Unit

A multi-unit franchise occurs when the same franchisee is granted multiple units by the same franchiser. These units can be within a specific geographic region negotiated between the two parties, or it can be multiple units with random geographic locations. In many cases, a franchiser will offer multiple units to a successful single-unit franchisee, and then offer discounts in licensing fees to start more locations. In some cases, franchisers may award multi-unit franchises to new franchisees who have displayed a competence for running multiple business units with other franchise opportunities.

Area Development

An area development franchise agreement is typically offered to companies or individuals that have already set up successful franchises for other franchisers. A franchisee is given a geographic territory and must begin to develop units within that territory. Normally there is a established schedule between the franchiser and franchisee as to how many units must be set up within a predetermined time period. The geographic area can vary depending on the business and the agreement. It can be a region the size of a county, or it could be an entire state. If the franchisee does not live up to the unit development schedule, his or her license could be revoked and he or she may be subject to fines. Normally the franchiser offers special licensing pricing and ongoing royalty pricing to area development franchisees.

Master Agreement

The master franchise agreement is rare, but it is something that many franchisees look to have. A master franchise owner is similar to an area development franchiser in that he or she is given a geographic region and cost breaks for the agreement, but the master franchisee can also sell franchises on behalf of the franchiser and collect part of the regular royalty for the franchise as well. The master franchise owner speaks as the appointed representative of the franchisee for their region, and the region is normally larger than one given to an area development franchisee.

Absentee Franchisee

There is one other kind of franchise agreement, which allows someone to start a franchise but not have to be the hands-on manager. In this case of the absentee franchisee, the agreement is made in advance that the franchisee will not be the day-to-day operator of the franchise, but that he or she will be responsible for reporting royalties and income to the franchiser. This allows people to have a franchise without leaving their regular employment.

In simple terms there are four ways in which it can be used.

1. Creation of a new business specifically for franchisers

An entirely new product or service can be created specifically for franchising.

2. Development of an existing business

This is perhaps the most usual way of evolving a franchise. An existing product or service is further developed by use of the franchising method. Such businesses include the restaurant businesses and so on.

3. Conversion of existing business to the franchise format

Sometimes an established business can decide to convert its managed outlets to franchised outlets. Such decisions are usually taken because of a desire to accelerate growth and reduce overheads without sacrificing quality control.

4. Importation

This is a very common method of evolving a franchise in the specific territory. The United States is the great exporter of franchise concepts around the world. Brands such as KFC, Holiday Inns, Hilton Hotels, Pizza Hut and McDonalds are all American exports.

5. What types of businesses are franchised?

The following list of businesses that have been successfully franchised gives some idea of what can be franchised.

Automotive products and services

car valeting,  vehicle cleaning, vehicle rental, vehicle repair, vehicle security, chauffeur hire.

Business aids and services

Accountancy, advertising services, information bureau, display cards, job recruitment, temporary staff, office communications.

Construction, home improvement and maintenance products and services

Air conditioning services, bathrooms and bath renovations, brick and stone pointing, ceiling cleaning, chimney lining, heat and energy conservation.

Entertainment, recreation, etc.

Hotels, adventure games indoors and outdoors.

Fast foods, restaurants and takeaways

Chicken, coffee, croissants, hamburgers, ice cream, orange juice, pancakes, pizzas, popcorn, potatoes, sandwiches, steaks, general restaurants.

Food stalls

Baked goods, confectionery, dairy produce, eggs, fish, grocery stores, health foods, fresh juices.

Health, medical and beauty care

Fitness health clubs and studios, hairdressing, optical goods, skin care, fitness equipment.

Household services

Carpet cleaning, curtain design and fitting, domestic cleaning services, furniture and fabric cleaning, furniture stripping and restoration, upholstery and vinyl repair.