Franchising
"Franchising
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.
Bibliography
"A
Definition of Franchising" available at
http//:perso.club-internet.fr/fff/def_.html
"The Ten Commandements"
available at
http//:perso.club-internet.fr/fff/tencom_.html
"Franchising-an
Interactive Self-Test" available at
www.betheboss.com/PF2/gstarted/f101/selftest.html
"The Five Steps of
Selecting a Franchise" available at
www.betheboss.com/PF2/gstarted/f101/fivestep.html
"Step 1- Examine your
Opportunities" available at
www.betheboss.com/PF2/gstarted/f101/step1.html
"Step 2-Examine the
Franchise and the Franchisor" available
at
www.betheboss.com/PF2/gstarted/f101/step2.html "Step 3- Analyze and
Evaluate
the Disclosure Statement" available at
www.betheboss.com/PF2/gstarted/f101/step3.html
"Step 4-Investigate the
Franchisor" available at
www.betheboss.com/PF2/gstarted/f101/step4.html
"Step 5- Make a Decision"
available at www.betheboss.com/PF2/gstarted/f101/step5.html