An Introduction to Franchicing

WHAT IS A FRANCHISE?
A franchise is the agreement or license between two legally
independent parties which gives:
• a person or group of people (franchisee) the right to market a product
or service using the trademark or trade name of another business
(franchisor)
• the franchisee the right to market a product or service using the
operating methods of the franchisor
• the franchisee the obligation to pay the franchisor fees for these rights
• the franchisor the obligation to provide rights and support to
franchisees
Franchise Agreement
Types of Franchises
Types of Franchising Arrangements
• Types of Franchise Arrangements
• Because so many franchisors, industries and range of investments
are possible, there are different types of franchise arrangements
available to a business owner.
• Two types of franchising arrangements:
• ✔ single-unit (direct-unit) franchise
• ✔ multi-unit franchise: • area development • master franchise
(sub-franchising)
Types of Franchise Arrangements
• A single-unit (direct-unit) franchise is an agreement where the
franchisor grants a franchisee the rights to open and operate ONE
franchise unit. This is the simplest and most common type of
franchise. It is possible, however, for a franchisee to purchase
additional single-unit franchises once the original franchise unit
begins to prosper. This is then considered a multiple, single-unit
relationship.
Types of Franchising
• A multi-unit franchise is an agreement where the franchisor grants a
franchisee the rights to open and operate MORE THAN ONE unit.
• There are two ways a multi-unit franchise can be achieved:
• ✔ an area development franchise or
• ✔ a master franchise. Under an area development franchise, a
franchisee has the right to open more than one unit during a specific
time, within a specified area. For example, a franchisee may agree to
open 5 units over a five year period in a specified territory.
• A master franchise agreement gives the franchisee more rights than
an area development agreement. In addition to having the right and
obligation to open and operate a certain number of units in a defined
area, the master franchisee also has the right to sell franchises to
other people within the territory, known as sub-franchises. Therefore,
the master franchisee takes over many of the tasks, duties and
benefits of the franchisor, such as providing support and training, as
well as receiving fees and royalties.
Alternatives to Franchising
• WHAT ARE THE ALTERNATIVES TO FRANCHISING? In addition to franchising, there are two other
popular methods by which businesses expand their market and distribution channels: ✔
distributorships ✔ licensing
• In a distributorship, the distributor usually: • has a contractual relationship with the supplier •
buys from the supplier in bulk and sells in smaller quantities • is familiar with local markets and
customers • may do business with many companies, more than just the supplier/producer • may
not receive contractual support and training from the supplier/producer like a franchisee
• Some popular distributorships include: ✔ Amway ✔ Color Me Beautiful Cosmetics ✔ Mountain
Life Spring Water ✔ Knorr Soup Vendor.
Alternatives to Franchising
• Licensing, on the other hand, allows a licensee to pay for the
rights to use a particular trademark. Unlike franchises, in which
the franchisor exerts significant control over the franchisee’s
operations, licensors are mainly interested in collecting royalties
and supervising the use of the license rather than influencing
the operations of the business.
• Some popular licensors include: ✔ Netscape Communications ✔
Apple Computer ✔ Canon Inc. ✔ Woolmark ✔ Compaq
Computer
WANT ARE COMMON FRANCHISE
TERMS?
business format franchise – this type of franchise includes not only a product, service and trademark, but also the complete
method to conduct the business itself, such as the marketing plan and operations manuals
disclosure statement – also known as the UFOC, or Uniform Franchise Offering Circular, the disclosure document provides
information about the franchisor and franchise system
franchise – a license that describes the relationship between the franchisor and franchisee including use of trademarks, fees,
support and control
franchise agreement – the legal, written contract between the franchisor and franchisee which tells each party what each is
supposed to do franchisee – the person or company that gets the right from the franchisor to do business under the
franchisor’s trademark or trade name
franchising – a method of business expansion characterized by a trademark license, payment of fees, and significant
assistance and/or control
franchisor – the person or company that grants the franchisee the right to do business under their trademark or trade name
royalty – the regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s
gross sales
trademark – the franchisor’s identifying marks, brand name and logo that are licensed to the franchisee
ADVANTAGES AND DISADVANTAGES OF
OWNING A FRANCHISE?
• Advantages:
• ✔ “Owning a franchise allows you to go into business for yourself, but not by yourself.”
• ✔ A franchise provides franchisees with a certain level of independence where they can
operate their business.
• ✔ A franchise provides an established product or service which already enjoys widespread
brandname recognition. This gives the franchisee the benefits of customer awareness
which would ordinarily take years to establish.
• ✔ A franchise increases your chances of business success because you are associating with
proven products and methods.
• ✔ Franchises may offer consumers the attraction of a certain level of quality and
consistency because it is mandated by the franchise agreement.
• ✔ Franchises offer important pre-opening support: • site selection • design and
construction • financing (in some cases) • training • grand-opening program
Disadvantages:
• Disadvantages:
• The franchisee is not completely independent. Franchisees are required to operate their
businesses according to the procedures and restrictions set forth by the franchisor in the
franchise agreement. These restrictions usually include the products or services which can be
offered, pricing and geographic territory. For some people, this is the most serious disadvantage
to becoming a franchisee.
• ✔ In addition to the initial franchise fee, franchisees must pay ongoing royalties and advertising
fees.
• ✔ Franchisees must be careful to balance restrictions and support provided by the franchisor
with their own ability to manage their business.
• ✔ A damaged, system-wide image can result if other franchisees are performing poorly or the
franchisor runs into an unforeseen problem.
• ✔ The term (duration) of a franchise agreement is usually limited and the franchisee may have
little or no say about the terms of a termination.