Professional Documents
Culture Documents
Growth Of Franchising
Singer Sewing Machine first franchise (mid-19th century, 1850) Automobile (e.g. Ford), petroleum products (e.g. Shell), soft drinks (e.g. Coca Cola) Food and restaurants (e.g. McDonalds, Starbucks) (1933)
What is Franchising?
A franchise operation is a contractual relationship between the franchisor and franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format and/or procedure owned or controlled by the franchisor, and in which the franchisee has or will make a substantial capital investment in his business from his own resources.
- Definition by International Franchise Association
What is Franchising?
Contractual relationship between the franchisor and franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee. The agreement is governed by a contract, the Franchise agreement, which runs for a defined period of time, generally renewable and ranging from five to 20 years. Use of franchisors trade name, format, system and/or procedure under license. Means to raise capital and expand quickly.
Franchising
Assistance to franchisee Marketing, management, advertising, store design, standards specifications Payment by franchisee by way of royalty, licensee fee or other means Franchising is more than distributorship Extends to an entire operation or method of business Greater assistance, control and longer duration Distributor merely re-sells products to retailers or customers
Franchising
Franchising A marketing system revolving around a two-party agreement, whereby the franchisee conducts business according to the terms specified by the franchisor Franchisee An entrepreneur whose power is limited by a contractual agreement with a franchisor Franchisor The party in the franchise contract that specifies the methods to be followed and the terms to be met by the other party
TYPES OF FRANCHISE
A product distribution franchise model is very much like a supplier-dealer relationship. Typically, the franchisee merely sells the franchisors products. However, this type of franchise will also include some form of integration of the business activities
EXAMPLES
FRANCHISEE
In a business format franchise, the integration of the business is more complete. The franchisee not only distributes the franchisors products and services under the franchisors trade mark, but also implements the franchisors format and procedure of conducting the business.
EXAMPLES
3. MANAGEMENT FRANCHISE
A form of service agreement. The franchisee provides the management expertise, format and/or procedure for conducting the business.
Examples
Advantages of Franchising
Buying a name/reputation
Established markets Technical/management assistance Standardized procedures Quality standards Selection of location Facility design Quicker cash flow
Disadvantages of Franchising
Loss of independence High initial fees High royalties and advertising allowances Contractual restrictions
Inapplicable advertising
Termination clauses Not receiving promised help Unsuitable products Lack of competitive advantage of parent company
Why franchise?
Franchises offer important pre-opening support:
site selection
Why franchise?
Franchises offer ongoing support
training
national and regional advertising operating procedures and operational assistance supervision and management support increased spending power, access to bulk purchasing and economies of scale
Successful prototype stores with a track record of profitability and a positive reputation
A business that can be systematized so that it can be easily replicated. A product or service that can be successful in many different geographic regions. An operations manual that specifies all the functions of the business and their associated policies
FranchisorFranchisee relationship
Regulated by contract which usually covers:
Initial fee
Royalty fee/Management fee Capital required from franchisee Territory/Area of operation Duration of license and renewal IPRs Termination
FranchisorFranchisee relationship
Elements to look for in a franchise relationship:
Responsiveness Empathy Communication Dependability Accessibility Give and take Anticipation Structure Open-mindedness
Franchise agreements
Trade name franchise agreement that provides to the franchisee the right to use the franchisor's trade name and/or trademarks Product distribution franchise agreement that provides specific brand name products which are resold by the franchisee in a specific territory Business format franchise agreement that provides a complete business format, including trade name, operating procedures, marketing, and products or services for sale Piggyback Franchise A retail franchise operation within the physical facilities of a host store Area Developer/Master Licensee Firms or Individuals that obtain the legal right to open several franchised outlets in a given area
Is the franchisor in partnership or any other legal relationship with another franchisor? If so, how will the franchisee be protected should that relationship fail?
Is the franchisee required to do anything that appears questionable from a legal or ethical perspective? Under what circumstances can the franchisee or franchisor terminate the franchise agreement and what are the consequences to either party? Will the franchisor grant an exclusive territory? Is that area subject to reduction or modification? If so, under what conditions?
BE CAREFUL
In addition to the initial franchise fee, franchisee must pay ongoing royalties and advertising fees. Franchisee must be able to balance restrictions and support provided by the franchisor with their own ability to manage the business
BE CAREFUL
A damaged image or franchise system can result if other franchisees perform poorly or the franchisor has financial problems. The duration of a franchise is usually limited and the franchisee may have little or no say concerning termination
Not reading, understanding and/or asking questions about the franchisee agreement and other legal documents Not understanding the responsibilities of a franchisee and the rights and obligations of a franchisor Not seeking sound legal and financial advice Not verifying oral representations of franchisor
Not analyzing the local market in advance Not analyzing the competition Not making thorough due diligence of the franchisor Not choosing the right location
Conclusion
Franchising a great model for minimizing risks and maximizing returns Proven formula for success ready and waiting to be adopted by the new entrepreneur. Provides proven operating systems, solid research and development, established marketing methods and instant credibility, plus extensive training and support
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