What is meant by “Franchising”?

Language-wise

The term “franchising” is a term that dates back to the post-Middle Ages/”Modern Times” and in that context referred to the granting, generally by a king or higher authority, of a right for instance to do commerce in a context in which this right was usually reserved to the higher authority, or to develop/colonise a territory which belonged to the State.

In a similar spirit which had its foundations in the privileged-founded regimes of those times in Europe, it meant the granting of an immunity from an obligation. To be granted a franchise was to be granted a liberty, meaning oftentimes an exemption from a restraint.

Since then and depending on the context, the term “franchise” in English has been used variedly but with very close meaning, although not always with great clarity. One hears of “business franchise” as one hears of “territorial franchise” such as in the film Star Wars.

As franchising has grown internationally, the term “franchise” has been adopted to indicate a business system composed of a brand name, a "system" or format implying the distribution of a product and/or service through a network. This system replicates itself with every new business partner (franchisee) that invests and becomes another member of the network. Interestingly, as cultures, market and social conditions differ, many aspects of business format franchising differ too. The term "franchising" in business evokes: brand name, replication of a system, expansion and network. In fact, it is a lot more complex.

In summary:

In the context of modern commerce, franchising is a business model aimed at the distribution of goods and/or services based on the licensing of a brand, a set of intellectual property rights (the brand names, trademarks or trade names associated with the brand), a business format – bundled and sold as an asset. This business “kit” is sold by the franchisor – the founder of the system – to independent partners who each invest in this offer in order to operate the business opportunity for themselves and in respect of the prescriptions of the format.

The independent partners, the franchisees, together with the franchisor, form the franchise network.

The promotional slogan for such a business partnership is expressed by some as “being in business for yourself but not by yourself”.

“Business-format franchising” is a common term used for this form of commercial distribution.

Franchising has proven itself to be a powerful and efficient means of growing a business and of creating employment and wealth both at local and international level.

This comes from the distinct but combined roles of the franchisor and of the franchisees whose efforts together leverage the potential of the business concept.

In greater detail:

Franchising operates on the basis of a contractual agreement between two independent business parties, the franchisor and the franchisee, in which the franchisor grants the franchisee, for the term of the contract, the right to buy and operate the franchisor’s branded and formatted business system for a fee and according to the prescribed rules and procedures developed for the system by the franchisor.

Hence the term most commonly used to refer to this type of commercial relationship: “business format franchising”.

The franchisor’s “business format franchise” necessarily comprises the following 5 essential* elements:

1. A brand name (registered as a brand name and/or a trademark, etc.) which serves as the umbrella sign for network, and a rallying sign for the consumer and public),

2. a licence to the use the brand, granted to the franchisee by the franchisor,

3. a business system – a business concept formatted into a duplicable value “package” founded on the franchisor’s tested Know How and his continued assistance during the term of the agreement),

4. payment by the franchisee of a financial consideration, either in a direct form, such as an entrance fee and/or continuing fee (“royalty”), and/or an indirect form such as a mark-up on supplied goods,

5. the investment in, and ownership of, the assets of the franchised business by the franchisee

(* source: Martin Mendelsohn, “Franchising Law”, Kluwer, 2004)

A mother company may choose to operate its network entirely as a franchise, or combine franchising with company-owned outlets.

Franchisor and franchisee each have a distinct but complementary role to play in the optimisation of the efficiency and results of the franchise business.

A franchisor seeks to duplicate, as many times as possible, a tested and successful business system with a network of independent partners, the franchisees. As stated above, each franchisee is the owner of his franchised business, and is legally and financially independent of the franchisor and of the other franchisees in the network.

During the term of the franchise contract, the franchisor imparts his know-how and assistance to the franchisees with the purpose of increasing their opportunity for running their franchised business efficiently and profitably.

A franchisee’s principal motive in joining a franchise network is to be in business “for yourself, but not by yourself” and thus improve his chances of success as an independent entrepreneur by having the back-up of a tested system. This increases survivability in the first years of setting up the franchised business, as well as greater chances of rapid expansion since the franchisee concentrates principally on his specific role within the franchise.

The franchisee’s benefits over an isolated independent non-franchised entrepreneur are the following. He

 buys into a brand-name,

 has immediate access to a market via the right to utilise the parent company’s brand name or trademark,

 and benefits from both the transfer of know-how (management, marketing, merchandising) and on-going assistance.

In return for which the franchisee pays the franchisor a fee or royalty, or a combination of fees, which often but not always, includes an entrance fee and/or a fixed percentage of annual turnover for the period of the contract.

Other financial models are possible.

The role of the franchisor is to concentrate on:

 developing and constantly improving the franchise business’s concept so as to ensure the credibility, quality and notoriety of the brand on the market,

 constantly improving the “franchise package” offered to the franchisee which includes:

• seeking and guaranteeing better purchasing prices for goods and services,
• optimising management and sales skills through on-going training,

 organising national or international advertising campaigns,

 steering the business’s overall development strategy.

The role of the franchisee is to concentrate on:

 guaranteeing the customer the best possible service,

 optimising his sales force and results,

 respecting the principles and manner of operating of the franchise business as defined in the franchise contract, which includes respecting the common identity and reputation of the franchise network, and the confidentiality of the business know-how transferred.

Franchising in the life-cycle of a business

To start with, the EFF defends the idea that it is absolutely essential for a franchise system ready to launch itself to have first tested the concept for a period of time allowing for an honest and realistic assessment of its survivability through at least two company-owned pilot outlets on the target market or on a market with a similar economic environment.

A distribution business may set itself up as a franchise from the start, in other words, the business model and its future development is founded entirely on establishing a network made up of the of head company (the franchisor) and a number of independent investors/operators (the franchisees).

Alternatively, the business may from the start combine the "franchise" model with a parallel network of company-owned outlets ("mixed" franchise and company-owned).

Alternatively, a non-franchised business may in the course of its development switch to a franchise business model. Many analysts call this switch "conversion franchising" whereby a non-franchised business converts to the franchise model.

Then again, a business may adopt the various modalities described above at different moments of its development. It may for instance start as a fully franchised concept, gradually evolve into a "mixed" model, and eventually be bought back by the franchisor and turned into a fully company-owned business.

In the course of these developments, the initial concept may change too, and this change factor is an essential factor for the survivability of any business in the fast-evolving world we live in.

For each business, many configurations are possible in the course of time, each motivated by very specific reasons and conditions proper to each system.

Business Format Franchising and other forms of networks of independent entrepreneurs:

The European Franchise Federation upholds the idea that what it qualifies as “franchising” is “Business format franchising” founded on all of the elements described above, and operated in the framework of the principles of ethics defined in the EFF’s Code of Ethics for franchising.

Other forms of business offers exist on the market which may combine certain of the elements of franchising. Some businesses combine all of the above and yet do not call themselves franchises. Others combine only some of the elements above and yet qualify themselves as franchises.

Hence the role of the franchise associations to educate as to what authentic and ethical franchising is.

Offers which may share some aspects of franchising, but which must not be confused with franchising are: 

 agency agreements, 

 selective or exclusive distribution agreements, 

 “business partnerships” taken in a very loose sense 

 co-operatives.

Quote from the Past Chairman of the European Franchise Federation, Pierre Jeanmart, experienced franchisor from Belgium:

“Of the many forms of business relationships between independent business-partners organised in a network, franchising is the most sophisticated both in its business concept construct as in the scope and quality of the franchisor-franchisee relationship without which a franchise system cannot succeed in the long-term. When all of these elements are combined together, we can speak of “authentic and ethical franchising”.

source:www.eff-franchise.com

Facts about Franchise Businesses

What is a franchise business?
A franchise business is a form of trade practiced by few companies for distributing their products by third parties. The independent operator trades with the business method, goodwill and goods of the company. He/ she has to pay a royalty fee and a percentage of their total income to the company. The company who allows the independent operator to use its trademarked goods is called the franchisors. The independent operator who takes this kind of dealing is called franchisee.

Which are the companies who can opt for this form of trade?
This form of trade is very useful for expansion purpose. Some companies who can opt for this kind of dealing are:

* Companies with a good annual profit record.
* Companies expanded over a larger geographical area.
* Companies with unusual concepts.
* Companies which are less expensive to operate.

What are the advantages of Franchise business?
Such trades are advantageous on the part of the owner as well as the holders.

From the holder's perspective:
* It provides self employment opportunities to the person who has acquired the license for some trade from the owner.
* It provides an opportunity to start this form of dealing without having to go through a lot of hazards of starting a new company altogether.
* It provides the new holder with training from the prime owner. With this expert training he/ she stands with a bright opportunity of expanding their trade.

From the owner's perspective:
* They have the opportunity to expand their business over a larger area.
* They will have to go through lesser legal proceedings. It is a kind of selling out the ownership with some other person.
* They will have the opportunity to get a higher income. The holder will utilize his full expertise to attain the highest income. This in turn will come as an income to the owner.

Therefore, on an overall basis you can call such dealings the safest bet for you. If you are the owner then you can get your business expanded without having to worry a lot. At the end of the year you can expect to get a handsome amount as royalty fee and percentage of the total income of the franchisee business.
If you are the holder then you can enjoy the entire profit of the business by giving out only a part of the total income. The success of both the parties depends on how well they bid on the contract amount. The holder will be successful if he can bid the lowest royalty fee and percentage on the total income. The owner is always the most beneficent. In any case, it is a win-win situation for both the parties.

Source: Franchising Nation, eNewsletter, Team India Managers Ltd

How to Choose the Best Franchise Ideas

Are you interested in starting your own company but are worried about an idea that will sell? If so, consider franchising since you have access to many established and successful franchise ideas to choose from. Without having to worry about something new and original that customers will switch their chosen brands for, you can take advantage of a known brand and business that is already generating profit and open up your own branch of it. It takes a lot of the stress out of marketing a new product and takes advantage of the pre-existing customer base. Unless you want to take a chance with something entirely new, use a franchise directory and start looking for existing franchises for sale and what market you’d like to work in.
You need money to start any new business, and even more so with a franchise since you need to be able to afford to pay for it upfront. The upside is that there is franchise financing which you should take advantage of to free up your saved money to pay for other expenses you will encounter when starting the business. Buying a franchise is also beneficial because you have little legwork to do in terms of marketing yourself or designing extensive advertising campaigns to gain clients. You will have customers right away due to the established brand you will be selling, so if you are weak in the selling department, this is the route for you. However, you will need to support and pay into any marketing strategy or campaign the franchise sets up, and you have little control over how to run your business, sales, design or inventory, since it is all a package deal. A franchise is really the best option only for someone who is looking more to manage their own business than create one, since little creativity is required. Examine your skill set to determine what area of expertise you have to contribute. Don’t choose a franchise in an industry you are interested in but have never worked in unless you are planning to hire a manager to run it for you. Know what you can offer and find a franchise list that supplies available stores in that industry in your area. When you have chosen what you want, create a business plan of your projected costs, profits, plans and changes to bring with you when you apply for franchise finance. This will help you secure your loan and have a plan for the future of your business. When the loan is secure, hire your staff, order your inventory, and put your plan into action.

Source: Franchising Nation, eNewsletter, Team India Managers Ltd

Pros and Cons of Buying a Franchisee today

The advantages offered by investing in a franchise have grown considerably. In this day and age entrepreneurs are looking for the best possible opportunities and fast. They want to jump in to the next bandwagon that's available. So why should you consider a franchise? That's simple.

Advantages of a franchise

• Owning your own business. Because when a person works for himself, the efforts are recompensed fast and at a high level.
• A franchise allows many business objectives.
• A franchise is a part of a business that has already been established and is profitable for the original owner and has a mature customer base, which will reduce the risk of starting a business alone.
• The franchise allows to obtain the key to operate the business, the "know - how", the success in the market.
• A fast and safe development, since it has been demonstrated that people who go with franchises reach the success point quicker, which is needed in order to achieve long-term stability.
• The business has a brand guaranteed by the previous marketing activities, a prestigious brand, accepted and recognized both nationally and internationally.
• The franchisee will benefit from new developments in its network and will be implemented and paid by the franchisor, thus satisfying the demands of the market.
• The franchise is continuously updated.
• The franchisees pay to the parent company to provide the ability to implement important improvements in the system that was subsequently implemented in the main business successfully.
• Buying groups are cheaper. While your firm belongs to a franchise, you get more favorable purchasing conditions, more favorable payment terms and the security to obtain the materials. In addition you will benefit from the updated and comprehensive information regarding the franchisor's knowledge of the market and the sector.
• Plans for initial and ongoing training to give you the opportunity to work at a level regardless of your previous experience and success/failures.
• The franchisee benefits from a brand known nationally and internationally and investing large amounts in advertising both in newspapers, radio and television.
• The franchisee benefits from a brand with financing facilities, training and permanent assistance.

All this plus other benefits are added to the advantage of a franchise, but we also must provide the disadvantages of acquiring a franchise.

Disadvantages of a franchise

• When opening a franchise we must contemplate and cover the high costs of entry, the royalty and advertising.
• Disagreement between franchisor and franchisees can arise in the processes and they can have different opinions about the business methods.
• The low efficiency and other outlets of the network can seriously affect the image and reputation of your establishment.
• The franchisees have no freedom to make the necessary decision to run their businesses, this is the franchisor exclusivity.

In addition

• Sometimes you will receive poor service, support and assistance from the franchisor, because their interest is to attract new franchisees and not to care for what they have already collected on.
• Resource constraints that affect service delivery.
• Signing with an unethical franchisor who wants nothing to do with the building of the franchise’s name, and only wants to earn from selling its brand.

As you can tell it is important to analyze as many factors and aspects before purchasing into a franchise.

Source: http://www.ozcarguide.com/business-money/start-ups/796-pros-cons-buying-franchise

Turning Sales Skills into a Franchise Opportunity

You were a successful salesperson -- until recently, that is. One day, your boss called you into the office, sat you down and, just like that, you became a laid-off former salesperson. Now what do you do?

If you’re like many people, you’ll polish your resume, start networking with your business contacts, and hope you get job leads, turn them into interviews, and ultimately get a great job offer. But in today’s economy, there’s another option that could be far more profitable: buying your own franchise business.

Sure, sales skills are always in demand -- and that gives you a better-than-average chance of getting hired, even in tough times. But instead of looking for a job, why not look for a franchise opportunity that lets you put those valuable sales skills to work for yourself, in your own business?

There are many franchise businesses specifically tailored to the experience and skills former salespeople possess.There are companies that specialize in promotional products, online advertising, direct mail, outdoor advertising, and more. Such opportunities can be a great fit with someone who has knowledge of sales, advertising, and marketing principles.

But even beyond advertising-related opportunities, there are many types of franchises in which sales abilities are a major plus. To match your sales experience with the right type of franchise opportunity, first consider whether you have mostly sold business-to-business (B-to-B) or to the consumer.

If B-to-B is your specialty, you’ll find options such as business consulting, janitorial services, management training, and more. If your experience has focused on selling to the consumer, this can be applicable to many General Service,Home Service, and Children’s Franchise opportunities, just to name a few. For example, if you buy a child care franchise, you’ll need to be able to market your services to local parents.

No matter what type of franchise you’re interested in buying, your sales experience will give you an edge in the eyes of the franchisor. When franchisors are asked what characteristics potential franchisees need to succeed, one of the qualities that they cite most often is “sales skills” or “sales experience.” Why? Several reasons:

1. Compared to operations and other nuts-and-bolts elements of running a franchise, sales skills are far more difficult to teach. It’s easier for a franchisor to sell a painting franchise to an experienced salesperson and train him to run it than it is to sell the same franchise to an experienced painter and teach him how to sell. And because many people are intimidated by the idea of selling, those with proven sales ability are in high demand as franchisees. 
2. People who are good at selling also tend to be positive, energetic and enthusiastic. That means they’re generally good at motivating and energizing their employees. 
3. Good salespeople are goal-oriented and persistent. Starting any business, even a franchise, takes lots of hard work. Successful salespeople are up to the challenge -- they’re used to working hard to surpass their quotas and know that they must put in effort to see results.

No wonder franchisors are sold on salespeople-turned-franchisees. Are you sold on the idea of buying a franchise yet?

Source: www.allbusiness.com

Mom and Pop vs. Franchisees: Pros and Cons

By Liza Porteus Viana

There are many advantages to opening up a franchise versus an independent store. But there are some disadvantages, as well.
When it comes to owning a small business, not everyone goes the route of starting up their own mom-and-pop shop. In fact, if a hopeful entrepreneur has no clue how to write a business plan and likes the idea of having a bigger “parent” company at their backs, opening a franchise might be the better option.
But does one really feel the same sense of ownership with a franchise as an independent small business? It is possible - under certain conditions, that is.
“I think what you find in the most successful franchise systems is a group of franchisees who feel completely integrated into the culture of that business, who feel completely part of the fabric of the way that particular company operates,” said Matthew Shay, president and CEO of the International Franchise Association. “For franchisees to really feel integrated into that culture, there needs to be a very strong sense they’ve got ‘ownership’ over the brand, over the units – ‘this is really our thing’ … It needs to be a collective sense with the franchisor.”
In the United States, there are about 900,000 individual franchise units -- that includes the total number of franchisors AND franchisees (ie Jamba Juices, McDonald’s, Wendy’s and the like) across the country. The number of franchisees is significantly less than that, as many franchisees own multiple units. This may be because once a franchisee knows how to “work” the franchise system, he or she often then will open multiple franchises in different areas. For example, a Burger King owner may have 10 of the company's franchises, as well as a car wash.
There are many advantages to opening up a franchise versus an independent store, including: the franchisee can operate under the parent-company’s business plan, name recognition, corporate logo, trademark and can utilize all its training and support resources in exchange for an initial franchise fee plus ongoing royalty payments; national marketing is up to the franchisor, so the franchisee can focus more on being the direct “face” of the company to consumers; franchisees also can minimize the amount of financial risk involved in starting their own business; landlords and property owners may be more likely to give a franchisee prime space knowing the track record of the franchise; and franchisees also often benefit from volume purchase agreements.
“They do see themselves as independent,” said Giovanni Coratolo, vice president of small business policy at the U.S. Chamber of Commerce. “They know how to operate within that system. They’re entrepreneurial within that franchise system. … They know how to expand and invest within that system.
“There’s a dynamic relationship” between the franchisor and franchisee, he said, and it is to the advantage of both to see the individual businesses succeed.
But there are some disadvantages, as well. As, for one, franchisees don’t have total control over what they can do with their own store.
“There are give and takes – sometimes it’s not a totally harmonious relationship,” Coratolo added. “They [franchisees] don’t consider the parents a boss – it’s a contractual relationship.
The business plan often will specify hours of operation, colors of the corporate logo and other details. Some franchisees may be required to purchase from certain distributors or to offer certain promotions, and to agree to termination clauses, which essentially say the franchisor may have the right to terminate the franchise agreement if certain items are not met.
Franchisees may face other stipulations in the franchise agreement, according to the American Franchisee Association, including a waiver of legal rights and freedom of association with certain organizations, obligation to purchase supplies from certain entities approved by the franchisor and non-compete clauses.
Franchisees “may feel somewhat constrained by some of the terms of the franchise agreement and they may want to make some changes, but it’s important for them to understand that the branding and the power of brand is consistency. You need to understand that going in,” said Bill Allen, a counselor with the Orlando, FL, chapter of SCORE, which is affiliated with the Small Business Administration.
Given all these pros and cons, experts agree it takes a certain type of person to be ready and willing to run a franchise versus an independent startup.
“Some entrepreneurs are so independent-minded they don’t want to give up control of any aspect of the business,” Shay said, noting that the decision should be based on one’s personality type. “For those business people, fitting into the structure of the corporate business” isn’t for them.
While a different dynamic than that for a typical mom-and-pop shop does exist, experts said there isn’t a total loss of identity as a franchised-business owner.
“The franchisee owner tends to feel himself very independent within the parameters of the franchise,” Coratola said. “They don’t look at themselves as a less of an entrepreneur just because they’ve elected to go within a structure.”

Source: http://www.foxsmallbusinesscenter.com/strategy/2010/01/28/mom-pop-vs-franchisees-pros-cons/

Franchising in 2010

Following a tumultuous 2009, what is going to happen to franchising this year?

This is a question that tinkers in many enthusiast minds...

Each year, some companies prosper and others fail, but 2009 was definitely the year that tipped the scales in franchising—and not in a good way. We watched as more companies experienced their toughest times with lead generation for franchise sales, difficulties with franchisee relations, tougher supplier negotiations, and negative consumer sales. Franchise companies were hit from all sides, and no one was exempt.

That brings us to the biggest question about franchising: What is really going to happen in 2010?

For us to really understand or predict what is going to happen, we could poll many opinions. These thoughts could come from the banking and lending companies, the franchise companies, industry executives, brokers, or consultants in the industry. Yes, each may have valuable opinions and substantial data to make such comments. But I ask you, are they the real source to learn what will happen to franchising?
I encourage you to look at a different source for information this year. Why? Because we no longer have the luxury to sell franchises or support franchisees as we have in the past. 2009 proved above all that the old ways do not work anymore.
So who is it that can tell us what is going to happen, and provide guidance on how franchisors need to evolve and improve? How about the franchise owners? As last year unfolded, I felt that we had to hear from franchisees, who hold a direct lifeline to growth for all franchise systems.
Since I actually spent more time with franchisees in the early part of my career than I did my corporate partners, this past summer I went back to the land of the franchisees. Instead of attending some industry meetings or spending time speaking at conferences, we went to smaller meetings and locally organized meetings, traveled, and had fun with franchisees. We connected again with small, mom-and-pop owners and large, multi-unit developers. It was clear that to truly understand what was going to happen this year, the answers could no longer come from the sources that we had leaned on previously.

What did we hear? In 2010, franchisees are not going to do business as they have in the past, either.

Here are our top three thoughts about changes to franchising in 2010:

New franchisees will enter the market through transfers of ownership. The legacy and older franchisees with no generation behind them will split up their units (if they have a high multiple) and sell to newer franchisees. Traditionally, the focus has been “the new franchise sale”—new restaurant growth. This is always a good strategy. However, the resale was basically ignored for the most part. In many companies, the team handling transfers of ownership (selling a current restaurant) was not part of the franchise sales team and not trained extensively to handle these types of transactions. In order to sign the best franchisees, franchise companies must be not only ready for this, but proactive about it. An example: Burger King has put a key person in place to oversee these types of sales.

A higher level of education will be demanded (and needed for future success). It will not just be about what support the franchise offers. The franchisees that stay in the system are going to push companies to revamp their training and support. The new franchisees want this as well. Both types of franchisees are more technology savvy than ever before, and will be more abreast of the latest developments and how to e-communicate to other franchisees. They will demand more business training. An example: Our company had an increase in 2009 of over 150 percent in requests to conduct our Educational Programs to franchisors and franchisees as an outsource vendor versus conducting these in-house.

The marketing jobs will be back—in a new way. Companies will need to focus on increased marketing activities and new areas of marketing. More experience (and I mean real experience) in social media will be needed. An example: One vendor to the industry (not a marketing company) held free conferences in 2009 for their clients and non-clients about social media issues.

Actually, 2010 is shaping up to be a great year. We may truly be back to the focus being about operations in the restaurant industry, and not just selling franchises.

Source: http://www.qsrmagazine.com/articles/outside_insights/138/2010franchising-1.phtml