Essay, Research Paper: Franchising


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can be defined as a system based on a close and ongoing collaboration whereby a
company, the franchisor, gets into partnership with one or several companies,
the franchisee(s). Its prime aim is to develop a franchise concept designed in
the first place by the franchisor.” (Internet, 1) In order to better
understand the concept of franchising I will first explain several commonly used
terms in this concept. Ø Franchise is a legal agreement that allows one
organization with a product, idea, name or trademark to transmit some rights and
information about a business to an independent business owner, which in return
pays a fee and royalties to the owner. Ø Franchisor is a company that owns a
product, service, trademark or business format and provides this to a business
owner in return for a fee. Franchisor often is the one that makes the conditions
under which a business owner operates, however he doesn’t control the
business. Ø Franchisee is a business owner who purchases a franchise from
franchisor and operates a business using the name, product, business format and
other items provided by the franchisor. Ø Franchise fee is a one time paid fee
by the franchisee to the franchisor, and is paid for rights to use trademark,
management assistance and some other services. Ø Royalty fee is a fee
continuously paid by the franchisee to the franchisor- usually paid as a percent
of gross revenue earned. Ø Franchise trade rule is a law by the Federal Trade
Commission that places several legal requirements on the franchisors Ø
Trademark is a distinctive name or/and symbol used to distinguish a particular
product or service from all the others. In practice we have four types of
franchising- Product Franchise, Manufacturing Franchises, Business Opportunity
Ventures, and Business Format Franchising. In the case of Product Franchise,
manufacturers use the product franchise to govern how a retailer distributes
their product. The manufacturer grants an owner of the store the authority to
distribute goods by the manufacturer and he is allowed to use the name and
trademark of the manufacturer. In return the storeowner has to pay a fee or
purchase some inventory of stock in return for the rights given. Manufacturing
Franchises provide an organization with the right to manufacture a product and
to sell it using the name and the trademark provided by franchisor. This type of
franchising is usually seen in food and beverages industry. Business Opportunity
Venture usually requires that a business owner purchases and distributes the
products for one specific company, which must provide him with the customers. In
return business owner has to pay a fee or some other type of compensation.
Finally, the Business Format Franchising, the most popular type, is the approach
where a company provides a business owner with a proven method for operating a
business using the name and the trademark. The company has to provide assistance
to the owner of the business at the beginning, and the business owner has to pay
a fee in return. Usually people are asking what makes one company to offer a
franchise, so it is important to understand the franchisor’s perspective.
First of all, franchising is an opportunity for more rapid expansion. Many
companies may experience of lack of capital and skilled employees, so the
franchisee can offer all of that. At the beginning the franchisor assists a
franchisee with obtaining financing for a new business, however the franchisee
is liable for repayment of the funds. Franchisor is selecting its franchisees by
their experience and skills, and in that way he/she is minimizing its risks.
Another reason for franchising is higher motivation. This is because when the
company franchises its operations it acquires a group of new, motivated
managers, which are more accountable for actions since as an owners they are
completely responsible for business outcomes. Further more capital is another
reason for getting involved in franchising. The company, by franchising, is
raising the money without selling an interest in the business, and the
franchisor is using the franchisee money for further business expansion. This
way the company is avoiding the risks, which may come out from issuing stock and
taking the loans. The company’s image and name are at certain risk when sold
to other individual. So, a franchisor is very particular about the standards
that franchisees are obliged to meet, and therefore franchisor indicate specific
practices that other party must follow. Because of all that risk the franchisor
reserves the right to buy back the franchise operation. On the other hand
franchisees can take comfort in the fact that most franchisors want to see them
succeed, which is motivation for providing necessary help. Another disadvantage
for franchisor is the sacrifice of profits, because a company’s owned shop is
much more profitable than a franchise. Also the franchisee has to have in mind
the future ambitions of the franchisor-if the franchisor is expecting to buy
back the business after a period of time, when the franchisee has already
invested the time and the money in the business. Franchising business also has
the liability of training the competitors. This is because the franchisee may
acquire know how and than decide to open the same kind of business on his/her
own under the different name. The good franchisor will try to establish good
relationship with its franchisees in order to avoid this kind of problems in the
future. Furthermore it is important to look at the situation from the
franchisee’s point of view, concerning the benefits and costs. Some of the
major benefits of franchising are the following: Ø Lower Risks-according to the
expert opinion and some statistics the franchising business is more likely to
succeed and less risky. Ø Established product and service- the product offered
is already established and sold in the market so comparing to the independent
business, that is based on untried idea and operation, is much better. However
franchisee should look at the number of franchisees in business, for how long
they are operating, and the number of franchisees that have failed in conducting
the successful business. Ø Experience of Franchisor- the experience,
often-offered trough the training of the employees, that franchisor has
increased the possibility for success. Ø Name Recognition- the franchisee is
getting the name that is already well recognized locally or internationally. Ø
Management Assistance- this is the benefit because the franchisor is providing
the franchisee with necessary professional helps. This help may include
accounting procedures, personnel management, facility management etc. Ø
Business Plan- very often franchisor is providing franchisee with the help in
developing business plan. Ø Start-up Assistance- since the most difficult
aspect of a new business is a start-up it is very helpful to have professional
help. Ø Marketing Assistance- the franchisor can provide and pay for the
development of professional advertising campaigns. Ø Assistance in Financing-
new franchisee is able to get financial help from some institutions due to the
agreement between the institution and the franchisor, since the institutions
might find such the agreement profitable due to the high success rate of
franchise business. Another issue that franchisee should keep in mind is the
cost. The first cost that will occur in this agreement is the payment of
franchise fee, and it can range from few thousands to several hundred of
thousands dollars. Another fee is on going royalty fees. This is the fee
required by franchisor to be paid continuously as a percentage of the gross
income from the business. This percentage is usually less than 10%. Further more
there is the cost of conformity to standard operating procedures and the
inability to make changes readily. The franchisor may prohibit franchisee from
selling products or services other than the ones approved by him/her. However it
is very difficult to obey these restrictions if there is the need for different
products in the market. Another issue is the duration of the relationship.
Typically, there is no way to clear away from the business other than sell it,
however there might be some restrictions about that issue. Also the future
franchisee should pay attention to the question of franchisor buying back the
business. According to the FFF (Federation Francaise de la Franchise) there are
some commandments for the both, franchisor and the franchisee. The 10
Commandments for the franchisor 1/ The necessary capital, you shall have. 2/ A
market study, you shall make. 3/ A trademark, you shall protect. 4/ Your
concept, you shall test. 5/ Your know-how and brand image, you shall develop. 6/
The first clause of the Doubin act, you shall abide by. 7/ The Code of Ethics,
you shall put into operation. 8/ The franchisees, you shall carefully choose. 9/
The respect of the brand image, you shall control. 10/ The everlasting existence
of the network, you shall secure. The 10 Commandments for the franchisee 1/ The
needs of the commercial world, you shall be aware of. 2/ The necessary capital,
you shall have; 3/ The system of franchising, you shall learn. 4/ The spirit of
franchising, you shall incorporate. 5/ The Code of Ethics, you shall assimilate.
6/ A study of the relevant brands, you shall make. 7/ With full responsability,
you shall sign. 8/ The brand image, you shall represent. 9/ The network, you
shall respect. 10/ The consumer, you shall satisfy. However before commandments,
in order for one to see if he is able and ready for franchising business, one
can test himself/herself by answering some basic questions (Internet, 2) like:
Ø Do I prefer to limit my risk as much as possible? Ø Am I willing to operate
the business in exact accordance with the instructions of a franchisor? Ø Am I
willing to forgo sales on new ideas and products because of franchisor
restrictions? Ø Am I comfortable with sharing my success, including profits,
with franchisor? Ø Will I enjoy being part of a well-known organization? Ø Do
I feel like needing the management experience and assistance that a franchisor
can provide? Ø Do I need assistance in developing a business plan? Ø Is my
experience in marketing limited, so the franchisor would help in overcoming this
weakness? Ø Am I willing to pay a franchise fee to obtain a proven business
operation? Ø Am I comfortable linking my success with the success of the
franchisor? Since the franchising is very old kind of trade during the time it
attracted some inexperienced and occasionally fraudulent franchisors, so the
federal government implemented the law in order to protect the consumers.
According to my Internet source (Internet, 3) there is the basic, simple,
process for evaluating and protecting the investment. The following process,
consisting five steps, can help in avoiding disastrous mistakes made by others,
and can help finding the right franchisor. First step in this process is
examining the opportunities. This step is very important because there are
hundreds of franchises in the market, in all types of businesses. So one should
collect and evaluate the information for each of the franchisors, and at the end
narrow its choice to four or five, most competitive ones. The finalist should be
examined even further with the steps 2-5. Second step in this evaluation is
examining of franchise and the franchisor. In addition the federal government
has laws specifying the information that has to be provided to potential
franchisee by the franchisor. The list of information should consist info about
franchisor and its affiliates’ business experience, info about the business
experience of all the franchisors employees connected and responsible for
franchise services. Furthermore it should include the lawsuits, if any, in which
the franchisor was involved, info about any bankruptcies faced in the past, info
about initial financial fee and other obligatory payments. Information about
continuing payments, restrictions on the quality of goods and services, and
description of any assistance available from the franchisor or its affiliates in
financing the purchase of the franchise should be included. After that another
necessary descriptions are the description of restriction on the goods and
services that the franchisee is permitted to sell, description on any
restrictions on the customers, description on any territorial protection that
will be granted to the franchisee. Moreover there should be: Ø Description of
training programs provided by franchisor Ø Description of any assistance
provided by the franchisor in choosing the site for the franchise Ø Statistical
information about the number of franchises, franchisees planed for future and
terminated in past Ø The financial statement Ø The list of addresses and names
of the already existing franchisees However the franchisor, before providing the
franchisee with this information, might want a prior approval from the
franchisee. On the other hand the information must be provided to the franchisee
before signing the agreement, so he can have a chance to evaluate and study the
information. If at this point franchisor shows that he is upset, it might be the
first sign that he might not be the right person for doing business with. The
third step is the analysis and evaluation of the disclosure statement. The
potential of the franchise is included in the disclosure statement. On the other
hand the franchisor also has to be investigated in order to be sure that all the
information are truthful and accurate. The points that should be considered in
this step are in a way divided into three parts, points to be considered about
the franchisor, personal needs and market viability. Points to be considered
about the franchisors are: Ø Experience of management and directors Ø Number
of franchisees in operations Ø Number of franchises no longer in operation Ø
Years franchisor has been in operation Ø Type and amount of training Ø
Financial stability Ø Assistance in financing Ø Site location assistance Ø
Planing and constructing a building Ø Reputation among franchisees Ø Projected
operating losses Ø Potential profits Points to be considered about personal
needs are: Ø Equity requirements Ø Interest and enthusiasm Ø Business skills
Points to be considered about market viability: Ø Community fit Ø Location
availability Ø Longevity of product Ø Population stability Ø Competition Ø
Price Ø Advertising and cooperative advertising According to my Internet source
the fourth step is the investigation of the franchisor, which is very important.
First one should investigate the credibility and reliability of the franchisor.
Then one should talk with the franchisees about their experience with the
franchisor. After that one should seek advice of professionals about the
franchisor and franchise agreement, paying attention to the length and type of
the contract, restrictions, criteria, etc. Also the banker should be contacted
to give his opinion on the franchise, financial proforma and to point out the
financing issues that will be involved during the life of the contract. Also it
would be useful to contact accountant and to hear his opinion about financial
information provided by franchisor and about financial potential of the
business. The last step in selecting a franchise is a decision-making, the last
but most difficult step since there are a lot of questions to be answered and a
lot of information to be evaluated. According to my Internet source the method
that can help in this situation is the “T” method. In this method evaluator
can put positive reasons on one side and negative on the other side of the
paper, assigning the numbers from 1, for unimportant, to 3 for important. After
completing the list and adding the numbers, one can be more certain in his/her
decision. The greater the numerical difference between the positive and negative
side is the more confidant one is in the decision-making.

“A Definition of Franchising” available at http//
“The Ten Commandements” available at http//
“Franchising-an Interactive Self-Test” available at
“The Five Steps of Selecting a Franchise” available at
“Step 1- Examine your Opportunities” available at
“Step 2-Examine the Franchise and the Franchisor” available at “Step 3- Analyze and Evaluate
the Disclosure Statement” available at
“Step 4-Investigate the Franchisor” available at
“Step 5- Make a Decision” available at

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