Franchise Management and Operations

Franchise Management and Operations
This book is a part of the course by Jaipur National University, Jaipur.

This book contains the course content for Franchise Management and Operations.
JNU, Jaipur
First Edition 2013
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JNU makes reasonable endeavours to ensure content is current and accurate. JNU reserves the right to alter the
content whenever the need arises, and to vary it at any time without prior notice.
Index
I. Content....................................................................... II
II. List of Figures...........................................................VI
III. List of Tables......................................................... VII
IV. Abbreviations........................................................ VII
V. Case Study.............................................................. 106
VI. Bibliography.......................................................... 112
VII. Self Assessment Answers................................... 115
Book at a Glance
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Contents
Chapter I........................................................................................................................................................ 1
Introduction to Franchising......................................................................................................................... 1
Aim................................................................................................................................................................. 1
Objectives....................................................................................................................................................... 1
Learning outcome........................................................................................................................................... 1
1.1 What is a Franchise?................................................................................................................................. 2
1.2 Types of Franchises................................................................................................................................... 2
1.2.1 Product Distribution Franchises................................................................................................ 2
1.2.2 Business Format Franchises...................................................................................................... 2
1.3 Types of Franchise Arrangements............................................................................................................. 3
1.3.1 Single-unit (direct-unit) Franchise............................................................................................ 3
1.3.2 Multi-unit Franchise................................................................................................................. 4
1.4 Common Terms in Franchise.................................................................................................................... 4
1.5 Alternative to Franchise............................................................................................................................ 5
1.5.1 Distributorship.......................................................................................................................... 5
1.5.2 Licensing................................................................................................................................... 5
1.6 Advantages and Disadvantages of Owning a Franchise........................................................................... 5
1.6.1 Advantages................................................................................................................................ 5
1.6.2 Disadvantages........................................................................................................................... 6
1.7 Legal Issues of Franchising...................................................................................................................... 6
1.7.1 The UFOC................................................................................................................................. 6
1.7.2 The Franchise Agreement......................................................................................................... 7
Summary........................................................................................................................................................ 8
References...................................................................................................................................................... 8
Recommended Reading................................................................................................................................ 8
Self Assessment.............................................................................................................................................. 9
Chapter II.....................................................................................................................................................11
Aspects of Franchising.................................................................................................................................11
Aim................................................................................................................................................................11
Objectives......................................................................................................................................................11
Learning outcome..........................................................................................................................................11
2.1 Options to Begin a Business................................................................................................................... 12
2.1.1 Start a New Business ............................................................................................................. 12
2.1.2 Buy a New Franchise.............................................................................................................. 12
2.1.3 Buying an Existing Franchise................................................................................................. 13
2.2 The Key Subjects in the Franchise Agreement....................................................................................... 14
2.3 Financial Statement................................................................................................................................. 15
2.3.1 Balance Sheet.......................................................................................................................... 15
2.3.2 Income Statement................................................................................................................... 16
2.4 Business Options..................................................................................................................................... 16
2.4.1 Type of Business..................................................................................................................... 16
2.4.2 Need of Market....................................................................................................................... 17
2.4.3 Affordability............................................................................................................................ 17
2.4.4 Profitability............................................................................................................................. 18
2.5 Criteria for Selecting a Franchise........................................................................................................... 18
2.5.1 Cost......................................................................................................................................... 18
2.5.2 Training and Support.............................................................................................................. 18
2.5.3 Abilities................................................................................................................................... 18
2.5.4 Franchisor’s Experience......................................................................................................... 19
2.5.5 Demand and Competition....................................................................................................... 19
2.5.6 Expansion Plans...................................................................................................................... 19
2.6 Investigating Franchise........................................................................................................................... 19
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2.7 Key Items in a Discloser Document....................................................................................................... 20
2.8 Help Centres............................................................................................................................................ 20
Summary...................................................................................................................................................... 21
References.................................................................................................................................................... 21
Recommended Reading.............................................................................................................................. 21
Self Assessment............................................................................................................................................ 22
Chapter III................................................................................................................................................... 24
Franchise Law............................................................................................................................................. 24
Aim............................................................................................................................................................... 24
Objectives..................................................................................................................................................... 24
Learning outcome......................................................................................................................................... 24
3.1 Legal Definition of Franchise................................................................................................................. 25
3.2 Franchise Law......................................................................................................................................... 25
3.3 Procedure................................................................................................................................................ 25
3.3.1 Choice of Law......................................................................................................................... 26
3.3.2 Forum Selection...................................................................................................................... 26
3.3.3 Arbitration............................................................................................................................... 26
3.4 The Franchise Relationship, Termination, and Non-Renewal................................................................ 27
3.5 Relevant Requirements of Franchise Law.............................................................................................. 27
3.6 Common Law Claims............................................................................................................................. 28
3.6.1 Contract Issue......................................................................................................................... 28
3.6.2 Fraud Mispresentation............................................................................................................ 28
3.6.3 Antitrust.................................................................................................................................. 28
3.7 Exemptions............................................................................................................................................. 29
3.8 Remedies................................................................................................................................................. 29
3.9 Franchise Sales Laws and Other Laws Affecting International Franchising.......................................... 30
3.10 Laws and Government Agencies Regulating the Offer and Sale of Franchises................................... 31
Summary...................................................................................................................................................... 32
References.................................................................................................................................................... 32
Self Assessment............................................................................................................................................ 33
Chapter IV................................................................................................................................................... 35
Franchisee and Operating Franchise........................................................................................................ 35
Aim............................................................................................................................................................... 35
Objectives..................................................................................................................................................... 35
4.1 Becoming a Franchisee........................................................................................................................... 36
4.1.1 Finding Good Sources of Information about Available Franchises........................................ 36
4.1.2 Working with a Franchise Broker........................................................................................... 37
4.1.3 Deciding Whether to Buy a New or Old Franchise................................................................ 38
4.1.4 Franchisor’s Services ............................................................................................................. 38
4.1.5 Market Research..................................................................................................................... 38
4.2 Franchisee Attributes.............................................................................................................................. 38
4.2.1 The Factor Analysis................................................................................................................ 39
4.3 Franchisee Profiling................................................................................................................................ 40
4.3.1 Profiling.................................................................................................................................. 41
4.4 Franchisor- Franchisee Relationship....................................................................................................... 42
4.4.1 Franchisor Support.................................................................................................................. 42
4.4.2 Relationship Factors............................................................................................................... 44
4.5 Legal Issues............................................................................................................................................. 45
4.5.1 Discloser Law......................................................................................................................... 46
4.5.2 Relationship Laws................................................................................................................... 46
4.6 Franchisee Motivation............................................................................................................................ 46
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4.7 Trends, Opportunities and Future Prospects........................................................................................... 48
Summary...................................................................................................................................................... 49
References.................................................................................................................................................... 49
Self Assessment............................................................................................................................................ 50
Chapter V..................................................................................................................................................... 52
Franchise Sales and Broker....................................................................................................................... 52
Aim............................................................................................................................................................... 52
Objectives..................................................................................................................................................... 52
5.1 Franchise Sales........................................................................................................................................ 53
5.2 Franchise Brokers................................................................................................................................... 53
5.2.1 Functions of a Franchise Broker............................................................................................. 54
5.3 Duties of a Franchise Broker.................................................................................................................. 55
5.4 Benefits of Franchise Broker.................................................................................................................. 55
5.4.1 The Initial Steps ..................................................................................................................... 56
5.4.2 Beginning the Franchise Search ............................................................................................ 56
5.4.3 Narrowing Options ................................................................................................................ 56
5.5 Questions Asked to the Brokers.............................................................................................................. 57
5.6 Origin of Franchise Sales and Regulation.............................................................................................. 57
5.7 Understanding the Procedure of Franchise Sales.................................................................................... 59
5.8 Study an Effective Franchise Sales Process............................................................................................ 60
5.8.1 Map the Sales Process............................................................................................................. 60
Summary...................................................................................................................................................... 62
References.................................................................................................................................................... 62
Self Assessment............................................................................................................................................ 64
Chapter VI................................................................................................................................................... 66
Multiunit Franchising................................................................................................................................. 66
Aim............................................................................................................................................................... 66
Objectives..................................................................................................................................................... 66
6.1 Multiunit Franchising ............................................................................................................................ 67
6.1.1 Single Unit Franchising versus Multiunit Franchising .......................................................... 67
6.2 Characteristics of Multiunit Franchising................................................................................................ 68
6.3 Benefits of Multiunit Franchising........................................................................................................... 68
6.4 Multiunit Franchising Phenomenon........................................................................................................ 69
6.5 Multi-facets of Multiunit Franchising..................................................................................................... 70
6.6 Advantages and Disadvantages of Multiunit Franchising...................................................................... 71
6.7 Importance of Training in Multiunit Franchising................................................................................... 72
6.8 Methodology of Multiunit Franchising................................................................................................... 73
6.8.1 Master Franchisee................................................................................................................... 73
6.8.2 Sub Franchising...................................................................................................................... 73
Summary...................................................................................................................................................... 74
References.................................................................................................................................................... 74
Self Assessment............................................................................................................................................ 76
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Chapter VII................................................................................................................................................. 78
International Franchising.......................................................................................................................... 78
Aim............................................................................................................................................................... 78
Objectives..................................................................................................................................................... 78
7.1 International Franchising ....................................................................................................................... 79
7.2 Types of International Franchising......................................................................................................... 79
7.3 International Expansion.......................................................................................................................... 80
7.4 Trademarks in International Franchising................................................................................................ 80
7.4.1 Protection of Trade Marks Internationally.............................................................................. 80
7.4.2 Availability of Trade Marks.................................................................................................... 81
7.4.3 Weak versus Strong Trade Marks........................................................................................... 81
7.4.4 International Classification of Goods and Services................................................................ 82
7.4.5 Registration Procedures.......................................................................................................... 82
7.4.6 Other Considerations.............................................................................................................. 82
7.5 Advantages of International Franchising................................................................................................ 83
7.6 International Franchise Market............................................................................................................... 83
7.7 Regulating International Franchising...................................................................................................... 84
7.8 International Franchising Opportunities................................................................................................. 84
7.8.1 Expanding Emerging Markets: India...................................................................................... 85
7.9 Precautions in International Franchising................................................................................................ 86
7.10 Social and International Franchising.................................................................................................... 86
7.10.1 International Social Franchising........................................................................................... 87
7.11 Economic Potential of International Franchising.................................................................................. 87
Summary...................................................................................................................................................... 88
References.................................................................................................................................................... 88
Self Assessment............................................................................................................................................ 90
Chapter VIII................................................................................................................................................ 92
Social Franchising....................................................................................................................................... 92
Aim............................................................................................................................................................... 92
Objectives..................................................................................................................................................... 92
8.1 Social Franchising................................................................................................................................... 93
8.2 Significance of Social Franchising......................................................................................................... 93
8.2.1 Community ............................................................................................................................ 93
8.2.2 Various Forms......................................................................................................................... 93
8.2.3 Knowledge Transfer . ............................................................................................................. 94
8.2.4 Handles the Competition Better . ........................................................................................... 94
8.3 Establishing a Social Franchising System.............................................................................................. 94
8.4 Social Franchising Formats..................................................................................................................... 94
8.5 Key Elements of Social Franchising....................................................................................................... 95
8.6 Difference between Social Franchising and Commerce Franchising..................................................... 96
8.6.1 Franchisee Selection .............................................................................................................. 97
8.6.2 Social Impact Measurement .................................................................................................. 97
8.6.3 Finance and Funding . ............................................................................................................ 97
8.7 Considerations for Social Franchising.................................................................................................... 98
8.7.1 Market Structure..................................................................................................................... 98
8.7.2 Comparative Advantage: Roles and Responsibilities............................................................. 98
8.8 Regulations and Social Licensing........................................................................................................... 98
8.8.1 Quality Monitoring................................................................................................................. 99
8.8.2 Implications of Commercial Franchising for Social Franchisors........................................... 99
8.9 Future of Social Franchising................................................................................................................. 100
8.9.1 Potential Difficulties of Social Franchising.......................................................................... 100
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8.9.2 Rights of Social Franchisors................................................................................................. 101
8.9.3 Duties of Social Franchisors................................................................................................. 101
Summary.................................................................................................................................................... 103
References.................................................................................................................................................. 103
Recommended Reading............................................................................................................................ 103
Self Assessment.......................................................................................................................................... 104
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List of Figures
Fig. 1.1 An introduction to franchising........................................................................................................... 2
Fig. 1.2 Examples of business format franchises............................................................................................ 3
Fig. 1.3 Types of franchise arrangement......................................................................................................... 3
Fig. 1.4 Alternatives to franchise.................................................................................................................... 5
Fig. 1.5 Types of franchising legal documents............................................................................................... 6
Fig. 1.6 Contents of franchising documents................................................................................................... 7
Fig. 2.1 Option for beginning a business...................................................................................................... 12
Fig. 2.2 Advantages and disadvantages of starting a new business.............................................................. 12
Fig. 2.3 Advantages and disadvantages a buying a new franchise............................................................... 13
Fig. 2.4 Advantages and disadvantages of buying an existing franchise...................................................... 13
Fig. 2.5 Financial statement.......................................................................................................................... 15
Fig. 2.6 Definition and contents of balance sheet......................................................................................... 15
Fig. 2.7 Steps for beginning a business......................................................................................................... 16
Fig. 2.8 Aspects of conducting a market research........................................................................................ 17
Fig. 2.9 Parameters of affordability.............................................................................................................. 17
Fig. 2.10 Detail criteria for selecting a franchise.......................................................................................... 18
Fig. 2.11 Methods to investigate a franchise................................................................................................ 19
Fig. 2.12 Key items in UFOC....................................................................................................................... 20
Fig. 3.1 Procedure of law franchise.............................................................................................................. 25
Fig. 3.2 Aspects of franchise relationship, termination, and non-renewal.................................................... 27
Fig. 3.3 Types of common law claims.......................................................................................................... 28
Fig. 3.4 Types of remedies............................................................................................................................ 29
Fig. 3.5 Different types of franchise sales law.............................................................................................. 30
Fig. 4.1 Steps involved in becoming a franchisee........................................................................................ 36
Fig. 4.2 Resources of information................................................................................................................. 36
Fig. 4.3 Franchisee options........................................................................................................................... 40
Fig. 4.4 Categories of franchisee.................................................................................................................. 41
Fig. 4.5 Franchisee life cycle........................................................................................................................ 42
Fig. 4.6 Franchise revenue vs. time.............................................................................................................. 43
Fig. 4.7 Factors contributing to franchisee- franchisor relationship............................................................. 44
Fig. 4.8 Types of franchise laws................................................................................................................... 46
Fig. 4.9 Motivation curve for a franchisee (Source: Indian Franchisee: an outlook)................................... 47
Fig. 5.1 Services offered by broker to a franchisee...................................................................................... 54
Fig. 5.2 Functions of a broker....................................................................................................................... 54
Fig. 5.3 Broker questions.............................................................................................................................. 57
Fig. 5.4 Procedure of franchise sales............................................................................................................ 59
Fig. 6.1 Forms of franchising ...................................................................................................................... 67
Fig. 6.2 Advantages and disadvantages of multiunit franchising................................................................. 71
Fig. 6.3 Four basic features are common to all commercial franchise structures......................................... 72
Fig. 7.1 Advantages of international franchising.......................................................................................... 83
Fig. 7.2 Assessment of international franchise............................................................................................. 83
Fig. 7.3 Regulating laws............................................................................................................................... 84
Fig. 7.4 Important steps in international franchising.................................................................................... 85
Fig. 7.5 Types of international franchise....................................................................................................... 86
Fig. 8.1 Advantages and disadvantages of social franchising....................................................................... 93
Fig. 8.2 Relationship between franchise, franchisor and customer.............................................................. 94
Fig. 8.3 Social franchising strategies ........................................................................................................... 96
Fig. 8.4 Core components of social franchising......................................................................................... 100
Fig. 8.5 Duties of social franchisor............................................................................................................. 101
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Abbreviations
FDD - Franchise Discloser Document
FEMA - Foreign Exchange Management Act
FTC - Federal Trade Commission
GDP - Gross Domestic Product
IFA - International Franchise Association
MRTP Act - Monopolies and Restrictive Trade Practices Act
MUF - Multi Unit Franchising
RBI - Reserve Bank of India
ROC - Registrar of Companies
SIA - Secretariat of Industrial Assistance
SUF - Single Unit Franchising
UFOC - Uniform Franchise Offering Circular
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Chapter I
Introduction to Franchising
Aim
The aim of this chapter is to:
• explain franchise
• elucidate common franchising terms
• enlist the advantages and disadvantages of owning a franchise
Objectives
The objectives of this chapter are to:
• discuss alternative to franchising
• elucidate the legal issues in franchising
• explicate different examples in franchising
Learning outcome
At the end of this chapter, you will be able to:
• understand the meaning of franchise
• enlist the types of franchise
• identify the legal issues in franchising
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1.1 What is a Franchise?

A franchise is the license or agreement 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 support and rights to franchisees.
FRANCHISE AGREEMENT
F R A N C H IS O R F R A N C H IS E E
Owns trademark or trade name Uses trademark or trade name

P r o v id e s s u p p o r t: E x p a n d s b u s in e s s
with franchisor’s support
• advertising & marketing
• training
R e c e iv e s f e e s P a ys fe e s
Fig. 1.1 An introduction to franchising

(Source: http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/Intro%20
to%20Franchising%20Student%20Guide.pdf)
1.2 Types of Franchises

There are two main types of Franchises, product distribution and business format.
1.2.1 Product Distribution Franchises

Product distribution franchises simply sell the franchisor’s products and are supplier-dealer relationships. In it,
the franchisor licenses its trademark and logo to the franchisees but typically does not provide them with an entire
system for running their business. The industries where you most often find this type of franchising are soft drink
distributors, automobile dealers and gas stations. Examples of product distribution franchisee are: Coke, Exxon,
Toyota motor company. Although product distribution franchising represents the largest percentage of total retail
sales, most franchises available today are business format opportunities.
1.2.2 Business Format Franchises

Business format franchises is, not only use a franchisor’s product, service and trademark, but also the complete
method to conduct the business itself, such as the marketing plan and operations manuals. Business format franchises
are the most common type of franchise.
Ten most popular franchising opportunities are in these industries:

• Fast food
• Retail
• Service
• Automotive
• Restaurants
• Maintenance
• Building and construction
• Retail-food
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• Business services
• Lodging
Some popular business format franchises include:
Restaurants Health & Beauty Maintenance/Cleaning Real Estate

KFC Merle Norman Costmetic Jani-King International Century 21
McDonald’s Studios The ServiceMaster RE/MAX International
Pizza Hut Supercuts Company Coldwell Banker
Taco Bell Jenny Craig International Merry Maids
Cost Cutters Family Hair
Retail Care Automotive Service Convenience
Blockbuster Video Meineke Discount 7-Eleven
Radio Shack Business Services FamilyMart
The Athlete’s Foot Mail Boxes Etc. AAMCO Transmissions
GNC Franchising H & R Block Midas International
ACE America Cash Precision Auto Care
Lodging Express
Choice Hotels Kwik Kopy Education/Training
Bass Hotels/Holiday Inn Dale Carnegie Training
Marriott Hotels Barbizon School of
Modeling
Berlitz International
Sylvan Learning Systems
Fig. 1.2 Examples of business format franchises

(Source: http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/Intro%20
to%20Franchising%20Student%20Guide.pdf)
1.3 Types of Franchise Arrangements
Types of
franchise
arrangement
Multi unit Single unit

franchise franchise
(Direct unit)
Area Master franchise

development (Sub franchise)
Fig. 1.3 Types of franchise arrangement
1.3.1 Single-unit (direct-unit) Franchise

It 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.
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1.3.2 Multi-unit Franchise

It is an agreement where the franchisor grants a franchisee the rights to open and operate more than one unit.
Area development
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.
Master franchise
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.
1.4 Common Terms in Franchise

Franchise: A license that describes the relationship between the franchisor and franchisee including use of trademarks,
fees, support and control.
Franchisor: The person or company that grants the franchisee the right to do business under their trademark or
trade name.
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 characterised by a trademark license, payment of fees, and significant
assistance and/or control.
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 agreement: The legal, written contract between the franchisor and franchisee which tells each party
what each is supposed to do.
Product distribution franchise: A franchise where the franchisee simply sells the franchisor’s products without
using the franchisor’s method of conducting business.
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.
UFOC: The Uniform Franchise Offering Circular, UFOC, is one format for the disclosure document which provides
information about the franchisor and franchise system to the prospective franchisee.
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1.5 Alternative to Franchise
In addition to franchising, there are two other popular methods by which businesses expand their market and
distribution channels:
Alternative to
franchise
Distributorship Licensing
Fig. 1.4 Alternatives to franchise
1.5.1 Distributorship
Some distribution arrangements are similar to franchises, and vice versa. A franchisee with a great deal of leeway
in how to run the business may look like an independent distributor. A distributor may be subject to many controls
by the supplier/producer and begin to resemble a franchise.
• 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
examples of distributorship: Amway, Beautiful Cosmetics, Mountain Life Spring Water, Knorr Soup, Campbell’s
Soup, Vending Machines.
1.5.2 Licensing
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., Wool mark, and Compaq Computer.
1.6 Advantages and Disadvantages of Owning a Franchise

The importance of owning a franchise should be carefully evaluated before deciding to purchase one. Following
are the advantages and disadvantages of owing a franchise.
1.6.1 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 brand name 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.
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• Franchises offer important pre-opening support:

Site selection
Design and construction
financing (in some cases)
Training
Grand-opening program
• Franchises offer ongoing support
Training
National and regional advertising
operating procedures and operational assistance
Ongoing supervision and management support
Increased spending power and access to bulk purchasing (in some cases).
1.6.2 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 franchise may have little or no say about
the terms of a termination.
1.7 Legal Issues of Franchising

A good relationship between the franchisee and franchisor is critical for the success of both parties. Since franchising
establishes a business relationship for years, the foundation must be carefully built by having a clear understanding of
the franchise program. Unfortunately, understanding the legal language of franchising can be daunting. The advice of
an experienced franchise attorney should be sought to help a prospective franchisee understand the legal issues and to
protect them from making costly mistakes. Franchising is governed by federal and state laws that require franchisors
to provide prospective franchisees with information that describes the franchisor-franchisee relationship.
Franchising legal document
• The Disclosure Document, which may be

in the format known as the UFOC.
• Franchise agreement
Fig. 1.5 Types of franchising legal documents
1.7.1 The UFOC

The purpose of the UFOC is to give prospective franchisees with information about the franchisor, the franchise
system and the agreements they will need to sign so that they can make an informed decision. In addition to the
disclosure part of the document, the UFOC includes the actual franchise agreement as well as other agreements the
franchisee will be required to sign, along with the franchisor’s financial statements.
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The UFOC is designed to give you some of the information you need in order to make an informed decision about
investing in a particular franchise. By law, a franchisor cannot offer a franchise until the franchisor has presented
the prospective franchisee with a Disclosure Document. In fact, 14 states require franchisors to register their UFOCs
with the state or to notify them that they will offer franchises before they begin to conduct any franchising activity in
the state. Receipt of the UFOC is governed by the “ten-day rule.” This is a cooling-off period in which franchisors
must give prospective franchisees 10 business days to think about their decision before they are allowed to sign the
franchise agreement.
1.7.2 The Franchise Agreement

The franchise agreement is more specific than the UFOC about the terms of the relationship between the franchisor
and franchisee. The franchise agreement is the legal, written document that governs the relationship and specifies
the terms of the franchise purchase. Like the UFOC, the franchise agreement also enjoys a “cooling off” period.
Prospective franchisees are legally entitled to have the final franchise agreement for at least 5 business days before
they are allowed to sign. This gives them time to consider and review the terms of the agreement.
• The franchisor
• The company’s key staff
• Management’s experience in franchise management
• Franchisor’s bankruptcy and litigation history
UFOC
document • Initial and ongoing fees involved in opening and running the franchise
• Required investment and purchases
• Territory rights
• Responsibilities of the franchisor and franchisee
• Other franchisees in the system with contact information.
• The franchise system, such as use of trademarks and products

• Territory
• Rights and obligations of the parties: standards, procedures, training,
Franchise
assistance, advertising, etc.
agreement
• Term (duration) of the franchise
• Payments made by the franchisee to the franchisor
• Termination and/or the right to transfer the franchise
Fig. 1.6 Contents of franchising documents
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Summary
• A franchise is the license or agreement between two legally independent parties. 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
support and rights to franchisees.
• There are two main types of Franchises, product distribution and business format.
• Business format franchises is, not only use a franchisor’s product, service and trademark, but also the complete
method to conduct the business itself, such as the marketing plan and operations manuals.
• Franchise is arranged in two ways, viz., Single-unit (direct-unit) franchise is an agreement where the franchisor
grants a franchisee the rights to open and operate one franchise unit.
• A multi-unit franchise is an agreement where the franchisor grants a franchisee the rights to open and operate
more than one unit. In addition to franchising, there are two other popular methods by which businesses expand
their market and distribution channels: Distributorships, Licensing.
• 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 brand name recognition.
This gives the franchisee the benefits of customer awareness, which would ordinarily take years to establish.
• 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.
• The two main franchising legal documents are the: Disclosure Document, which may be in the format known
as the UFOC and franchise agreement.
References
• Beshe, B., An Introduction Franchising, [pdf] Available at: <http://www.franchise.org/uploadedFiles/Franchise_
Industry/Resources/Education_Foundation/Intro%20to%20Franchising%20Student%20Guide.pdf> [Accessed
24 April 2012].
• Mendelsohn, M., A guide to Franchising, [pdf] Available at: <http://books.google.co.in/books?id=v_RandLSS
DAC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false> [Accessed 25 April
2012].
• Archar, D., 2011. Free Franchise Seminars sponsored by Lloyds TSB, [Video Online] Available at: <http://www.
youtube.com/watch?v=7fplEaFutZs> [Accessed 24 April 2012].
• Dr Michael, S. C., 2011.The Ins and Outs of Franchising, [Video Online] Available at <http://www.youtube.
com/watch?v=EPI6ef29CDE> [Accessed 24 April 2012].
• Asbil, R. and Goldman, S., 2001. Fundamentals of International Franchising, American Bar Association.
• Barkoff, R. M. & Selden, A. C., 2008. Fundamentals of Franchising, 3rd ed., American Bar Association.
Recommended Reading
• Judd, R. J. and Justis, R.T., 2007. Franchising, 4th ed., Custom Publishing.
• Charles. M., Business Franchise Secrets, Kindle publication.
• Kestenbaum. H., 2008, Franchise Your Business, 1st ed., Entrepreneur Press.
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Self Assessment
1. _________ is an agreement where the franchisor grants a franchisee the rights to open and operate one franchise
unit.
a. Class
b. Data
c. Name
d. Single unit agreement
2. What is also known as UFOC?

a. Royalty
b. Discloser statement
c. Franchise
d. Object
3. _______________ is one of the alternatives to franchise.

a. Distributorship
b. Multi unit franchise
c. Polymorphism
d. Message passing
4. Which of the following statements is false?

a. A franchise is the license or agreement between two legally independent parties.
b. A franchise provides franchisees with a certain level of independence where they can operate their
business.
c. Multi-unit franchises are not an agreement where the franchisor grants a franchisee the rights to open and
operate more than one unit.
d. Each sub-class defines only those features that are unique to it.
5. Which of the following statement is true?

a. The franchise agreement is more specific than the UFOC about the terms of the relationship between the
franchisor and franchisee.
b. A good relationship between the franchisee and franchisor is not critical for the success of both parties.
c. Polymorphism, a Greek term, means the ability to take more than one form.
d. A franchise decreases your chances of business success because you are associating with proven products
and methods.
6. A_________ may be subject to many controls by the supplier/producer and begin to resemble a franchise.
a. distributor
b. franchise
c. trainee
d. owner
7. _________ is the franchisor’s identifying marks, brand name and logo that are licensed to the franchisee.
a. Trademark
b. Object
c. Encapsulation
d. Inheritance
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8. A_________ is the license or agreement between two legally independent parties.

a. Franchise
b. Document
c. UFOC
d. Linearity
9. Prospective franchisees are legally entitled to have the final franchise agreement for at least _____business days
before they are allowed to sign.
a. 7
b. 8
c. 5
d. 30
10. The franchisee is not completely_________.

a. independent
b. dependant
c. objective
d. legal
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Chapter II
Aspects of Franchising
Aim
• elucidate to begin different option to begin business
• explain key subjects in franchise agreement
• elucidate financial statement
Objectives
• investigate business options
• describe criteria for selecting franchise
• elucidate franchise
Learning outcome
• understand franchise agreement
• enlist key items in the discloser document(UFOC)
• enlist help options
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2.1 Options to Begin a Business

Once you decide to start your own business, you need to decide whether you want to be an independent business
owner or a franchisee.
Options for
beginning
a business:
start a new buy a new buy an

business franchise existing franchise
Fig. 2.1 Option for beginning a business
2.1.1 Start a New Business

Franchising is a method of product or service distribution that is governed by a contract. It is important for anyone
deciding to start a business by becoming a franchisee to remember that in franchising a person is tied into a
partnership arrangement for a defined period of time. Following are the advantages and disadvantages of starting
a new business.
Advantages Disadvantages
• Usually lower start-up cost • Requires more time and

• Independence and creative energy
freedom • High risk of failure
• Freedom with location and • Takes longer to become
procedures profitable
• No inherited problems from an • Financing may be more
existing business difficult to obtain
Fig. 2.2 Advantages and disadvantages of starting a new business
2.1.2 Buy a New Franchise

Buying a franchise is an option that many people looking to manage their own small business should consider, as
there are a number of advantages to joining this industry. The main benefit of becoming a franchisee is that your
business will already have in place the knowledge and experience of the franchiser that has enabled it to expand,
which provides each franchise with a solid business platform. Following are the advantages and disadvantages of
buying a new franchise.
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• Reduced risk of failure • Costs more (fees, royalties,

• Proven methods and products supplies)
• Start-up assistance • Smaller profit margins
• On-going training and support • Lack of independence and
freedom
• Local, regional and national
advertising • Difficult to achieve redress
if franchisor fails to meet
• Collective purchasing power
obligations
• Research and development
• A franchisor’s problem may
• Association and synergy with become
other franchisees
• Easier To obtain Financing
Fig. 2.3 Advantages and disadvantages a buying a new franchise
2.1.3 Buying an Existing Franchise

The brand name will be known across the region or country and potential franchisees can also check the success of
the franchiser and its reputation before making a firm commitment. Systems such as product pricing, recruitment
and marketing will be tried and tested, and any early mistakes will likely have already been ironed out. Therefore,
this reduces the risk of failure compared to someone starting their own small business on their own. Following are
the advantages and disadvantages of buying an existing franchise.
• The business is already up and • Tangible limitations:

running • Design problems
• Risk and uncertainty may be • Location problems
reduced
• Merchandise problems
• The basic infrastructure is in
• Intangible limitations:
place:
• Customer or employee ill will
• Established location
• Pricing problems
• Existing customers and
reputation • Inadequate procedures
• Employees • Lease problems
• Vendors • Potentially higher costs to buy
• Policies and procedures • Legal Liability in inheriting
lawsuits
• Cash flow
• Easier to obtain financing
Fig. 2.4 Advantages and disadvantages of buying an existing franchise
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2.2 The Key Subjects in the Franchise Agreement

The franchise agreement is more specific than the UFOC about the terms of the relationship between the franchisee
and franchisor.
• Use of trademarks: One of the main benefits you receive when purchasing a franchise is the use of well-known
trademarks. This section lists the trademarks, service marks or logos the franchisee is entitled to use.
Has the trademark been in operation for a significant amount of time and is it well known?
Are there any restrictions on its use by the franchisor or franchisee?
• Location of the franchise: This section describes the exclusive area or territory granted to the franchisee.
Do you have exclusive rights in a certain territory?
• Term of the franchise: In this section, the duration of the agreement is specified.
How long does the agreement last?
Can the franchisor purchase the franchise before the agreement expires?
Do you have the right to renew the agreement?
• Franchisee’s fees and other payments: In this section, all the mandatory fees are described:
Initial fee and what the franchisee receives for that fee
Royalty payment, what it is based on and when it is due.
• Obligations and duties of the franchisor: This section describes, in detail, all the services which the franchisor
will provide:
Training
Operations support
Advertising
• Obligations and duties of the franchisee: This section describes the franchisee’s responsibilities:
Requirements for training
Requirements for participation in the business
Requirements for keeping and submitting adequate records
• Restriction on goods and services offered: This section describes any restrictions placed on the goods or services
offered, including:
Required quality standards
Approved suppliers
Approved advertising
Hours of operation and pricing
Renewal, termination and transfer of franchise agreement.
The rights and obligations of a franchisee upon termination
Descriptions about the transfer or renewal of the franchise agreement.
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2.3 Financial Statement
Financial statements are the track record of the franchise. They are provided the UFOC and contain important
information about the franchisor’s financial status and strength.
The two most important

financial statements
Balance sheet Income statement
Fig. 2.5 Financial statement
2.3.1 Balance Sheet

A balance sheet is a snapshot summary of a company’s worth on any given day. It reports the financial condition
(solvency) of the franchisor. It includes the following
Assets – what a
Liabilities – what a
company owns: Stockholders’
company owes: current
current, fixed and equity
and long-term debt
intangible assets
Fig. 2.6 Definition and contents of balance sheet
Definition of Stockholder’s Equity

Stockholder’s equity is company’s net worth; it is the money the company has taken in from the sale of stock plus
any accumulated profits:
Stockholders’ Equity = Assets – Liabilities = Net Worth
Things on a franchisor’s balance sheet

• Increasing assets
• Increasing stockholders’ equity
• More cash than debt
• Amount of current debt < (less than) 1/2 of the total assets
• Amount of current debt < 1/3 of the stockholders’ equity
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2.3.2 Income Statement

An income statement reports a company’s profit or loss. It shows a company’s income, expense and net income also
known as the “bottom line” or earnings.
Income statement categories include:

• Revenues
• Income before taxes
• Provision for income taxes
• Net income (earnings)
• Net income (earnings) per share
Things on a Franchisor’s Income Statement

• Increasing profit
• More revenue derived from royalties and system income than from selling franchises
• Increasing revenue trends, usually > 15%
• Increasing net income trends, usually > 15%
• Increasing net income per share trend, usually > 15%
• A profitable franchisor.
Knowledge about Financial Statements

• The financial statements should be audited financial statements.
• The statements should contain two to three years of financial date.
2.4 Business Options

Regardless of whether you choose to become an independent business owner or become a franchisee, research is
the single most important activity in making your decision. Without adequate information, it may end up making
the most costly decision.
Can you
make enough
What is Is there Can you
money to
business? a market? afford it?
make it
worthwhile?
Fig. 2.7 Steps for beginning a business
2.4.1 Type of Business

Sometimes people start a business because they think they’ll make a lot of money, only to find out that they do not
enjoy the business. The adage, “know thyself” certainly applies here.
Parameters of which business to select includes, interest and hobbies, experience, special skills and talents,
Industries involved in your interests and use your skills and talents, products or services could be sold in this
industry(s).
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2.4.2 Need of Market
All successful businesses must:
• Satisfy a need
• Solve a problem
• Respond to a trend
Advantages
• How many potential customers are in the area?

• Will the product or service sell?
• What need does it satisfy?
• What problem does it solve?
• What trend or fad does it address?
• What should the appropriate pricing be?
• Who are the competitors?
• How many competitors?
• What do they offer?
• How will the product or service be unique?
• What marketing niche can it capture?
Fig. 2.8 Aspects of conducting a market research
2.4.3 Affordability
Estimate how much working Brainstorm where you might

Costs to consider
capital you will need be able come up with money
• Estimate your start-up • salaries • self
costs: • insurance • family
• location design and • utilities • friends
construction
• advertising • savings and investments and
• professional fees partner
• rent
• equipment and fixtures
• interest on a loan
• furniture
• opening inventory and
supplies
• insurance
• pre-opening labour
• opening advertising and
promotion
Fig. 2.9 Parameters of affordability
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2.4.4 Profitability
Estimate the profit potential for the business:
• income
• expenses
• profit (income – expenses)
Think about the amount of time and energy it will take to make the business successful.
2.5 Criteria for Selecting a Franchise

Before buying any business, carefully consider many factors that are critical to success:
Demand and
competition
Expansion
Costs
plans
Criteria for
Selecting a
Franchise
Training and Franchisor’s

support experience
Abilities
Fig. 2.10 Detail criteria for selecting a franchise
2.5.1 Cost
• How much money will this franchise cost before it becomes profitable?
• Can the owner afford to buy this franchise?
• Can the owner make enough money to make the investment worth time and energy?
2.5.2 Training and Support

• What kind and how much training and support does the franchisor provide?
• Do existing franchisees find this level of training and support adequate?
2.5.3 Abilities
• Does the owner have the technical skills or experience to manage the franchise?
• Does the owner have the business skills to manage the franchise?
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2.5.4 Franchisor’s Experience
• Has the franchisor been in business long enough to have established the type of business strength you are
seeking?
2.5.5 Demand and Competition

• Is there enough demand in an area for the franchisor’s products or services?
• Is the demand year-long or seasonal?
• Will the demand grow in the future?
• Does the product or service generate repeat business?
2.5.6 Expansion Plans

• Is the franchisor planning to grow at a rate that is sustainable ?
2.6 Investigating Franchise

Like starting any business, buying a franchise involves a risk. Studies show that successful franchisees:
• Conduct their own marketing research
• Use their own financial and legal advisors
• Develop thorough marketing and business plans
• Have prior work experience
Prospective franchisees must devote a vast amount of time researching the franchises available and evaluating the
strength of the franchisors.
Find out what franchises are

Evaluate the strength of the franchisor:
available:
• Read directories • Investigate the franchisor’s history
• Read articles and ads in business • Carefully study and obtain professional advice
publications concerning the franchisor’s UFOC and franchise
• Attend trade shows and agreement, paying special attention
expositions • Visit and talk with existing franchisees
• Conduct research on the • Visit the franchisor’s headquarters
internet • Go to work in an existing franchise for a couple
of weeks and really get to know them
• Seek the advice of an attorney and accountant
who specialise in franchises.
Fig. 2.11 Methods to investigate a franchise
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2.7 Key Items in a Discloser Document
Renewal, termination, transfers

Initial investment Franchisor’s obligations
and dispute resolution
• Some of these costs are • Be sure you understand the • Take your time to understand
averages or estimates and services you will get before you what rights you will have and
may vary in your area. open: site selection training what rights you are giving
• Talk to other franchisees who development assistance up.
have been in the system for a • Be sure you know what • Pay particular attention to any
year or more to see: services you will receive for non-compete provisions and
• how much money they needed your grand opening: marketing your obligations when the
in the beginning until they advertising field support franchise relationship ends.
became profitable • Be sure you know what
• how much they were able to services you will receive after
draw from the business to you begin operating your
support themselves business: training advertising
operations
Earnings Claims List of franchise outlets. Financial statements.
• Only 20 to 25 percent of • Examine how many units • Financial statements are the
all franchisors provide the franchisor has taken back track record of the franchisor.
prospective franchisees with and resold. If this number You should be given copies
information about earnings is high, this could indicate of the franchisor’s last two
claims. churning (when the franchisor or three years financial
• The next best thing to do is takes back failed locations statements. Take them to an
to talk to existing franchisees and remarkets them over and accountant who specialises in
about earnings potential. over.) franchising to evaluate.
• Pay attention to the contact • The two key financial
information of the franchisees statements to focus on are the
who have left the system. balance sheet and the income
These are people you definitely statement. Make sure they are
want to talk to. audited.
Fig. 2.12 Key items in UFOC
2.8 Help Centres

• International Franchise Association (IFA), www.franchise.org
• American Bar Association’s Forum on Franchising, www.abanet.org
• IFA’s Supplier Forum publishes a list of firms that specialise in franchising law,www.franchise.org
20/JNU OLE
Summary
• There are three options to begin a business, start a new business, buy an existing franchise, and buy a new
franchise.
• The franchise agreement is more specific than the UFOC about the terms of the relationship between the
franchisee and franchisor.
• Financial statements are the track record of the franchise. They are provided the UFOC and contain important
information about the franchisor’s financial status and strength.
• Stockholder’s equity is company’s net worth; it is the money the company has taken in from the sale of stock
plus any accumulated profits.
• An income statement reports a company’s profit or loss.
• Research is the single most important activity in making decision about options in business.
• Before buying any business, carefully consider many factors that are critical to success: costs, training and
support, abilities, franchisor’s experience, demand and competition, expansion plans.
• Prospective franchisees must devote a vast amount of time researching the franchises available and evaluating
the strength of the franchisors.
• The purpose of the UFOC is to provide prospective franchisees with information about the franchisor, the
franchise system and the agreements they will need to sign so that they can make an informed decision.
References
25 April 2012].
• Mendelsohn, M., A guide to Franchising, [pdf] Available at: <http://books.google.co.in/books?id=v_RandLSS
DAC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false> [Accessed 25 April
2012].
• Andrew, O., 2011. What is the best way to buy a franchise? [Video Online] Available at<http://www.youtube.
com/watch?v=SRrvUXLoHGM&feature=related> [Accessed 9 May 2012].
• 2009. Franchising-Entrepreneurial Opt Q&A, [Video Online] Available at <http://www.youtube.com/
watch?v=SCW9nf74Ku0> [Accessed 9 May 2012].
Recommended Reading
• Keup, E., 2007. Franchise Bible, 6th ed., Kindle publication.
• Mathew, J., Debolt, D. & Prevical, D., 2011. Street Smart Franchising, 2nd ed., Entrepreneur press.
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Self Assessment
1. One of the main benefits you receive when purchasing a franchise is the use of well-known ___________.
a. copyright
b. patent
c. trademark
d. single unit agreement
2. ________ is the track record of the franchise

a. Financial statement
c. Profit sheet
d. Business

a. Distributorship is a major aspect of franchise.
b. All successful businesses must satisfy a need.
c. There are no options to begin a business.
d. Stockholder’s equity is not company’s net worth.

a. The next best thing to do is to talk to existing franchisees about earnings potential.
b. Make sure that all the agreements listed are attached to the UFOC, read every one of them.
c. Like starting any business, buying a franchise involves a risk.
d. Polymorphism, a Greek term, means the ability to take more than one form.
5. Which of the following statements is true?

a. Research is the single most important activity in making decision.
b. An income statement does not report a company’s profit or loss.
c. Franchising is an easy way of income.
d. There are very few aspects to start a franchise.
6. ________ is one of the criteria’s for selecting a franchise.

a. Costs
b. Problem
c. Need
d. Market
7. _________________ is the franchisor’s identifying marks, brand name and logo that are licensed to the
franchisee.
a. Trademark
b. Object
c. Encapsulation
d. Inheritance
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8. ________ is a key item in an UFOC
a. Franchise
b. Earning claims
c. Income statement
d. Balance sheet
9. _________publishes a list of firms that specialise in franchising law.

a. IFA’s Supplier Forum
b. Franchisor
c. Newspaper
d. Balance sheet
10. Income statement categories include ________.

a. Revenues
b. Market
c. Asset
d. Equity
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Chapter III
Franchise Law
Aim
• explain legal definition of franchise
• explicate franchise law
• elucidate procedure of franchising law
Objectives
• elucidate relevant requirements
• describe law claims and exemptions
• explain remedies
Learning outcome
• understand the terms and commonly negotiated provisions
• enlist the laws and government agencies
• identify franchise sales law and other laws
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3.1 Legal Definition of Franchise
India does not have franchise specific legislation. However, the term ‘franchise’ is defined as an agreement by which
the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any
process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol,
as the case maybe, is involved. This definition is wide enough to cover all possible franchise relationships for the
purposes of tax implications.
3.2 Franchise Law

A franchisor may set up any of the following entities:
• Sole proprietorship: Though it is the simplest form of ownership, sole proprietor risks his or her personal assets
for any liability in connection with the operation of the franchised business.
• Partnership: In a partnership, the partners are jointly and individually liable for the liabilities of the partnership
and for the actions of the other partners acting within the scope of the partnership; or
• Company: The shareholder generally will not be liable for the liabilities of the corporation except to the extent
of the shareholder’s capital contribution. Any individual can set up a sole proprietorship.
There are no specific laws governing the formation of such an entity. Partnerships are governed by the Partnership
Act 1932 and registered with the Registrar of Firms. Companies are incorporated under the Companies Act 1956 as
private limited companies or public limited companies and registered with the Registrar of Companies (ROC).
The Supreme Court is the apex court in India followed by the high courts. Subordinate to the high courts are the district
courts and the session courts. In the event of any dispute between a franchisor and franchisee, the option available
to the parties is to initiate litigation or any other method of dispute resolution such as arbitration or conciliation. In
case of a cross-border franchise it is advisable to have an international forum as the arbitrator. Domestic arbitration
would be covered by the Arbitration and Conciliation Act 1996.
The franchise agreement will be governed by the Indian Contract Act 1872. This statute covers all aspects of the
contract: offer, acceptance, validity, breach and termination. The principles set out in this statute govern the rights
and obligations of the parties. In case of breach, the rights can be enforced by appropriate legal proceedings and
invoking the Specific Relief Act, 1963 for remedies such as injunction and damages. The intellectual property
protection and issues will be governed by the Trade Marks Act 1999, the Patents Act 1970, the Designs Act 2000
the Copyright Act 1957.
The MRTP Act and the Competition Act 2002 regulate competition in business. An action can be taken by a consumer
under the Consumer Protection Act 1986 for deficiency in goods or services. The franchise agreement would
normally provide for this liability to be borne by the franchisee. The Income Tax Act 1961 governs all tax aspects
of any franchise business in India. FEMA prescribes the guidelines on foreign investments and foreign remittances.
Currently, remittance towards franchise fees is freely allowed. However, there are limits on free payments (without
approval) towards royalty and technical fees for technology transfers.
3.3 Procedure
Following is the procedure of law franchise
CHOICE OF FORUM
ARBITRATION
LAW SELECTION
Fig. 3.1 Procedure of law franchise
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3.3.1 Choice of Law

An explanatory example of choice of law is explained hereafter,which is the first step of defining franchise law.In
Momentum Marketing Sales & Services, Inc. v. Curves International, a Texas federal court ruled that Texas law
trumped out-of-state statutory claims asserted by franchisees, even in states whose franchise statutes contained anti-
waiver provisions. The initial actions were brought by franchisees asserting claims against Curves and its president
in Texas, New Jersey, New York, and Florida federal courts. The franchisees contended that Curves fraudulently
induced them to enter franchise agreements to open a Curves franchise in their respective communities, but then
over-saturated the market in breach of the franchise agreements.
The district court evaluated the four factors of the Restatement in addressing a choice of law analysis:
• The place where the injury occurred
• The place where the conduct causing the injury occurred
• The domicile, residence, nationality, place of incorporation and place of business of the parties
• The place where the relationship, if any, between the parties is centered.
Because the plaintiffs’ claims also involved allegations of fraud and misrepresentation, the court conducted an
additional analysis under the Restatement. The court considered
• where the Plaintiffs acted in reliance
• where the Plaintiffs received the representations
• where the Defendants made the representations, the domicile, residence, and nationality of the parties
• where the tangible thing was situated
• where the Plaintiffs are to render performance.
3.3.2 Forum Selection

The court gave great weight to the forum selection clause when evaluating the local interests in adjudicating local
disputes.
The law governed the question of whether an action should be transferred based on a forum selection clause. The
court held that while “the forum selection clause ‘will be a significant factor that figures centrally in the district
court’s calculus, the clause should receive neither dispositive consideration nor no consideration. Example stating
the importance of forum selection is Hull v. Pizza Inn, Inc., a franchisee and its guarantors filed a lawsuit against
Pizza Inn in the Eastern District of Texas.
3.3.3 Arbitration
The arbitration provision, in addition to other sections of the franchise agreement, was subject to a “survival” clause,
which provided that the provision would survive termination “regardless of which party initiated termination or
whether termination was wrong.
To establish innovation, Hygiene was required to prove

• the validity of a previous obligation
• an agreement among all parties to accept a new contract
• the extinguishment of the previous obligation, and
• the validity of the new agreement.
A court should not deny arbitration unless it can be said with positive assurance that an arbitration clause is not
susceptible of an interpretation which would cover the dispute at issue.
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3.4 The Franchise Relationship, Termination, and Non-Renewal
Following are aspects of franchise relationship, termination, and non-renewal
The franchise relationship,

termination, and non-renewal
• Statutory update
• Dealership termination
• Distribution rights
Fig. 3.2 Aspects of franchise relationship, termination, and non-renewal
The terms under which the franchisee can terminate the franchise agreement will also be as stipulated in the franchise
agreement. Under common law parties are under a legal obligation to deal with each other in good faith. The
remedies available to an aggrieved party in case of breach of contract by the other party would be to initiate civil
proceeding for compensation and damages and criminal proceedings under the Indian Penal Code for cheating, fraud,
misrepresentation of facts and criminal breach of trust. A franchisor may refuse to renew the franchise agreement
subject to the terms of the franchise agreement. If there is no provision for renewal or the conditions for renewal
are not complied with, the franchise agreement can be terminated.
3.5 Relevant Requirements of Franchise Law

The franchise agreement will be governed by the Indian Contract Act,1872. This statute covers all aspects of the
contract: offer, acceptance, validity, breach and termination. The principles set out in this statute govern the rights
and obligations of the parties. In case of breach, the rights can be enforced by appropriate legal proceedings and
invoking the Specific Relief Act, 1963 for remedies such as injunction and damages.
The intellectual property protection and issues will be governed by the Trade Marks Act 1999, the Patents Act 1970,
the Designs Act 2000 the Copyright Act 1957.
The MRTP Act and the Competition Act 2002 regulate competition in business.
An action can be taken by a consumer under the Consumer Protection Act 1986 for deficiency in goods or services.
The franchise agreement would normally provide for this liability to be borne by the franchisee.
The Income Tax Act 1961 governs all tax aspects of any franchise business in India.
FEMA prescribes the guidelines on foreign investments and foreign remittances. Currently, remittance towards
franchise fees is freely allowed. However, there are limits on free payments (without approval) towards royalty and
technical fees for technology transfers.
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3.6 Common Law Claims

Following are the types of common law claims:
Common Law claims
• Contract Issue
• Fraud mispresentation
• Antitrust
Fig. 3.3 Types of common law claims
3.6.1 Contract Issue

Contract issues arise when one or neither party claims ambiguity of the contracts, so the court interprets the contracts
as a question of law. An example of contract issue law claim is Blockbuster, Inc. v. C-Span Entertainment; Inc.115
This dispute arose from the franchisee’s purchase of eleven Blockbuster stores. Sunil Dharod attended a two-day
informational seminar with Blockbuster and, at the end of the seminar, expressed an interest in purchasing eleven
Blockbuster stores in Tyler, Texas. With the representation of legal counsel during the transaction, Dharod purchased
the stores for $5.9 million.
The parties executed the asset sale agreement and franchise agreements in connection with the closing. Dharod
signed the asset sale agreement in his individual capacity and on behalf of C-Span, a Subchapter S corporation in
which Dharod was the sole shareholder, as its president. Dharod signed the franchise agreements in his individual
capacity.
When the Blockbuster stores did not perform as anticipated, Dharod and C-Span sued Blockbuster and their attorneys,
Akin Gump Strauss Hauer & Feld LLP. In addition to claims for breach of contract, Dharod and C-Span claimed
that Blockbuster fraudulently induced Dharod to enter into the asset sale agreement when it provided him with the
August 1999 profit and loss statement, which was more favourable than the profit and loss statement included in the
bid package, but still showed a negative number for cost of goods for the month of July. Blockbuster answered and
asserted the affirmative defense of release, among its other defences. Blockbuster also counterclaimed for breach
of contract. Hence claim aroused as a loss of ambiguity in the contract.
3.6.2 Fraud Mispresentation

• Fraud mispresentation occurs as a claim in the following circumstances, a threat to do something beyond the
legal right of the party making the threat.
• An illegal exaction or some fraud or deception occurs.
• A restraint arises that is ‘imminent’ and destroys ‘free agency without present means of protection.
As mentioned above, there are no disclosure requirements in India. However, the liability for any misrepresentation
will depend on the franchise agreement between the franchisor and sub-franchisee. Normally, the franchisor or the
sub-franchisor is vicariously liable for all acts of its individual officers, directors and employees, either in the course
of business or in good faith, or both. The individual officers, directors and employees of the franchisor or the sub-
franchisor are not exposed to any liability unless the liability is specifically undertaken.
3.6.3 Antitrust
Schlotzsky’s, Ltd. v. Sterling Purchasing & National Distribution Co., the Fifth Circuit ruled in favour of the
franchisor on the antitrust claim of a supplier on the issue of franchisor-mandated exclusive suppliers, is an claim
on antitrust in the law of franchise.
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3.7 Exemptions
Since, there are no specific laws regulating franchise, there are no exemptions and exclusions from any franchise
laws and regulations.
3.8 Remedies
As mentioned above, there are no disclosure requirements in India. However, the liability for any misrepresentation
will depend on the franchise agreement between the franchisor and sub-franchisee. Normally, the franchisor or the
sub-franchisor is vicariously liable for all acts of its individual officers, directors and employees, either in the course
of business or in good faith, or both. The individual officers, directors and employees of the franchisor or the sub-
franchisor are not exposed to any liability unless the liability is specifically undertaken.
compensatory
damages
Remedies
injunctive relief
Fig. 3.4 Types of remedies
Case study for the remedy using compensatory damage, In re Magna Cum Latte, Inc., the bankruptcy court held that
a coffee store franchisee could recover lost profits against its franchisor based on breach of the implied covenant of
good faith and fair dealing and wrongful termination under the California Business Code.
The court stated that California law supported the award of lost profits to a franchisee for a breach of contract, but
that the plaintiff had to prove the occurrence and extent of the lost profits.
Case study for injunctive relief, Schlotzsky’s, Ltd. v. Sterling Purchasing & National Distribution Co., discussed
above for its Lanham Act and antitrust rulings, and also involved a claim for injunctive relief. The franchisor,
Schlotzsky’s, Ltd., was granted an injunction under the Lanham Act prohibiting Sterling, together with its principal
and affiliates, from representing to manufacturers that it was the “exclusive” distributor of products for Schlotzsky’s,
Ltd franchisees, when, in fact, it was not authorised by Schlotzsky’s, Ltd.
To do so.174 “Sterling argued that the injunction was improper because the district court did not make, nor could
it have made, findings concerning irreparable harm or threatened future conduct.
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3.9 Franchise Sales Laws and Other Laws Affecting International Franchising
Franchise sales laws

• United States • United States
• 18 other countries • Federal law
• Other franchise laws • State law
• EU block exemption • Foreign franchise sales laws
• Franchise relationship laws • Australia, Belgium, Brazil,
• Other laws Canada, China,France,
Indonesia, Italy, Japan,
• Trademark laws
Malaysia, Mexico, Romania,
• Commercial agency laws South Africa, South Korea,
(Europe, Mideast, Latin Spain, Sweden, Taiwan,
America) Vietnam
• Technology transfer laws
• Foreign exchange control
laws
• Tax laws and treaties
• Anti-bribery laws
Fig. 3.5 Different types of franchise sales law
The Trade Marks Act 1999 provides for the protection of marks of goods and services, collective marks, certification
trademarks and well-known marks in India.
The Trade Marks Act gives the proprietor of the registered trademark an exclusive right to its use and statutory
remedy for infringement of this right.
The following courses of action are available against violation of trademarks rights: an action for infringement in case
of registered trademark or a passing-off action in case of unregistered trademark, and criminal action. In an action
involving infringement or passing off, a court may grant injunctive relief. At the request of the plaintiff, damages
or an account of profits, together with any order for the delivery of the infringing labels and marks for destruction
or erasure, can be obtained. Similarly, a civil action can be supplemented by a penal action for violations.
A franchisor’s know-how and confidential information can be adequately protected by express provisions in a
contract. For the grant of an injunction it would be necessary to prove that the information was important enough
to justify an injunction, in the absence of which irreparable damage would be caused to the franchisor.
Where there is no express provision, an implied obligation may be construed depending on the circumstances of
the case.
The franchisor’s income in the form of royalties or franchise fees would be treated and taxed as business income
under the Income Tax Act 1961, and will be subject to a tax deduction at the applicable rates.
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3.10 Laws and Government Agencies Regulating the Offer and Sale of Franchises
There is no franchise-specific legislation.
The various statutes, which would be relevant are:

• The Indian Contract Act 1872, governing the contractual relationship between the franchisor and the
franchisee
• The Specific Relief Act 1963 for enforcement of the rights
• The Trademarks Act 1999
• The Designs Act 2000
• The Copyright Act 1957
• The Patents Act 1970
• The Monopolies and Restrictive Trade Practices Act 1969 (MRTP Act)
• The Competition Act 2002
• The Consumer Protection Act 1986
• The Income Tax Act 1961
• The Provincial Insolvency Act 1920
• The Foreign Exchange Management Act 1999 (FEMA)
• The Rules issued by RBI and
• Various state statutes and regulations
In the context of cross-border franchising the Secretariat of Industrial Assistance (SIA), the Ministry of Commerce
and the RBI are the main government agencies regulating the foreign investment and remittances abroad.
There is no mandatory requirement for franchise agreements to be in any local language. Generally franchise
agreements are in the English language. The franchisor can restrict a franchisee from transferring its franchise
ownership by expressly providing for the same in the franchise agreement.
As per the normal trend, the franchisee acquires or owns the real estate. Commercial premises can be acquired either
outright or on lease basis by an Indian franchisee. A foreigner would need to obtain approval from the Reserve
Bank of India (RBI) to acquire property, except for a lease not exceeding five years. There are no restrictions on a
domestic franchisor acquiring property. Suitable provisions need to be incorporated in the franchise agreement and
leases for transfer of the property rights (to the franchisor or its nominee) at the franchisor’s option.
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Summary
• India does not have franchise-specific legislation.
• Sole proprietorship – though it is the simplest form of ownership, a sole proprietor risk his or her personal assets
for any liability in connection with the operation of the franchised business.
• The franchise agreement will be governed by the Indian Contract Act 1872. This statute covers all aspects of
the contract: offer, acceptance, validity, breach and termination.
• The court gave great weight to the forum selection clause when evaluating the local interests in adjudicating
local disputes.
• The arbitration provision, in addition to other sections of the franchise agreement, was subject to a “survival”
clause, which provided that the provision would survive termination “regardless of which party initiated
termination or whether termination was wrong.
• The Trade Marks Act gives the proprietor of the registered trademark an exclusive right to its use and statutory
• There is no mandatory requirement for franchise agreements to be in any local language. Generally franchise
agreements are in the English language.
• The franchisor can restrict a franchisee from transferring its franchise ownership by expressly providing for the
same in the franchise agreement.
References
• Zeidman, P., Franchise [pdf] Available at : <http://www.franchise.org/uploadedFiles/Franchise_Industry/
International_Development/Resources/India%20laws.pdf> [Accessed 29 April 2012].
• Coldwell, D. And Williams, A., Franchise law [pdf] Available at: <http://www.haynesboone.com/files/
Publication/9d6259b1-357f-4a92-8823-0391c371fe6b/Presentation/PublicationAttachment/7c00f7e5-8c26-
4b11-9ead-1114e670ba9e/Franchise_Law_SMU.pdf> [Accessed 29 April2012].
• Goldstein, J., 2012. Franchise law obligations, [Video Online] Available at: <http://www.youtube.com/
watch?v=I8FfbDrBNnc> [Accessed 29 April 2012].
• Gray, D., 2008, Franchise legal consultants Darwin gray solutions [Video Online] Available at: <http://www.
youtube.com/watch?v=8eK7DxfThoE> [Accessed 29 April 2012].
• Sherman, A. J., 2011. Franchising & Licensing, 4th ed., AMACOM Div American Mgmt Assnn.
• Campbell, D. & Netze, A., 2007. International franchising, Kluwer Law International.
Recommended Reading
• Lafiura, D., 2011, Franchise litigation handbook, American bar association.
• Sherman, A., 2011, Franchising and Licensing, 4th ed., Amacom publication.
• Green, S. and Dawn, R., 2009, Law and order, Benbella books.
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Self Assessment
1. The term ‘franchise’ is defined as an agreement by which the__________ is granted representational right to
sell or manufacture goods or to provide service or undertake any process identified with franchisor.
a. class
b. franchisee
c. name
d. single unit agreement
2. Partnerships are governed by the________ Act 1932 and registered with the Registrar of Firms.
a. Partnership
b. Income tax
c. Franchise
d. Consumer
3. The ________is the apex court in India.

a. District court
b. Supreme court
c. Court
d. Franchise

a. Domestic arbitration would be covered by the Arbitration and Conciliation Act 1996.
b. The MRTP Act and the Competition Act 2002 regulate competition in business.
c. The shareholder generally will not be liable for the liabilities of the corporation except to the extent of the
shareholder’s capital contribution.
d. There is franchise-specific legislation.

b. A good relationship between the franchisee and franchisor is not critical for the success of both parties
and methods.
6. The Trademarks Act ________is one of the regulating bodies of franchising law.
a. 1999
b. 2000
c. 1967
d. 1998
7. _____________ issues arise when one or neither party claims ambiguity of the contracts, so the court interprets
the contracts as a question of law.
a. Contract
b. Franchise
c. Bond
d. Investment
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8. The Trade Marks Act gives the _______ of the registered trademark an exclusive right to its use and statutory
a. franchise
b. proprietor
c. franchiser
d. owner
9. The MRTP Act and the Competition Act 2002 regulate _________in business.
a. Antitrust
b. Harmony
c. Competition
d. Ambiguity
10. The court gave great weight to the ________selection clause when evaluating the local interests in adjudicating
local disputes.
a. forum
b. dependant
c. franchise
d. legal
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Chapter IV
Franchisee and Operating Franchise
Aim
• explain franchisee
• elucidate factors contributing to chose a franchise
• explicate legal issues
Objectives
• describe decision making in franchising
• explain franchisor franchisee relationship
• explicate effective marketing plan
Learning outcome
• understand the operations of franchise
• enlist the steps in capital management
• identify the legal issues in franchisee and its operation
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4.1 Becoming a Franchisee

Most people buy a franchise because they feel it is less risky than starting a business from scratch. They recognise
that their work experience has not prepared them with the knowledge or skills needed to begin and run a business of
their own. In addition, many are unwilling to spend time, effort, and money reinventing what is already available.
Franchising is also attractive because, to some extent, a franchise is a cooperative—a community of common
interests—from centralised national advertising to common products, operating procedures, and quality control
standards. Because of the protective nature of franchising—with its intensive training programs, written standards
and procedures, and national name recognition—people who otherwise would not have risked entering the business
world have taken the leap and opened their own businesses and done well.
Becoming a franchisee within a solid franchise system removes much of the guesswork of running a business. It
also allows avoiding most of the mistakes that independent start-ups make. That’s part of buying a franchise from
a mature franchise system.
Finding Good
Sources of Working with Deciding Evaluating a
Market
Information a Franchise Whether to Buy Franchisor’s
research
about Available Broker. Old or New. Services.
Franchises.
Fig. 4.1 Steps involved in becoming a franchisee
4.1.1 Finding Good Sources of Information about Available Franchises

Choosing and buying the right franchise takes time, money, and lots of information. Finding the best way to gather
information is to make lists of questions, write down answers, and set up a method for cross-referencing and
cross-checking facts as you proceed. Jot down the information they tell you so that you begin building a body of
information that eventually gives a clear picture of the business in consideration. In order to get a complete picture
of the franchises, it is suggested that investor takes advantage of every resource you can find.
List of resourses to
find information
• Print directories
• Consumer business publications
• Trade shows and expositions
• The Internet
Fig. 4.2 Resources of information
• Print directories: Several different franchise directories list most of the franchise companies currently offering
franchises. These guides are one of the best places to begin examination because they give a capsule of information
on each company listed. Just because a franchisor is included in one of the directories doesn’t mean that the
information is complete or accurate. Many of the directories do not independently verify the information the
franchisor provides. Some Print directories are as follows:
Franchise Opportunities Guide: Published by the International Franchise Association (IFA), this guide
lists the trade association’s member companies, franchise lawyers, consultants, and other suppliers, as well
as descriptive sections on franchise statistics, other publications, and educational affiliates.
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Franchise Update Publications: This magazine publishing group prints a variety of franchise guides,
including The Executives’ Guide to Franchise Opportunities, Food Service Guide to Franchise Opportunities,
and the Guide to Multiple-Unit Franchise Opportunities. They also publish Franchise UPDATE magazine,
a leading trade and management publication targeted to the professionals in the industry.
Bond’s Franchise Guide: This guide includes detailed profiles of more than 1,000 franchisors listed by
name, address, and contact person.
The Franchise Handbook: This guide is a quarterly directory of companies currently franchising, along
with key information about them; it also offers articles and success stories.
• Consumer business publications: Several magazines and newspapers regularly publish franchising-related
sections that contain articles and advertising on franchising:
Entrepreneur: www.entrepreneur.com
Fortune Small Business: www.money.cnn.com/magazines/fsb
Franchise Times: www.franchisetimes.com
Franchise Update: www.franchise-update.com
Franchising World: www.franchise.org
Inc.: www.inc.com
Nation’s Restaurant News: www.nrn.com
The New York Times: www.nytimes.com
USA Today: www.usatoday.com
The Wall Street Journal: www.wsj.com
• Trade shows and expositions: Trade shows and expositions give an opportunity to meet face-to-face with
representatives of many franchise companies at one time. At trade shows, franchisors usually offer you a
sense of their business on the exposition floor. Trade shows are a wonderful source for brochures on franchise
opportunities. Most franchisors give their brochures and then follow up later by telephone or in writing. Finally,
under no circumstances do you actually buy a franchise at a trade show. Franchisors must follow certain rules
regarding the offer and sale of franchises, and one of those rules requires that the franchisor give a copy of its
UFOC and time to review the information.
• Internet: The Internet provides a showcase for franchise companies and can be a useful avenue of basic
information. Most franchisors have their own Web sites and list their Web site addresses in their advertisements
and their franchise brochures or, if they are members of the IFA, on the IFA’s Web page, with links to their
Web site. Many franchisors also are included in various online franchise directories. The online directories
feature basic information, including company history, total investment, and liquid capital needed to invest,
areas currently developing, and descriptions of the business. Some directories offer an analysis of particular
industries and organise franchisors for easy navigation and comparison and have become the best source of
information quickly about any franchise.
4.1.2 Working with a Franchise Broker

Franchise brokers are individuals or companies that offer to help you find the franchise that’s right. Brokers work
to develop individual profile that reflects background, interests, lifestyle, expectations, and financial qualifications.
Most brokers do not charge the prospective franchisee a fee; instead, brokers are paid by franchisors to introduce
prospects to them. Franchise brokers usually receive 40 to 50 percent of the initial fee you pay the franchisor. Good
and competent brokers provide a valuable service to someone looking to invest their life savings into a franchise.
It is important to explore franchising independently even if using a broker. The broker works for the franchisor, so
make sure to hire own professional advisor such as an accountant, attorney, or reputable franchise consulting firm
to help in the process.
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4.1.3 Deciding Whether to Buy a New or Old Franchise

Sizing up an existing franchise and getting some details before starting from scratch are the two parameters to make
the decision of buying a new or an old franchise.
• Sizing up an existing franchise: Buying an existing operation from the company or from a franchisee may
offer advantages over starting from scratch. From a franchisor’s perspective, buying an existing location makes
sense. They may have made a strategic decision not to operate a company owned store at that location looking
for a franchisee to buy it.
Getting a new, enthusiastic franchisee is a good swap. Secondly, franchisors typically require new franchisees to
sign the then-current franchise agreement, which allows them to alter the terms of the franchise for that location
sooner than they probably would have if the franchisee had stayed and operated under the old contract.
Before buying an existing operation, digging for information is a must. Find out why the owner wants to sell. Did
the market dry up? Is the location no longer desirable? Did the owner simply want to move on to other things? Is
the owner retiring?
4.1.4 Franchisor’s Services

Every franchisor is different and the services franchisors provide their franchisees vary widely, based on a company’s
philosophy, maturity, and fees. The franchise agreement defines the services the franchisor provides. The services
are usually divided into those the franchisor provides pre-opening, such as initial training, and those that continue
throughout the life of the franchise, such as field staff support. Modern franchising is a complex business, and
franchisees require continuous updating and retraining to keep them up to speed and at the top of their markets.
4.1.5 Market Research

Conducting some preliminary market research is vital to set up a franchise. Most franchisors have fairly sophisticated
support mechanisms that will assist later, but to know some things before making the decision to become a franchisee
for a particular company are always an added benefit.
4.2 Franchisee Attributes

Choosing the right franchisee is one of the most important aspects of franchising. It involves a lot of interaction
between the franchisor and the franchisee followed by a judicious decision by the franchisor. Though there are
various ways one can go about choosing a franchisee but a franchisor should try and avoid those franchisees that
meet only a few criterion say for instance financial requirements but fail to meet the other criterion that are equally
important. The following are the attributes of a franchisee taken into consideration:
• Age
• Education
• Management skills
• Work experience
• Financial fitness
• Networking abilities
• Motivation/family support
• Risk taking capacity
• Analytical ability
• Family business
• Technical skills
• Profit orientation
Age: Age is a significant factor that a franchisor looks for in his franchisee. The reason being it determines the
mindset of a person.
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Education: It is a commonly used selection criterion to assess the likely future chances of success of potential
franchisees. The educational background of the franchisees is further classified into three levels:
• Basic education or +2 level of education
• Graduate level of education
• Post-graduate level of education
It may be noted that having the level of education is not just enough; having the right kind of education is more
important and more desirable.
Management skills: Franchisors tend to look for franchisees that have developed certain business and management
skills. These skills assist in dealing with people, leading a team, communicating with others, managing the operations
etc.
Financial fitness: Having adequate capital is necessary to minimise the financial risk associated with starting a
new business.
Networking abilities: The ability to network and to manage customer and business relationships effectively
forms an important role of a franchisee. Loyalty and trust are vital features when it comes to managing staff and
customers.
Analytical ability: It is the measure of the concentration and specificity of the franchisee. If a person is specific to
every minute detail then there are less chances of making errors or mistakes.
Family business: Family business can act as an asset while a franchisee embarks on his journey as an
entrepreneur.
4.2.1 The Factor Analysis

The research has shown that there are four broad attributes that are important for becoming a successful franchisee.
These factors are the attributes that differentiate one franchisee from the other. These four major factors are then
used to identify the underlying variables on which to group the franchisees.
Profile/ qualification
This includes age, education background and the experience of the individual. The education background is further
categorised into basic education, graduation and post graduation level. The experience of the individual is it in the
same field or in other also forms a part of this factor.
Skills
These are the attributes that can be regarded as the scaffoldings required by the franchisor for running the franchise.
Management skills, motivation and the emotional as well as financial support of the individual that he received
from family and friends.
Business expertise
This attribute includes the financial status of the individual, his analytical skills, and his risk taking ability and his
profit expectation from the business.
Inherent advantages
This includes the family business and the family support which he receives from time to time.
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4.3 Franchisee Profiling

There are several ways to project the long-term behaviour of the franchisee by using various questions relating to
the psychological behaviour of the Investor. The Model developed analyzes a franchisee on the basis of the most
obvious factors like age, education and previous experience of the franchisee.
Y=0.311 x1-0.273 x2+0.01 x3+0.232 x4 +0.084 x5
Where, y is based on the future plans of the franchisee

X1 is the previous occupation of the franchisee
X2 is the relationship that the franchisee has with the franchisor
X3 is the years of operation of the business, if the franchisee is an existing one
X4 is the present age of the franchisee
X5 is the educational qualification of the Investor or franchisee.
The previous occupation is the most important factor in a franchisee’s profile followed by the present age of the
franchisee. All the variables taken above are considered in an ordinal scale. This formula will help to analyse the
riskiness of the franchisee.
Replacing the variables that the franchisee or the prospective franchisee has with the categories and substituting
the values in the model provided will give the riskiness score of the franchisee. A franchisee with a higher score is
always more desirable.
A survey has shown that there are certain issues relating to franchisee retention. From a franchisor’s perspective a
long lasting relationship with the franchisee is the most desirable aspect. It has shown that there are a number of
franchisees who are not interested in a long lasting business relationship with the franchisor.
The following are the various options present before a franchisee which make their retention by the franchisor a
difficult task:
Franchisee leaving the Franchisees going into

Franchisee starting own
brand andtaking a new service sector from
business
brand franchising
• There is a trend that due • A franchised outlet • A very rare possibility
to stagnancy in sales or provides the proper is that the franchisee
the brand value going experience and leaves the franchising
down, franchisees exposure which is business altogether
close their previous needed to establish and goes into a
brand franchisee and one’s own business. salaried job. It occurs
set up a new franchisee very often with these
of some other brand. franchisees that have
• This decreases the jumped from service
franchisors’ business sector to franchising
and provides apotential
risk.
Fig. 4.3 Franchisee options
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4.3.1 Profiling
Franchise is profiled as follows:
Franchisee
Loyal Switcher Leaver
Fig. 4.4 Categories of franchisee
Switcher
This is a type of franchisee, which will switch from the existing brand to a franchise of some other brand. The
following are the characteristics of such a franchisee:
• This franchisee is not satisfied by the growth opportunities, the standards or the return on investment provided
by the current franchise.
• They always crave for new ideas, want to set their own rules, keep looking for other opportunities.
• The major features of such franchisees are:
• Age: The lowest range, the age bracket of 20-30 years.
• Education qualifications: Highly educated-Charted Accountants, IIT, IIM graduates.
• Prior experience: In terms of prior experience they are quite at the lower side.
• The franchisor can retain by providing proper incentives, working environment, variety in work and some
amount of flexibility.
Loyal
Those franchisees that will not leave a franchise and will continue same brand and take other franchises for the same
brand. The following are the characteristics of such a franchisee.
• They want a safe business, the one they are already experienced in and believe in.
• They make the franchising format successful by reaping a good amount of profit out of it.
Age: They are mostly in the late years of their life, around 40-45 years of age.
Education qualifications: These include lower education bracket, those who work hard and strive to prove
their worth.
Prior experience: They are operating for a long period in franchising and have gained the tricks to become
successful in this business.
These are the most loyal customers for franchisors and hence good prospective franchisors.
Leaver
Include those franchisees that will leave franchising altogether to start their own business or become an employee
of some company. The following are the characteristics of such a franchisee:
• They have lost their faith in franchising model or have some dire necessity like extreme losses.
• They want to get out of the system and are trying to wrap up their franchises.
Age: The middle range, the age bracket of 35-45 years.
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Education qualifications: These include Post graduates and graduates, who are qualified enough to take up
a salaried job and have earned money and experience to start up their own business.
Prior experience: They have a fair amount of work-experience in franchising as well as other fields.
A franchisor can’t stop such type of franchisees who have already made up their minds to leave. These are categorised
as the most risky franchisees.
4.4 Franchisor- Franchisee Relationship

Opening the doors to a new business is an exciting experience that will, consume the details of its day-today
operation. While this will be physically, emotionally, and psychologically draining, begin monitoring relationship
with the franchisor immediately. By tracking the assistance and services promised by the franchisor, systematically
assess the franchisors performance. Franchisees move through phases of growth, development, maturity and decline.
This lifecycle is same for most businesses, however, in franchising, the resources available to a franchise business
network to plan an inclusive offering is generally able to ensure the ongoing significance of the franchise brand
and franchise business model, effectively extending the business lifecycle and providing longevity in the market.
The franchisor & franchisee relationship is always a matter that requires regular attention from both the ends.
To understand and explore a franchisee franchisor relationship and recommend best practices to be adopted by a
franchisor, we have to first understand the life cycle of a franchisee, challenges and apprehensions which depend
on that fact that in which phase of business cycle one is.
4.4.1 Franchisor Support

Before opening doors, participate in the franchisor’s training program. The training program is the window on
the quality of the franchise system and a good time to begin the monitoring process. The training program is first
real opportunity to evaluate the franchisor’s performance. Because the operation of a franchise system involves a
partnership between franchisee and the parent company, the franchisor’s performance is an important ingredient.
Franchisor’s support to the franchisee makes a big difference to the franchisee’s own life cycle. High levels of
support early in the franchise relationship will accelerate a franchisee’s growth and facilitate their early maturation.
Franchisors usually find that the nature of support provided to a franchisee during the course of their lifecycle in the
franchise business changes from highly technical and operationally focused at the start, to management, financial
and marketing expertise as the franchisee matures.
Declining
phase
Maturity Search
phase phase
Growth Joining
phase phase
Fig. 4.5 Franchisee life cycle
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Search phase
• In this phase the unit is an entrepreneur who needs to go through the necessary introductory stage to ascertain
whether or not this is the correct time, product, and/or service to begin operating a franchised unit.
• There are various ways in which an entrepreneur looks out for a suitable franchise. A franchisee gets to know
of the franchise through close friends, or close business associates.
• Around 20% of the franchisees get to know of the opportunity through his brother or family members. Very rarely
they contact the existing franchisees of the brand to know about the franchisor unless they are their relatives
having franchisees of the same brand.
• Generally, this phase lasts from one month to one year.
Joining phase
• In this phase the franchising deal is signed between the franchisor and the franchisee.
• This phase may last from one month to two years depending upon the type of business, the agency helping them
to strike the deal and the franchisee.
• This phase is completed within a short period of time in a domestic/single-unit franchise and may take longer
in an international/multi-unit/master franchise.
• This is the most potential stage when the franchisee’s enthusiasm is at its peak. To maintain the level of enthusiasm,
it is advisable to strike the deal in a short span of time.
Growth phase
• The growth stage occurs from the time of the grand opening generally through the first year or two of operations.
At this time, the franchisee works very diligently in order to develop a strong level of business performance
for their unit.
• The initial business volume of the unit may be off and it may require several months of diligent effort to properly
promote and develop. Other organisations may begin very rapidly and are forced to struggle to maintain a high
initial business volume.
• The growth stage often levels off after a period of several months or a few years.
closure phase
R Initial Joining Growth Maturity
extended
e stage phase phase phase
growth phase
v
e
n
u
e
Time
Fig. 4.6 Franchise revenue vs. time

(Source: Indian Franchisee: an outlook)
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Maturity phase
• In the S-curve, this phase appear when the growth stabilises. The growth has come to a point when it is steady
and the scope of growth in the franchise is limited.
• The franchisee will often meet with the franchisor to discuss different products or services which will enhance
the volume of the business.
• The franchisee may seek to increase the sales level through the addition of new products or expanded services. It
is this phase when the level of franchisee motivation could be significantly affected; the volume of the business
remains more or less the same.
Declining phase
• During the declining stage, the franchisee generally starts to relax their compliance with the rules, regulations,
and standards which have been established by the franchisor. Franchisees who have become dissatisfied with
the franchisors often seek to terminate the franchise. Alternately, the franchisor may realise the problem and
seek to provide remedies as solutions.
• The franchisor may improve the communication and may be able to provide greater services and more value
to the franchisee. The franchisor may develop additional promotional, marketing, and advertising programs
which enhances the franchisee’s opportunity for success. The franchisor then has the opportunity to turn
around the franchise business and to instil within the franchisee, once again, the desire for mutual success and
prosperity.
Apart from the above mentioned suggestions which are for an extraordinary performer who need extra attention,
there are certain practices which a franchisor can do to enhance and develop the franchisee/ franchisor relationship.
Beyond monitoring the basics of relationship with the franchisor, also analyze the methods and avenues available
for input into the franchisor’s system. This input, may enhance business as well as the franchisors.
Franchisee - Franchisor
Relationship
• Sharing the Vision
• Active Communication
• Passionate marketing
support
• Total Training Program
• Developing & sharing an
aggressive
• Growth plan
Fig. 4.7 Factors contributing to franchisee- franchisor relationship
4.4.2 Relationship Factors

Franchisor should share the personal vision of opportunity and success which the franchise system offers. This
vision should include a high desire to receive the rewards of one’s work. This shared vision will become the focal
point of the franchisee-franchisor relationship as they build to mutually develop in a harmonious and successful
franchise experience.
• Active Communication: A regular line of communication from the franchisor acts as a guiding light for the
franchisee. This communication line would facilitate a bilateral flow of information thereby improving the
franchisor – franchisee relationship.
• Passionate marketing support: A franchisee requires effective market presence of the brand both on a local and
national basis. A balanced marketing and brand positioning strategy would help franchisee to reap the gains.
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• Training Program: Training is the fundamental ingredient of a strong franchisee-franchisor relationship. The
franchisor should provide training and improvement programs which will enhance the abilities and capacities
of the franchisee.
• Developing & sharing an aggressive growth plan: it is important to manage franchisee relations in order to align
their expectations and perceptions. Franchisor should be able to offer a plan for growth so that they can induce
the enthusiasm of a vibrant and growing organisation in the franchisee.
4.5 Legal Issues

It was found that many of the victims were first-time investors who knew little or nothing about purchasing a
business. Many lost their life savings or retirement income to fast talking salespeople who made false claims. The
FTC, after reviewing voluminous complaints against these early, fraudulent franchisors, realised that these deceptive
and unfair practices occurred largely due to an informational imbalance between franchisors and franchise buyers.
In light of this, regulators concluded that franchise purchasers should be able to get more complete information
about the business system they were going to buy. This gave rise to the disclosure laws in effect today. To correct
the imbalance, the FTC and a number of state governments borrowed the concept of pre-sale disclosure from the
securities industry.
Federal Law: The FTC Rule

The federal franchise regulation is formally titled “Disclosure Requirements and Prohibitions Concerning Franchising
and Business Opportunity Ventures” and can be found at 16 Code of Federal Regulations Part 436 (the “FTC Rule”).
The FTC Rule defines a “franchise” as follows:
Any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer
or contract specify, or the franchise seller promises or represents, orally or in writing, that:
• The franchisee will obtain the right to operate a business identified or associated with the franchisor’s trademark,
or to offer, sell, or distribute goods, services, or commodities identified or associated with the franchisor’s
trademark;
• The franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method
of operation, or provide significant assistance in the franchisee’s method of operation; and
• As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment
or commits to make a required payment to the franchisor or its affiliate.
Franchising is governed primarily by laws that require franchisors to inform prospective franchisees about the
system. This information is contained in the UFOC. Under the federal and state rules, a franchisor cannot offer a
franchise until the franchisor has prepared a UFOC.
The laws governing the UFOC mainly deal with disclosure of the terms of the franchise and information about the
franchisor. However, a second body of law gives added protection to the franchisee. These are called relationship laws.
They give franchisees protection from certain actions of the franchisor, including arbitrary termination of the franchise
or nonrenewal of the franchise at the end of its term, as well as the freedom to form franchisee associations.
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Franchise
law
Discloser Relationship
law law
Fig. 4.8 Types of franchise laws
4.5.1 Discloser Law

In most instances, the disclosure document sets forth approximately twenty categories of information about the
franchise company. This information is vital to purchasing decision.
• Although the FTC does not require a franchisor to register (file) disclosure documents, some states—the
registration. States--do require franchisors to file disclosure documents with the state Securities Administrator
or the Attorney General. This allows state agencies to regulate franchisors who sell in their states and makes it
easy to determine whether a franchisor is complying with the state’s law.
• The FTC Rule states that disclosure in all states must be at least as strict as the FTC Rule.
• As a general rule, if you are thinking of starting a business as a franchisee, don’t sign or enter into the transaction
until the seller is complying with the various franchise disclosure laws.
4.5.2 Relationship Laws

In addition to laws regulating the franchise sales, some states have laws governing a franchisor’s termination of or
refusal to renew a franchise known as relationship laws.
• They prohibit franchisors from terminating or refusing to renew a franchise without good cause. Franchisees in
certain industries, such as service station dealers and automobile dealerships, also have special state and federal
laws guarding against unfair terminations.
• Without these laws, franchisees would have far less protection and fewer rights.
4.6 Franchisee Motivation

The franchisee has characteristics and so his motivation level undergoes various ups and downs. The motivation
level begins to Increase during the initial phase when the franchisee is on the lookout for a new opportunity. After
being in the joining phase for some time, the motivation level begins to decline. This is because it takes time for
the business to breakeven. After crossing the breakeven, the franchisee now begins to make profits. This acts as a
propeller and brings him to the zenith of motivation level. But with the passage of time, as the growth of the business
reaches the maturity phase, the motivation level begins to decline again. This motivation level curve is applicable
for most of the franchisees across all the sectors.
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Initial phase Joining phase Growth phase Maturity phase
Motivation level
Motivation curve
Fig. 4.9 Motivation curve for a franchisee (Source: Indian Franchisee: an outlook)
The franchisor should perform the following duties-

• Manage a line of communication through various means like conference call, mails, personal visits, etc.
• Identify the stages where the franchisee needs maximum support which normally happens to be just before the
launch period and after the maturity phase.
• Share success stories and sales data of other franchisees.
• Maintain a healthy relationship with the franchisee through:
Regular visits to the franchisee unit.
Regular interaction with the management team that takes care of the individual franchisees.
A consulting firm that will acts as a facilitator between franchisor and franchisees.
The royalty
High royalty can severely affect the profits of the franchisee, especially during its initial years. And it will be the
biggest hindering factor during the maturity of a franchisee.
Staff training & attrition

Staff attrition or turnover rate is the ratio of the number of employees who left in the year to the average number of
employees in the year, multiplied by 100. One of the biggest issues franchisees face is to identify and retain good
employees.
Shrinkage
A common problem that bothers the franchisees the most is the shrinkages and pilferages. It is the difference in the
value of stocks as per books and the value of actual stock at the store on any given date.
Cannibalisation
Many franchise operations generally face the issue of ‘cannibalisation’, the tendency for new franchise operations to
become successful, in part or in whole, merely by ‘stealing’ business from existing franchises in the same market.
Irresponsible franchisees
There are franchisees that compromise on the quality of products and services in order to reduce costs, harming the
brand image as well as other franchisees’ business.
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4.7 Trends, Opportunities and Future Prospects

More than eighty percent of the respondents interviewed are looking for an expansion of their operation. The survey
has shown that a franchisee who owns an outlet would like to expand the business by taking another franchise from
the same franchisor, from a different franchisor. Even though majority of the franchisors provided standardised
procedures and detailed standard operating procedure, standardisation is not implemented thoroughly across the
franchised outlet. There is need to ensure that the operating procedure is standardised irrespective of the type of
business the franchise deals with.
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Summary
• Franchising is also attractive because, to some extent, a franchise is a cooperative, a community of common
interests, from centralised national advertising to common products, operating procedures, and quality control
standards.
• Every franchisor is different and the services franchisors provide their franchisees vary widely, based on
a company’s philosophy, maturity, and fees. The franchise agreement defines the services the franchisor
provides.
• Conducting some preliminary market research is vital to set up a franchise.
• In growth phase, the unit is an entrepreneur who needs to go through the necessary introductory stage to ascertain
whether or not this is the correct time, product, and/or service to begin operating a franchised unit.
• The growth stage occurs from the time of the grand opening generally through the first year or two of operations.
At this time, the franchisee works very diligently in order to develop a strong level of business performance
for their unit.
• The federal franchise regulation is formally titled “Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures” and can be found at 16 Code of Federal Regulations Part 436
(the “FTC Rule”).
• As a general rule, if you are thinking of starting a business as a franchisee, don’t sign or enter into the transaction
until the seller is complying with the various franchise disclosure laws.
• In addition to laws regulating the franchise sales, some states have laws governing a franchisor’s termination
of or refusal to renew a franchise known as relationship laws.
References
• Meany, J., 2004, How to buy a franchise, Sphinx publishing.
• Indian Franchisee: An outlook, Indian franchise association.
• Ramco, O., 2011. Franchise operations management, [Video Online] Available at: <http://www.youtube.com/
watch?v=6Oryu5j_kYE > [Accessed 30 April 2012].
• Gupta, A., 2012.The Indian education council, [Video Online] Available at <http://www.youtube.com/
watch?v=8CemMXmp51E> [Accessed 30 April2012].
• Franchise buyers guide, [Online] Available at : <http://www.franchising.com/franchisebuyersguide/> [Accessed
30 April 2012].
• Franchise know how, [Online] Available at: <http://www.franchiseknowhow.com/operations/> [Accessed 30
April 2012].
Recommended Reading
• Seid, M. & Dave, T., 2006. Franchising for dummies, 2nd ed., Wiley Publishing.
• Perkins, E., 2008. Fundamentals of franchising your business, Perkin law PLLC.
• Genn, A., 2008, So you want to Franchise your business? 1st ed., Entrepreneur Press.
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Self Assessment
1. _________ is a significant factor that a franchisor looks for in his franchisee Class
a. Age
b. Name
c. Gender
d. Caste
2. _____________ can severely affect the profits of the franchisee, especially during its initial years
a. High royalty
b. Shrinkage
c. Franchise
d. Cannibalisation
3. Buying an existing operation from the company or from a franchisee may offer _______over starting from
scratch distributorship.
a. disadvantages
b. profitable
c. advantages
d. Good

a. Maturity phase lasts from one month to one year.
b. In the joining phase the franchising deal is signed between the franchisor and the franchisee.
c. During the declining stage, the franchisee generally starts to relax their compliance with the rules, regulations,
and standards which have been established by the franchisor.
d. The growth stage often levels off after a period of several months or a few years.

b. A good relationship between the franchisee and franchisor is not critical for the success of both parties
and methods.
6. ________ is the fundamental ingredient of a strong franchisee-franchisor relationship distributor.

a. Trust
b. Franchise
c. Trainee
d. Training
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7. The laws governing the ________ mainly deal with disclosure of the terms of the franchise and information
about the franchisor.
a. Trademark
b. UFOC
c. FDD
d. Royalty
8. A _________ acts as a facilitator between franchisor and franchisees

a. Consulting firm
b. Document
c. UFOC
d. Supervisor
9. Conducting some preliminary________ is vital to set up a franchise.

a. Market Research
b. Survey
c. Study
d. Background Check
10. The franchisee is not completely_________.

a. independent
b. dependant
c. objective
d. legal
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Chapter V
Franchise Sales and Broker
Aim
• explain franchise sale
• explicate franchise brokers
• elucidate duties of a franchise broker
Objectives
• enlist the benefits of franchise broker
• explain the questions asked to a franchise broker
• elucidate origin of franchise sales regulations
Learning outcome
• understand the procedure for franchise sales
• describe an effective franchise sales process
• identify the need of a franchise broker
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5.1 Franchise Sales
Selling a franchising concept is similar to selling any other product or service. Franchisors use their own salespeople
and business brokerage firms to sell franchises nationally. First encounter with the franchisor might be through a
salesperson or broker. It is important to remember that they are sales people, hired or commissioned by the franchisor.
The best franchises sell themselves. Sales people offering the better systems will want to thoroughly investigate the
offering and compare it the competition.
Many sales people are well-versed in the art of flattery, and that the sooner started the more money will be earned.
The information provided in these sales presentations is the least important in the entire sales process. It is sales
talk. The hard core information upon which it should base is Franchise Salespeople and Brokers is found in the
disclosure documents, the professional evaluation from attorney and accountant, and self investigation of the
franchisor’s network.
This is the time when it is especially important to remember the self-analysis originally conducted. Remind of
strengths and weaknesses and likes and dislikes. They will usually ring truer than the comments of someone else. It
is easy to grow too eager, too early, and make the wrong decision. But consider all of the options and take enough
time about it.
This is not to say that all sales people, brokers, or business brokerage firms are unprofessional or will be misleading.
Just be aware that these are people with much to gain from making a sale. Many are on commission and may
receive part of the franchise fee. Once the franchise is sold, they probably will have little to no involvement in the
system’s performance. As a result, most salespeople or brokers will have little incentive to make sure that promises
are kept. Some may exaggerate and possibly misrepresent information, which is not permitted under the law. For
example, the first thing you want to know—and the first thing sales people want to tell you—is how much you are
going to earn if you buy a particular franchise. This is obviously significant information and you should never take
the sales person’s word for what you can expect to earn. Insist on proper documentation. Earnings claims must be
substantiated with documentation taken from existing franchises or some other reliable financial source. A sales
person who tells a franchise buyer how much money he or she can expect to earn operating a franchise, without
having any reasonable basis and without providing proper substantiating documentation in a disclosure document,
is engaging in an outright unlawful practice. This will serve well as to analyze new franchise opportunities.
Finally, any verbal promises made outside of the franchise agreement are generally not enforceable. Any representation,
rely upon should be put into writing and included in the franchise agreement.
5.2 Franchise Brokers

Franchise Brokers - Often times the idea of franchise sales brokers comes up when working with my clients as to
whether or not they should use this as a resource. As a core value, my recommendation is to not use franchise sales
brokers as they tend to take a large chunk of franchise fee, need, conflicting interests. However, utilising brokers in
as a supplement to in-house sales team is something worth considering. Again, when choosing brokers being very
careful which company to work with and be quick to pull the plug if there are no results after 6-9 months.
Getting ethical and professional assistance to help you find and purchase a franchise can be a very wise choice.
Using a franchise consultant- broker, if done right, can help define types of opportunities available.
A franchise broker can help understand the difference between the various types of opportunities so it’s easy to
determine which format is right. A competent broker can help focus on businesses that have met certain quality
standards and avoid making a potentially big mistake. The key advantage is that brokers have the inside track on
both the up and coming as well as the established franchise concepts that will meet the requirements of the new
franchise buyer.
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One of the biggest challenges for franchise companies is finding entrepreneurs who will be a good fit for their
particular business model. Franchisers get thousands of requests for their information packets, but most of these come
from people who are not qualified or motivated to actually become a part of their organisation. These companies
generally cannot support the amount of staff necessary to do an effective job of bringing in new franchisees. This
is why the value of an independent broker-referred candidate is so significant.
This process saves the franchiser a great deal of time and money, so they pay a fee to the broker if the candidate buys
a franchise. The candidate never pays the broker nor will they incur an increase in the cost of the franchise because
they used a broker. Thus there is never a cost for the broker’s consulting, research, and recommendations on behalf
of the interested buyer. This creates a winning scenario for all parties involved. A franchise broker understands
what type of candidates franchises are looking for and is duty bound to provide the best ones. Allowing a broker to
introduce to franchises ensures that the franchise view is as pre-qualified.
Broker
services
Raise Raise
visibility credibility
Fig. 5.1 Services offered by broker to a franchisee
5.2.1 Functions of a Franchise Broker

The broker’s commitment to be to present top-notch franchises that match needs and have:
• Successful track records
• Excellent training and support
• An opportunity for equity growth, and other important characteristics
Franchise broker
• Takes the time to understand

background, skills, interest
and objectives
• Understand financial limits
and risk tolerance
• Help define qualifications
to avoid waste of time and
energy
Fig. 5.2 Functions of a broker
This is possible because the franchises he/she represents have disclosed significant details about their opportunities,
and the broker has the best and most up-to-date details. The broker’s commitment to the franchisers is to present
only the best, most qualified and interested franchisee candidates.
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The franchise broker will treat all information with the strictest confidence and will only provide it to franchises in
which an interest has been expressed. Also understand that while the broker should be very knowledgeable on each
franchise in his/her portfolio, he/her cannot (due to sheer volume) be an expert on anyone company. The broker’s
objective is to eventually put franchisee in touch with franchises. One of the most valuable services a franchise
broker can provide is to make aware of opportunities.
The broker should provide one or more concepts that meet original goals, but he/she may also present horizon-
expanding opportunities that offer potential success through new and exciting avenues. There are many advantag-
es to getting help from a professional who knows the inside workings of an industry or issue. A franchise broker
can help identify businesses that are closely aligned with talents, interests and goals.
5.3 Duties of a Franchise Broker

Using a broker will not change the amount of fees to pay. But it’s important to keep in mind that brokers are paid a
commission only when franchisee buys a franchise from one of their clients.
The difference between buying a franchise and buying a home is that there are no multiple listing services for
franchisors. Except for the few houses that are not listed because they are being sold privately, the home buyer gets
the opportunity to learn about every house in the market. Not so in franchising, since the franchise brokers can only
earn money on the franchises offered by the clients they represent.
Therefore, while there may be thousands of franchises available and hundreds that meet ones pocketbook and interest,
the broker may only have a very small percentage of the market available to show.
While the number is growing, only a small percentage of franchisors use broker networks and even the largest broker
networks only represent a relatively small number of franchise opportunities.
Brokers can provide with important information on franchising and the opportunities available.
Brokers often appear very knowledgeable about franchising to the novice prospective franchisee. This is one of the
reasons that they are an appealing source of franchise sales for franchisors.
Inexperienced franchise prospects often take the broker’s recommendation as gospel and do not conduct the type of
thorough due diligence on the franchise opportunity that most professionals in franchising recommend.
Include brokers in the network of information on franchise opportunities.
5.4 Benefits of Franchise Broker

While using a franchise consultant is a growing trend in amongst prospective franchisees, many individuals do not
take advantage of these services; in fact, most people are simply unaware the service is even available. Among
those who do, some may feel they’ve already decided what concept is best suited for them. However, one of the
primary advantages of a franchise consultant is his or her ability to direct to franchises which might have never
been considered.
Many consultants have franchise industry experience or are former franchisees themselves. They have been down
the road before and can offer insightful advice to help avoid making the same mistakes they may have previously
made as a business owner.
A common mistake made by franchise seekers is to focus on the product or service of the franchise instead of the
business model and its characteristics. In simple words, your personal shopping preferences and tastes don’t always
guide you to the right franchise system to join.
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Personal likes and dislikes can also be misleading. For example, just because you like kids, it doesn’t mean a
child-care franchise is the right choice. A good franchise consultant will look not only for the best or most lucrative
opportunity available, but the one that best suits choice and experience.
5.4.1 The Initial Steps

• First contact a franchise consultant, forge some type of connection with the person and determine whether to
develop a professional relationship with him or her.
• Do you think you can benefit from their insight and advice?
• Will you benefit from their strengths and experience in franchising?
• Also consider that there is a huge amount of information and franchise options to be reviewed. Having a
consultant working during this stage can save you time, money, and aggravation.
5.4.2 Beginning the Franchise Search

• As a franchisee starts working with the franchise consultant, the first step is to provide information about
background and experience. This is often done via an online questionnaire. The franchise consultant needs to
have an understanding of finances to make sure franchises affordability.
• Next is the consultation, which is the most important part of the information-gathering phase. An in-depth
discussion will allow the consultant explore areas of interest and past work experience. This is a chance for
them to learn more about your goals, and an opportunity for you to learn more about franchising and whether
or not bear realistic expectations.
• After the meeting, the franchise consultant will evaluate the information provided and research franchises
opportunities that best fit the goals and skill set.
• After checking for market availability, the consultant will typically introduce you to franchise concepts that
make sense for you to consider. While it may be tempting to zero in on a particular franchise, it is important to
investigate more than one. This approach will allow you to perform a compare-contrast analysis to find your
best franchise match.
5.4.3 Narrowing Options

• Consultant will then coach through the due diligence phase of the investigation, which typically takes three to
four weeks, if not longer. By introducing only to quality opportunities that match your lifestyle and goals, a
consultant can save a great deal of time. Investigating franchises takes a lot of effort; many franchise seekers run
out of steam when the demands of life start to take priority over the due diligence required to make an informed
decision. Using a consultant increases focus and ultimately decides on the best opportunity.
• During the due diligence phase, most of important contact will be with the franchisor’s development
representatives, whose purpose is to educate about the details of their franchise opportunity to determine if
there is a mutual interest. During this period, consultant will continue to serve as an advisor and coach, making
sure franchisee’s learning about the concepts and making decisions that will ultimately lead to the franchise
that is the best match.
• Many, first time franchise owners this may be similar to jumping off the high dive for the first time. Franchise
consultant that has been with franchisee through the process will provide encouragement to make that life-
changing decision.
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5.5 Questions Asked to the Brokers
The franchise industry has experienced a ton of growth in the past 5-6 years, and with it, a plethora of so called
franchise “brokers” and “consultants”, who can match you up to franchises, and then get paid a finder’s fee from
the franchise companies for making a successful match. The executive recruiting model is very similar. However,
just like not all executive recruiters are created equal, in the franchise brokering business, not all brokers are created
equal.
13 Questions
• Exactly how long have you been a franchise broker?

• What is your franchise experience?
• How many articles on franchising have you been quoted in?
• How many articles on franchising have you written?
• Are you part of a franchise yourself? And if so, do you get paid a fee for
referring folks to your franchise companies headquarters?
• Can you give me a list of 20 people who are in franchised businesses of
their own, directly as a result of working with you in your current role as a
franchise consultant-broker?
• Can you give me the names of at least 3 franchise attorneys who know you,
and who will vouch for your character?
• Do you hold face to face meetings in your local
• market area, in addition to phone consultations nationwide?
• Do you teach small business/franchise classes at local colleges, libraries and
high schools?
• Is this your only business, or is this an add on to another business of yours?
• Did you used to be a franchise salesperson? {If so, franchise sales is a lot
different than franchiseconsulting}
• Do you have the courage to tell a prospective franchise owner that they need
to go find a job, instead of investing in a franchise, because a franchise is not
right for them?
• Are you a former franchise owner? Recently sell your business? Now a
franchise consultant-broker because you want something to do?
Fig. 5.3 Broker questions
5.6 Origin of Franchise Sales and Regulation

Advances in technology, orientation towards a service economy, a relative decrease in the importance of product
franchising, an expansive interstate road system, “be their own boss,” and women in the work force, have all
contributed to the burgeoning rise in business format franchising. Business format franchising accounted for 4.3
times as many business establishments as product franchising, and four times as many jobs, and operated more
establishments, met a greater payroll, and generated more output in business services than in any other single line of
business. The quick service restaurants hired more people than any other business format segment, and automotive
and truck dealers employed more workers and had the greatest payroll of any other product distribution franchise.
Jobs and payrolls in franchised businesses were greatest in California, Texas, Florida, and Illinois in 2001.
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One Short Case Study– the Beginnings of McDonald’s: Raymond Albert Kroc (“Kroc”), born in Chicago, became
a volunteer ambulance driver in World War I, a dance-band musician, a salesman, a representative for Lily-Tulip
paper cups and plates, and, later in his career, a promoter of a milk shake mixing machine. Never completing high
school, Kroc espoused a conservative, anti-regulatory philosophy, and fought for a modification of the minimum
wage law to allow entrepreneurs to employ teenage and student workers.
In 1954, Kroc visited the McDonald brothers’ small San Bernardino, California, hamburger stand, because he was
curious why the brothers needed so many of Kroc’s milk shake mixers. What Kroc found was a specialised labour
system that produced quality sandwiches at an affordable price. Kroc obtained the exclusive license to market the
McDonald name and methods, and founded McDonald’s Corporation. Kroc also opened a drive-in location in Des
Plaines, Illinois, to demonstrate the business format’s profitability.
Along with his associate, Harry Sonnenborn, Kroc purchased the land to build franchise locations, and then rented
the real estate to franchisees on long-term leases. This action increased access to capital funds. In 1957, there were
37 McDonald’s locations, by 1959 there were 100 locations, and by 1961, there were 228 locations. McDonald’s
meteoric rise continued. In 1977, Kroc assumed the title of Senior Chairman. By 1980, there were 5,000 McDonald’s
locations, and by 1987, there were 10,000. At that point, McDonald’s estimated that it had sold 65 billion hamburgers
to the eagerly consuming public. It has been estimated that McDonald’s purchases 7.5% of the total potato crop
production in the United States.
Franchise consultants make it easier to navigate the thousands of franchised concepts and hundreds of franchise
portals available on the market. Until 1970 when California enacted its Franchise selling practices, which were
unchecked practically and legally. With the dramatic growth of franchising, came a corresponding growth in
complaints over the franchise selling practices the magic of rags to riches stories often sensationalised by the press
induced an easily influenced relatively unsophisticated audience to make investments in franchise opportunities
based upon a paucity of information.
Franchise sales regulation has reacted to the informational imbalance by taking on the basic attributes of the federal
security laws. The regulations require a franchisor to provide a copy of its current of franchise agreement and
other ancillary agreements that the franchisee must sign to acquire a franchise and to make detailed disclosure of
certain material terms and conditions of those agreements, as well as detailed information about the franchisor,
its litigation and bankruptcy history, and financial conciliation; identification of existing franchisees; and copious
additional disclosures concerning the franchised business. Disclosures must be made a minimum number of days
before the franchisor may accept any consideration for the franchise or execute any contract with the franchisee.
Several states also impose a registration requirement, conditioning the right to offer or sell franchises in the state
upon acceptance by state regulators of a lengthy application containing the franchise disclosure documents and
financial statements. Franchisors must annually renew their license to offer for sale and sell franchises and amend
it there are material changes.
Franchise sales, by legal definition, are characterised by representations concerning marketing plans and assistance.
Even in states that define “business opportunities” without reference to whether or not promises of marketing
assistance are made, state administrators sometimes take an aggressive posture, claiming that franchise offers, by
their name, involve implied promises regarding profitability and income potential, and on that basis of reason to
extend their business opportunity statutes to traditional franchise relationships
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5.7 Understanding the Procedure of Franchise Sales
Initial thinking behind franchise sale:
• Make a list of the 10 fastest growing franchises in the country.
• Look for existing franchise operations in your target area.
• Keep up with franchise news.
• Check the minimum amount of capital required to open a franchise.
• For example, Taco Bell is one of most expensive franchises to set up.
• Research the required operational process flow. For example, Quiznos has three people involved in preparing
a sandwich, while Subway requires only one person.
• Research royalty fees charged by the franchise management and the advertising and marketing support they
provide.
• Research the financial rankings of franchisors. Banks rank franchises from grade A to D. A higher grade means
lower down payment, less paperwork and faster closing under SBA loan programs.
There are a number of areas to evaluate including franchisee lead flow, qualification process, sales representatives,
franchise brokers, review and monitor sales pitches, franchise sales software program, discovery days, proper
disclosure, follow-up, and going for the close.
Procedure of Franchise sale
• Lead Flow
• Lead Qualification
• Franchise Sales People
• Review and Monitor Sales
Pitches
• Franchise Sales Software
• Discovery Days
• Proper Disclosure and the
14-day Cooling Off
• Follow-up
• Going for the Close
Fig. 5.4 Procedure of franchise sales
• Lead flow: To capture leads following steps can me taken, exhibit at trade shows, marketing message for the
current franchise sales. It is important to remember that not to go for a total make over all at once since it is
most likely change too many variables and be unable to pinpoint what led to the increase in leads and ultimately
increasing franchise sales.
• Lead qualification: This is an important avenue for your sales process. It is important in the sales process to
stick to program; otherwise, you end up having discovery days and prospective franchise sales meetings with
people that just waste your time.
• Franchise sales people: The next step is to evaluate the people you have in place running your sales department.
No one can sell with the same passion and charisma that the creator has. Also examine how franchise sales
people are being compensated.
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• Review and monitor sales pitches: One of the best ways to assist your sales team is to review and monitor the
sales calls. To be sure to comply with any legal requirements prior to listening in to calls or making recordings
as there are many states that have specific rules. This is a great way to find out what people are actually saying
and more importantly to help them improve. It is as raw as it gets and allows to completely dissecting their
presentation and sales skills.
• Franchise sales software: There are many different kinds of CRM’s and sales software programs that are rather
inexpensive including Salesforce.com, ACT, Access, Goldmine, and many others. Generally it is recommend
to work with an “off the shelf” software program as they are less expensive and more people know how to
fix them. Run some diagnostics on the current sales process to ensure maximum utilisation. It makes the sales
process much easier and helps franchise sales people sell more franchises.
• Discovery days: conducting discovery days is presenting the best of business to the prospective franchisees.
Re-evaluating discovery days is a must practice. If you are not having any discovery days, make sure that you
add them in.
• Proper Disclosure and the 14-day Cooling Off: Remember to properly disclose your franchisees. Get the
signatures, the sign-offs, and everything else that needs to be taken care of when presenting the Uniform Franchise
Disclosure Document to your prospective franchisees. Always make sure to have your UFDD in its most current
form and be compliant with your state and federal regulations. Remember to be compliant with the 14 day
cooling off period where you cannot accept a deposit, sign a contract, or do anything that could indicate a sale
after the initial disclosure document is presented. This is an important aspect of the franchise sales process as
your prospects will consult with their lawyers, CPA’s, bankers, friends, family, etc. This is also your opportunity
to make sure that this is a prospective buyer that you are interested in bringing into your franchise system.
• Follow-up: After the qualification, phone calls, and discovery day the hardest part is next. You have to remember
to follow-up with your prospects. The follow-up is often times where you are able to hear the truth about what
your prospects are thinking. You need to examine how often and what you are saying in your franchise sales
follow-up. It is key to institute a quality follow-up procedure to assist your franchise sales long-term.
• Going for the close: As discussed the franchise sales process is full of detail, hard work, and persistence.
It is a rewarding and exhilarating experience that is full of high emotion for both you and your prospective
franchisees.
5.8 Study an Effective Franchise Sales Process

While recruiting franchisees is important to growth, it is also important to note that the offer and sale of franchises is
highly regulated. Consulting with franchise attorney as designed the sales process, including, among other things, like
handling franchise validation. The key is to understand the legal do’s and don’ts of franchise sales, process enables
prospects to gain the information they need, and they gain it in a way that complies with legal requirements.
5.8.1 Map the Sales Process

As mentioned in the opening, careful consideration of the franchisee you want to attract is a critical component
both in defining the right sales process to engage prospects and in determining the right lead-generation tactics to
find them.
All other steps of the sales process are based upon a actual give-and-take and engagement on both sides in the
process; as such, the other sections of the brochure are password-protected and require a salesperson to be part of
the prospect expenence.
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The steps may vary for you, depending on your concept’s level of complexity, and it may change over time-as
the model changes or as you improve your processes-as ours has. For vital brochure, break the process into the
following five steps:
• The Opportunity
• Competitive Advantages
• Training and Support
• Validation
• Join-the-Team Day
Another way to consistently improve performance is to evaluate the process monthly.
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Summary
• Selling a franchising concept is similar to selling any other product or service It is important to remember that
they are sales people, hired or commissioned by the franchisor.
• The hard core information upon which it should base is Franchise Salespeople and Brokers is found in the
disclosure documents, the professional evaluation from attorney and accountant, and self investigation of the
franchisor’s network.
• A sales person who tells a franchise buyer how much money he or she can expect to earn operating a franchise,
without having any reasonable basis and without providing proper substantiating documentation in a disclosure
document, is engaging in an outright unlawful practice.
• Getting ethical and professional assistance to help you find and purchase a franchise can be a very wise
choice
• A franchise broker can help understand the difference between the various types of opportunities so it’s easy
to determine which format is right.
• The broker’s commitment to be to present top-notch franchises that match needs and have , successful track
records , excellent training and support, an opportunity for equity growth, and other important characteristics.
• While the number is growing, only a small percentage of franchisors use broker networks and even the largest
broker networks only represent a relatively small number of franchise opportunities.
• As a franchisee starts working with the franchise consultant, the first step is to provide information about
background and experience. This is often done via an online questionnaire. The franchise consultant needs to
have an understanding of finances to make sure franchises affordability.
• Consultant will then coach through the due diligence phase of the investigation, which typically takes three to
four weeks, if not longer. By introducing only to quality opportunities that match your lifestyle and goals, a
consultant can save a great deal of time.
• There are a number of areas to evaluate including franchisee lead flow, qualification process, sales representatives,
franchise brokers, review and monitor sales pitches, franchise sales software program, discovery days, proper
disclosure, follow-up, and going for the close.
• One of the best ways to assist your sales team is to review and monitor the sales calls. To be sure to comply
with any legal requirements prior to listening in to calls or making recordings as there are many states that have
specific rules.
• Conducting discovery days is presenting the best of business to the prospective franchisees. Re-evaluating
discovery days is a must practice. If you are not having any discovery days, make sure that you add them in.
• Another way to consistently improve performance is to evaluate the process monthly.
References
• Sun, S., 2011, Grow Smart Risk less, Green book press.
• Barkoff, R. & Seldon, A., 2008, Fundamentals of franchising, 3rd ed., ABA publishing.
• King, P., 2011, VR business brokers franchise Brokerage for Business Sales and Mergers & Acquisitions, [Video
Online] Available at : <http://www.youtube.com/watch?v=bwn7NJzNy6s&feature=related> [Accessed 2 May
2012].
• Allen, G., 2011.Franchise Broker, [Video Online] Available at <http://www.youtube.com/watch?v=hFqblXZEu-
w&feature=related> [Accessed 2 May 2012].
• Wild, D., How to Franchise: Franchise sales, [Online] Available at: <http://www.2012businessopportunities.
com/component/content/article/1-latest-news/51-how-to-franchise-franchise-sales> [Accessed 2 May 2012].
• Libava, J., All about franchising, [Online] Available at: <http://www.biz2credit.com/b2c-ebook-franchise.pdf>
[Accessed 2 May 2012].
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Recommended Reading
• Tomzack, M & Bond, R., 1999. Tips and Traps when buying Franchise, 2nd ed., Source book Publication.
• Better business bureau., 2007. Buying a Franchise, Planning shop.
• Bennet, J., 2008. Franchise times, Sterling.
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Self Assessment
1. __________ can provide with important information on franchising and the opportunities available.
a. Brokers
b. Franchise
c. Unit
d. Owner
2. What are the functions of a broker?

a. Take all decisions
b. Train franchisee
c. Keep all the franchise and franchisee updates
d. Understand financial limits and risk tolerance
3. A common mistake made by franchise seekers is to focus on the product or service of the franchise instead of
the _______and its characteristics.
a. distributorship
b. multi unit franchise
c. business model
d. message passing

a. Personal likes and dislikes can never be misleading.
b. A good franchise consultant will look not only for the best or most lucrative opportunity available, but the
one that best suits choice and experience.
c. As a franchisee starts working with the franchise consultant, the first step is to provide information about
background and experience
d. Multi-unit franchises is not an agreement where the franchisor grants a franchisee the rights to open and
operate more than one unit

a. After checking for market availability, the consultant will typically introduce you to franchise concepts that
make sense for you to consider.
b. Franchise consultants make it easier to navigate the thousands of franchised concepts and hundreds of
franchise portals available on the market.
c. Franchise sales regulation has not reacted to the informational imbalance by taking on the basic attributes
of the federal security laws
d. Franchise sales, by legal definition, are characterised by representations concerning marketing plans and
assistance.
6. A_________ may be subject to many controls by the supplier/producer and begin to resemble a franchise.
a. distributor
b. franchise
c. trainee
d. owner
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7. __________ regulations have reacted to the informational imbalance by taking on the basic attributes of the
federal security laws.
a. Trademark
b. Franchise sales
c. Brokers
d. Market
8. Franchise sales, by legal definition, are characterised by representations concerning ________plans and
assistance.
a. franchise
b. personal
c. marketing
d. stock market
9. _______must be made a minimum number of days before the franchisor may accept any consideration for the
franchise or execute any contract with the franchisee.
a. Disclosures
b. Closers
c. Opening
d. Launch
10. The broker’s objective is to eventually put franchisee in touch with _________.
a. franchises
b. owners
c. market
d. current affairs
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Chapter VI
Multiunit Franchising
Aim
• explain multiunit franchising
• elucidate single unit franchising versus multiunit franchising
• enlist the characteristics of multiunit franchising
Objectives
• describe methodology of multiunit franchising
• explain multiunit franchising phenomenon
• elucidate benefits of multiunit franchising
Learning outcome
• understand the meaning of multiunit franchise
• enlist advantages and disadvantages of multiunit franchising
• identify the importance of training in multiunit franchising
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6.1 Multiunit Franchising
Two distinct forms of franchising with a specific purpose are used by franchisors. Franchising is distinguished into
two forms: product franchising and business format franchising. The first type is present when “a manufacturer
creates a contractual channel of distribution for one or more products” Coca-Cola, Goodyear Tires, or John Deere
are companies that use this form.
The second form is present when “a retailer licences the right to replicate its business concept in another location”.
The salient difference between these two forms is that in the product franchising, the franchisors do not offer an
operating system to franchisees while franchisors do in a business format franchising.
6.1.1 Single Unit Franchising versus Multiunit Franchising

Within the business format franchising, one can differentiate between two types of franchising. First, a franchisor can
use single-unit franchising where the franchisee manages only one unit and is restricted to run this unit. Second, a
franchisee can have the possibility to operate many units in a multi-unit franchising. The latter can again be subdivided
into two forms: area development and sequential multiunit franchising. These are direct modes of growth for the
system because franchisees are allowed to open new outlets under their own ownership resulting in the creation of
a number of mini-chains within the franchise system.
In the area development form, the franchisor obliges the franchisee under a contract to open a determined number
of units in an assigned territory during a specified period of time. In contrast, the franchisor grants the franchisee the
right to open subsequent outlets in the sequential multi-unit franchising. In this case, a separate franchise contract
is made for each additional unit. To clarify the structure, the following figure offers an overview of the different
forms of franchising.
single unit
franchising
business format area development
franchising form
multiunit
franchising
product sequential multiunit
Franchising
franchising franchising
manufacturing
or processing
franchising
Fig. 6.1 Forms of franchising

(Source: http://arno.unimaas.nl/show.cgi?fid=16765)
Within their systems, many franchisors have a combination of SUFs and MUFs (Weaven and Frazer, 2006). However,
multi-unit ownership has become the dominant form of franchising. Over the past two decades, the number of
franchisees owning and operating more than one unit has increased and the emergence of franchise owners who
have several outlets explained a major part of the recent growth in the franchising industry.
The importance of multi-unit franchising was investigated and confirmed in several studies. Kaufmann and Dant
(1996) reported that 88 percent of their surveyed franchisors have at least one multi-unit franchisee within their
systems. In addition, in another survey made by Kalnins (2004), 915 out of 1258 new outlets of three fast-food
chains were owned by 203 multi-unit franchisees. Finally, across all types of industries, a study conducted by the
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IFA Educational Foundation (2002) found that multi-unit franchisees own more than the half of the surveyed units.
The growing prevalence of multi-unit franchising is explained by the effectiveness of this strategy allowing a rapid
growth of franchising systems for franchisors (Kaufmann and Dant, 1996). At the same time, several advantages of
multi-unit franchising for franchisees exist: decreasing risk thanks to diversification with new outlets, economies
of scale or previous experience within the same franchising system.
6.2 Characteristics of Multiunit Franchising

Most franchisors initially experiment with operating multiple companies owned locations, before even beginning
franchising. Once a company decides to franchise, rights to operate multiple units often take the form of option
agreements or rights of first refusal which appear as amendments to single unit agreements.
• There are 3 principal methods of multi unit expansion prevalent, although there are far more terms used to
describe these relationships.
• The most traditional form of multi unit expansion occurs between two parties, the franchisor who licenses its
marks and systems, on the one hand, and the multi unit franchisee, which operates the units, on the other.
• The other methods of multi unit expansion, namely sub franchising and area representation, all involve third
parties, who will be recruited to operate the actual units.
• Area developer, which is the term most people like to call themselves, is used to describe all of these
relationships.
Multiunit franchisee: A multi unit franchisee is granted an exclusive or nonexclusive right to open a pre
determined number of units in a defined or geographic territory on an agreed upon development schedule. A
multi branded franchisee is a multi unit franchisee who operates units in more than one brand, from related
or unrelated franchisors.
Sub franchisor: A Sub franchisor licenses the rights to act as the franchisor in a specified territory, and recruits
franchisees to enter into individual franchise agreements directly with them, and then services and supports
them pursuant to those franchise agreement. The sub franchisor must satisfy any regulatory compliance
obligations, including any registration requirements. Sub franchising is used in practice less frequently in
domestic transactions, except perhaps in the janitorial or other service industries.
Area representative: An area representative or development agent as they are sometimes called, pays an initial
fee for the right to recruit prospective franchisees in a particular area pursuant to a development schedule,
and is usually responsible for performing certain of the franchisor’s pre-opening and ongoing service and
support obligations under the franchise agreement. A multi branded area representative represents multiple
non-competing brands, usually through a single entity.
Both a sub franchisor and area representative usually pays an initial fee to the franchisor in exchange for a portion
of initial franchise fees and royalties collected from franchisees in the area, but when a franchisor uses an area
representative strategy, the franchisee enters into the franchise agreement directly with the franchisor, who collects
all fees and is contractually responsible for providing all service and support.
6.3 Benefits of Multiunit Franchising

The most significant recent trend in franchise development is the rise of multi-unit franchising.
• Multi-unit franchising implies the creation of two or more franchise locations either within a given territory, or
through multiple territories.
• Some investors choose to diversify their portfolio and invest in multiple brands however there are many
advantages to developing a single brand within multiple territories.
• Multiple units offer both greater returns and opportunities for overall growth of the franchise business.
• These expansion techniques are species of multiple unit franchising which share the common goal to open more
units faster, to leverage a franchisee’s money and personnel and to obtain a local presence.
• The most compelling reason to invest in multiple units is the increased potential for income. The benefits of
reducing your risk are equally persuasive.
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• From a franchisor’s perspective, multiple unit franchising provides opportunities for accelerated growth, a vehicle
to penetrate new markets, capitalise on certain market efficiencies, reduce the training, opening operational
assistance typically provided to single unit franchisees and a means to attract and reward productive franchisees,
as well as a means for liquidity for performing or under performing units.
• By creating a growth vehicle for multi unit franchisees, there often results a loss of control. Franchisors are forced
to deal with defaults differently, because the franchisor’s interest in enforcing compliance, are tempered by its
reliance on the franchisees ongoing royalties and validation. Moreover, depending on the discounts afforded to
multi unit operators or the consideration paid to area representatives, these relationships can severely impair a
franchisor’s cash flow.
• While multiple unit franchising is the clear trend, it is not appropriate for all opportunities. Sometimes it is a
function of timing, as many new franchisors use various forms of multi unit franchising to grow in early stages,
or in other cases the unit economics simply will not support the additional layers of infrastructure to make the
investment worthwhile, in other cases multi unit expansion is at odds with corporate philosophy, or the lack of
expansion capital in a particular industry or for other reasons.
• Most prospective multi unit franchisees will tell you that they look for new franchisors with experienced
management, strong unit economics, a successful multi unit history, and appropriate infrastructure (including
personnel necessary to support multiunit operations), a strong brand and recognised marks, some level of
integrated supply chain management, and a reputation for enforcing system standards.
• Training of staff can be a costly and cumbersome task. When multiple locations exist, savings and efficiencies
in training are evident and can often be handled by one team.
• Many multi-unit franchisees encourage competition among the units as a further incentive for their staff.
6.4 Multiunit Franchising Phenomenon

Despite the establishment of the above examined all embracing characteristics, a variety of franchise forms coexists
under the same name. However, the traditional perception of franchising is the “mom and pop” franchisee, which
brings all of her/his energy and focus to bear on operating one outlet (Caves and Murphy 1976).
• In recent years, practitioners’ as well as researchers’ attention has begun to focus on this new development in
franchising, the trend towards multi-unit franchising. In contrast to the historic “mom and pop” franchisee, an
ever growing number of franchisees currently owns and operates more than one outlet.
• Over the past few years, various studies have indicated the persistent importance of multi-unit franchising in the
U.S. Kaufmann and Dant (1996) found that 88% of the surveyed franchisors had multi-unit franchisees, while
Kaufmann (1995) found that 83% of the surveyed New Mexican restaurants in 1994 were opened by existing
franchisees. Within the McDonald’s franchise system, between 1980 and 1990, 61.5% of all new restaurants were
opened by existing franchisees (Kaufmann and Lafontaine 1994). Consequently, Kaufmann and Dant (1996,
pp. 346-347) conclude that “the typical location- based franchise system (of which the fast food franchise is the
prime and model example) is populated with multi-unit franchisees.” Further, based on various recent studies
(example, Kaufmann and Kim 1993, 1995; Robicheaux, Dant, and Kaufmann 1994), it can be concluded that
the franchising sector as a whole is not only growing, but that a substantial portion of the industry’s growth can
be attributed to the increasing popularity of multi-unit franchising.
• Hence, Kaufmann and his colleagues (Kaufmann and Dant 1996; Kaufmann and Kim 1993, 1995) identify three
types of multi-unit franchisees, apart from the traditional single-unit franchisee. “Sub franchising”, often also
denoted as “master franchising”, and is characterised by the franchisor’s permission to a franchisee to grant
franchises on the franchisor’s behalf to third parties.
• Sub franchising as a distinct form of franchising is widely used in the international expansion efforts of franchisors.
Often, a sub franchisor for one or even several countries is established who then, in turn, sub franchises to local
franchisees that are responsible for opening their units.
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• The sub franchisor functions as an additional control layer, and largely assumes the tasks of the franchisor in
her/his geographical area for a share of the royalty payments. Sub franchising as well as corporate ownership of
outlets by the franchisor have been in the past and are still today among the most frequently observed forms of
control in the international expansion process of U.S. franchise systems. Either strategy allows the franchisor a
great amount of control over its foreign operations, a paramount objective for franchisors in light of the prevailing
communication and strategic flexibility problems in global franchisor/franchisee relationships.
• Domestically, sub franchising plays a subordinate role compared to “sequential multi-unit” and “area
development” franchising which are described subsequently. Presumably, this inferior representation of sub
franchising in the domestic context is grounded in the structure of the arrangement. The additional control
layer in a sub franchising arrangement only complicates the functioning of the relationship without yielding an
additional benefit for either party.
• Therefore, the following more “direct” relationship constellations between franchisor and franchisee seem to be
preferred domestically. “Area development franchising” as well as “sequential multiunit franchising” denote
the types of franchising in which the franchisee her/himself opens additional units under her/his own ownership
and management. They are the prevalent types of franchising in the U.S. (Robicheaux, Dant, and Kaufmann
1994), with sequential multi-unit franchising as the most common domestic form (Kaufmann 1992).
• In area development franchising, the franchisor requires the franchisee her/himself to exercise the contractual
obligation to open a specified number of outlets within a specified period of time. In sequential multi-unit
franchising, the franchisor simply grants the franchisee the right to open additional units, with each subsequent
outlet being legally governed by a separate franchise agreement.
Both of these types of multi-unit franchising actively encourage the creation of mini-chains, i.e., multiple units
owned by the franchisee and operated by employee managers of the franchisee.
6.5 Multi-facets of Multiunit Franchising

Franchising gives young aspiring entrepreneurs the formula to run or own a business successfully. However, many
franchisees still consider that a franchisee at a time can only own or run a single outlet. However with advancements
in technology, communication and internet, managing more than single outlet is no more a Herculean task for
successful franchisees.
• For franchisees, who want to own more than single outlet can achieve newer heights through multi-unit
franchising.
• In simple words, the concept of multi-unit franchising business is the opening of more than one outlet of a
particular brand by a franchisee. The next logical step for franchisees, which have been running a single store
successfully, is to expand their business to earn more profits.
• Expansion of business with the same brand is considered preferable as both the franchisor and franchisee
may have developed good relations. Moreover, franchisors are keen in offering franchise rights to an old and
experienced franchisee who have been successful with the same brand.
Following are the positive aspects of investing in a multiunit franchise:

• Accelerates profits: Both franchisors and franchisees experience sudden increase in returns through multi-unit
franchising. Moreover, for franchisees it gives them the opportunity to expand their businesses and gain more
power. Multi-unit franchising decreases per unit expenses as the franchisee can share the expenses with his/her
multiple units. Multi-units have multi benefits. Firstly the franchisee can make more profits. More than this the
profitable outlets can support the new outlets well.
• Stronger relations: A multi-unit franchisee is sure to develop better relations with his franchisor as compared
to single unit franchisees. They can also get leverage from franchisors in terms of reducing the franchise fees
and regular royalties.
• Cost- effective in advertising and marketing: Owning multi-units of the same brand save money in terms of
marketing and advertising of the outlets. A franchisee can market all his various outlets through single advertising
campaign, as in most cases they are located in one region.
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• Rotation of experienced staff: A franchisee running a successful outlet must have efficient and experienced staff.
Therefore, it becomes easier to train and hire new staff for his new outlet as the previous employees can take care
of their outlets on their own. Moreover, the staff can be rotated according to the requirement of the outlets.
• Management of time: Opening the first outlet demands time and dedication. However, while opening additional
units, less time is spent on each outlet, as with every new outlet, franchisee gains experience and expertise to
run the outlet successfully.
• Developing relation with vendors: A multi-unit franchisee has to buy raw materials or products for all his outlets
simultaneously. Therefore, he can easily save money in buying the supplies in bulk for all his outlets. Vendors
also develop relations with their permanent customers and allow high discounts and other services to them.
• Contribution of whole family: Running multi-units can also engage the members of the franchisee’s family. A
multi-unit franchisee can employ them in different positions at different outlets. This will keep their business
in trustworthy hands.
• Time and efforts is the biggest investment: The franchisee has to put in 100 per cent of his efforts in all his
outlets to reap benefits. He has to give equal time and attention to his outlets. Thus, time and effort is the biggest
investment in maintaining multi-unit outlets.
• Hiring efficient managers: It is not possible for a franchisee to be available in all his outlets simultaneously,
therefore every outlet requires efficient and trust worthy managers. To get dedicated manager is a tough call
for franchisees.
• Maintaining high success rate: A franchisee running multi-units has to maintain high standards for all his outlets.
This can add lot of stress and tension to his personal life too.
6.6 Advantages and Disadvantages of Multiunit Franchising

Following are the advantages and disadvantages of multiunit franchising:
• Franchisee has been through this before • Cash flow can initially become more of
and is much more ready for most of the a critical issue.
surprises with the new store expansions. • Franchisee can no longer have the time to
• Franchisee have a much better feel for devote to any one unit or store…to really
how to market and grow your business. let the control its managers.
• Economies of scale (i.e. marketing and • Personnel issues and risks magnify.
inventory purchasing) start to work in • Risk/Reward comes into play more
its favor. strongly. Franchisee now have a lot more
• Taining of new employees is more honed of your investment into the business and
in. therefore have more money at risk.
• Franchisee is treated with more respect
from the franchisor (more units, more
revenue, more importance)
• Franchisee have a much greater revenue
(and hopefully profit) stream.
Fig. 6.2 Advantages and disadvantages of multiunit franchising
Much confusion still surrounds the concept of franchising despite the fact that it is a long established business
arrangement. This arises from the variety of business arrangements that closely resemble franchising, and the common
use of the term in everyday language. It is usually assumed explicitly or implicitly that franchising is a distinct and
well-defined category somewhere between complete vertical integration and autonomous firms.
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From a marketing standpoint, there are actually a number of alternative organisational forms between the two
extremes. Apart from franchising as a contractual vertical marketing system, examples of distribution channel hybrids
include administered vertical distribution systems, and strategic alliances. In an international context, licensing
represents another popular alternative to franchising. The possible hybrid organisational forms are so numerous
that they are best thought of as existing on a continuum. Franchises are not a single point along the continuum, but
rather constitute an alternative to each of the organisational types along the continuum.
Four basic features are common to all commercial franchise structures.
• The first is that the franchisor is the owner of a name, an idea, a secret process, a product, or a
specialized piece of equipment, as well as the goodwill associated with it.
• The second characteristic is the issuing of a franchise specified by contract, permitting the franchisee
to use the specific product itself, or even the complete business format. As outlined above, this
determines the distinction between “product and trade name” and “business format” franchising.
• The third characteristic is the inclusion in the franchise contract of regulations and controls relating
to the operation of the business in the conduct of which the franchisee exercises her/his rights.
• Finally, there is the payment by the franchisee of a royalty, an entry fee, and/or the payments
for supplies purchased from the franchisor in return for rights obtained and franchisor services
provided.
Fig. 6.3 Four basic features are common to all commercial franchise structures
6.7 Importance of Training in Multiunit Franchising

A franchising system requires a tremendous amount of preparation and training. New franchisees as well as staff
members need to learn about the various positions and occupations in their organisation.
Franchisees need to learn about hiring, firing, inventory control, marketing, advertising, promotion, bookkeeping,
and all other aspects of the franchise business. The knowledge is not enough. It is of equal or more importance that
the franchisor instils within the franchisee a sense of self-confidence and self-worth.
Because of the need to instil both positive attitudes and behavioural skills within the new franchisee, it is very critical
to select a competent training director.
The training director will be responsible for all training programs for both the headquarters staff and franchisee
staff. This training director must be capable of working with many different individuals and all kinds of different
personalities.
The effective training director will realise the duality of his position in providing training for.:
• Operational skills
• Positive self-confidence and attitude.
The training director will be responsible for explaining specific job duties, policies, procedures, and the handling
of each task within the business. In addition, the training director must be able to inspire confidence, a feeling of
rapport, and respect for the business operation. The training manager should possess personal expertise and all the
practical aspects of the operation, as well as being able to develop a sense of confidence for the franchisee and their
employees.
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The training operation of a franchise system generally involves the following three major components:
• Developing and implementing a training unit
• Creating a training centre or location
• Developing the training program including the philosophy, knowledge, experience, and skills which are to be
achieved and the methods used to provide such training.
Franchisee training generally assumes little or no business background. The training is generally divided into three
major components:
• Pre-opening training
• Grand opening training, and
• Continuing (post-opening) training.
6.8 Methodology of Multiunit Franchising

A major movement in the franchising field is the development and utilisation of multi-unit franchising programs.
A multi-unit franchisee is an individual who owns and operates more than one franchise. This most often occurs in
urban areas or in populations which provide opportunities for multi-unit franchising.
A multi-unit franchisee generally begins with one unit and often utilises the profits from that unit to expand into the
second, third, and fourth stores. Many larger franchisors limit franchisees to one, two, or three independent units.
6.8.1 Master Franchisee

Another major method of developing multi-unit franchises is handled through a master franchisee program.
• The master franchisee relationship is defined as a right to solicit prospective franchisees and to provide training
and other services to franchisees in exchange for a percentage of the initial fees and royalties paid by the
franchisee to the franchisor.
• In a master franchise relationship the individual has the right to develop, own, and operate franchise facilities
within the territory, as well as to seek other franchisees that may operate individual units.
• Probably the major use for the master franchisee arrangement is when the franchisor enters foreign countries and
seeks out individuals or corporations to serve as master franchisees for the entire country. For example, Merry
Maids has an arrangement with Duskin Corporation of Japan to develop their domestic cleaning franchises in
Japan. Master franchising in the United States has disappeared to a great extent because of the emergence of
multi-unit franchisees and in some cases, sub franchise programs.
6.8.2 Sub Franchising

An additional method of franchising is the sub franchise route which is defined as a sub franchisor that develops a
certain number of facilities within a specific territory through the direct sale of franchises.
• One of the main purposes of any training program is to prepare individuals to perform and handle the functions
for which they are responsible.
• There are very few positions in any organisation that does not require some form of training. It is indeed a
rare individual who completely understands an organisation and their function in that organisation when they
start.
If either the franchisor and/or franchisee fail to provide adequate training, the new franchisee or employee will be
forced by trial and error to perform their duties resulting in frequent lost time, poor quality, and lost products.
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Summary
• Within the business format franchising, one can differentiate between two types of franchising. First, a franchisor
can use single-unit franchising where the franchisee manages only one unit and is restricted to run this unit.
Second, a franchisee can have the possibility to operate many units in a multi-unit franchising.
• The importance of multi-unit franchising was investigated and confirmed in several studies. Kaufmann and
Dant (1996) reported that 88 percent of their surveyed franchisors have at least one multi-unit franchisee within
their systems.
• There are 3 principal methods of multi unit expansion prevalent, although there are far more terms used to
describe these relationships.
• Area developer, which is the term most people like to call themselves, is used to describe all of these
relationships.
• A multi unit franchisee is granted an exclusive or nonexclusive right to open a pre determined number of units
in a defined or geographic territory on an agreed upon development schedule.
• A Sub franchisor licenses the rights to act as the franchisor in a specified territory, and recruits franchisees to
enter into individual franchise agreements directly with them, and then services and supports them pursuant to
those franchise agreement.
• A multi branded area representative represents multiple non-competing brands, usually through a single
entity.
• Multiple units offer both greater returns and opportunities for overall growth of the franchise business.
• The most compelling reason to invest in multiple units is the increased potential for income. The benefits of
reducing your risk are equally persuasive.
• Many multi-unit franchisees encourage competition among the units as a further incentive for their staff.
• Sub franchising as a distinct form of franchising is widely used in the international expansion efforts of
franchisors.
• Domestically, sub franchising plays a subordinate role compared to “sequential multi-unit” and “area
development” franchising which are described subsequently.
• In area development franchising, the franchisor requires the franchisee her/himself to exercise the contractual
obligation to open a specified number of outlets within a specified period of time.
• The concept of multi-unit franchising business is the opening of more than one outlet of a particular brand by
a franchisee.
• A multi-unit franchisee is sure to develop better relations with his franchisor as compared to single unit
franchisees.
• Apart from franchising as a contractual vertical marketing system, examples of distribution channel hybrids
include administered vertical distribution systems, and strategic alliances.
• A major movement in the franchising field is the development and utilisation of multi-unit franchising programs.
A multi-unit franchisee is an individual who owns and operates more than one franchise.
• An additional method of franchising is the sub franchise route which is defined as a sub franchisor that develops
a certain number of facilities within a specific territory through the direct sale of franchises.
References
• Multiunit owners study, 2002, IFA Publications.
• Grunhagen, M., 1998, Multiunit franchising, [pdf] Available at: <http://www.sbaer.uca.edu/research/asbe/2001/06.
pdf > [Accessed 3 May 2012].
• Deering, J., 2011.Jim Deering on multiunit franchise operators, [Video Online] Available at: <http://www.
youtube.com/watch?v=3EZ3074GSUo> [Accessed 3 May 2012].
• 2011. Multiunit franchise conference, [Video Online] Available at: <http://www.youtube.com/
watch?v=5V5jtEC51Cg> [Accessed 3 May 2012].
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• Kalinins, A. & Lafontaine, F., Characteristics of multiunit ownership in Franchising, [Online] Available at:
<http://ideas.repec.org/p/nbr/nberwo/5859.html> [Accessed 3 May 2012].
• Libava, J., Multiunit Franchising: What you need to know, [Online] Available at: <http://smallbiztrends.
com/2009/10/multi-unit-franchising-what-you-need-to-know.html> [Accessed 3 May 2012].
Recommended Reading
• Kwansa, F. & Parsa, H., 2002. Quick service restaurants, franchising and multiunit chain management, 4th
ed., Routledge.
• Alon, I., 2012, Global Franchising: Operations and management, 1st ed., FT press.
• Windspreger, J., 2004, Economics and networks of Franchise networks, 1st ed., Physica-verlag HD.
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Self Assessment
1. Franchising is distinguished into two forms _________ and business format franchising.
a. product franchising
b. single unit franchising
c. multiunit franchising
d. area development
2. Which of the following is also known as single unit franchise?

a. A franchisor can use single-unit franchising where the franchisee manages only one unit and is restricted
to run this unit.
b. A franchisee can have the possibility to operate many units.
c. A franchise is the license or agreement between two legally independent parties.
d. A franchise provides franchisees with a certain level of independence where they can operate their
business.
3. _______________ is one of the alternatives to franchise.

a. Distributorship
b. Multi unit franchise
c. Polymorphism
d. Message passing

a. A Sub franchisor licenses the rights to act as the franchisor in a specified territory, and recruits franchisees to
enter into individual franchise agreements directly with them, and then services and supports them pursuant
to those franchise agreement.
b. Most franchisors initially experiment with operating multiple companies owned locations, before even
beginning franchising.
c. Multi-unit franchising implies the creation of two or more franchise locations either within a given territory,
or through multiple territories.
d. Single units offer both greater returns and opportunities for overall growth of the franchise business

a. In personal development franchising, the franchisor requires the franchisee her/himself to exercise the
contractual obligation to open a specified number of outlets within a specified period of time.
b. Franchising does not give young aspiring entrepreneurs the formula to run or own a business successfully.
c. For franchisees, who want to own more than single outlet can achieve newer heights through multi-unit
franchising.
d. A single-unit franchisee is sure to develop better relations with his franchisor as compared to single unit
franchisees.
6. Both franchisors and franchisees experience sudden increase in returns through ______-unit franchising.
a. single
b. multi
c. area development
d. sub
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7. A franchisee running multi-units has to maintain _______ standards for all his outlets.
a. high
b. low
c. mediocre
d. good
8. A multi-unit franchisee generally begins with _____ unit Franchise

a. multi
b. single
c. one
d. two
9. A major method of developing multi-unit franchises is handled through a _________ program.

a. area development
b. sub franchise
c. master franchise
d. multi franchise
10. The ________must be capable of working with many different individuals and all kinds of different
personalities.
a. training director
b. franchisee
c. customer
d. franchisor
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Chapter VII
International Franchising
Aim
• explain international franchising
• elucidate international expansion
• explicate trademarks in international franchising
Objectives
• explain the advantages of international franchising
• elucidate international franchising market
• explicate regulation of international franchise
Learning outcome
• understand international franchise opportunities
• identify social and international franchising
• describe economic potential of international franchise
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7.1 International Franchising
International franchising is both an offensive and defensive strategy used by large and small companies to diversify
into foreign markets - making the firm increasingly less dependent on home country revenues and demand.
It’s critical to realise international franchise expansion takes more than just a master franchise agreement. Having
connections within target country, including people, who know other, high-calibre people, is critical. An international
franchise partner can build a brand. But an inappropriate partner can just as easily wreck the brand, usually in a very
short time. That’s why our firm has taken time and care in developing international relationships.
Many businesses begin expanding at a certain region but as time goes by, those that perform well decide to expand
through franchising. Some even go to the level of international franchising. The tricky part is deciding if it makes
business sense to go for international franchising. Before considering international franchises, it is important to first
have a budget that is realistic and set achievable goals that should be in place within the first few years.
Marketing programs, training and support are necessary for international franchising. There is a need to come up
with the practical programs that will make it easier to implement the concept of the franchise in a foreign country.
The business model must cope with the market expectations in another country which is likely to have a different
culture. If there are strong business systems and support, the process of transferring the concept and the way it is
intended to work in another country will be better.
Even though the FDD is a U.S. legal requirement, investors in international franchise transactions insist on one,
even though their country may not “technically” require an FDD. So, a company’s FDD must be reviewed with an
international focus and include a master franchise agreement. When dealing with international franchising there
should be good systems for monitoring a business and setting standards. There are many instances of franchisors who
having great systems at home but they fail to enforce similar standards when they operate an international franchise
business. Research is also important in determining the number of units that can be established in that country.
7.2 Types of International Franchising

The most common form of franchisor-franchisee international franchise relationship is the master franchise, also
known as sub-franchisor. In such a relationship, the master franchisee is granted a franchise for all or part of a
particular country. The master franchisee is granted the right to develop the entire territory or sub-franchise the
units to third parties (sub-franchisees).
• The master franchisee is trained by the franchisor. Thereafter, in consideration for a portion of the royalties,
the master franchisee recruits, trains, and supports sub-franchisees to operate individual units of the franchise
in the territory. In effect, the master franchisee is now the franchisor for that particular country, and normally
there is no privacy of contract between the sub-franchisee and the international franchisor located in the United
States, or other countries.
• Another form of international franchisor-franchisee relationships is the Area Development Franchise. Like
the master franchise discussed above, the franchisor grants the Area Developer the right to develop an entire
country or part of it. Unlike the master franchise, the Area Developer focuses on running the business, rather
than selling franchises.
• Although less common, some international franchise relationships take the form of single-unit franchises.
A single-unit franchisee is granted the right to open one franchise. Franchisors steer away from this type of
arrangement due to the great costs sustained in servicing one unit outside the country.
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7.3 International Expansion

International franchising is an expansion strategy. While considering the first “international” it may not necessarily
rely solely on domestic resources to assist franchise companies in all countries. It is considered each situation
individually and uses the most appropriate talent from around the world, usually in combination with local service
providers.
As for the second part, not only does this involve either structuring or restructuring the international transaction,
but also due diligence investigations similar to performing mergers and acquisitions investigations apart from
franchising.
International franchising and distribution usually differ substantially from domestic programs. Also, it is not
uncommon for franchise companies to avoid domestic franchising, relying instead on company-owned outlets
domestically. In either case, a new program is typically called for when expanding internationally.
Following is a quick checklist of issues to cover when structuring an international franchise offer:
• Territory size should correspond to number of units to be opened.
• Require that Master open showcase and training units before selling franchises.
• Development schedule should be fairly aggressive, to pre-empt competition.
• Initial term should coincide with or extend just beyond the development schedule.
• Allow Area Rep who completes development schedule on time to renew for one or more additional terms,
but retain the right to require establishment of additional franchises during any renewal term as a condition
of renewal; if Area Rep fails to comply or renew, franchisor may take over the area or appoint a new rep to
manage the area.
• Duties of Master/Area Rep may include: contributing to Franchisor’s franchise lead generation activities,
such as advertising on the Web and national publications, preparing DVDs, and printing brochures, generating
additional franchise sales leads, qualifying leads, following up with qualified leads until ready to sign, filling
in blanks in documents for franchisor and franchisees to sign after the appropriate cooling-off periods, training
new franchisees at showcase unit, assisting new franchisees with opening of new units, periodically visiting with
franchisees in area, coordinating marketing, testing, and introduction of new products within area, conducting
refresher training, training new managers for franchisees when necessary, reporting to franchisor on franchisee
compliance and recommending termination, if appropriate, etc.
• Duties of the Franchisor may include: coordinating Internet and multi-territory marketing for franchise sales
leads, providing lead generation and sales tools, turning over “local” leads to Master/Area Rep, training Master/
Area Rep in franchise marketing and sales, training Master/Area Rep in training, assisting, and supervising
franchisees, coordinating system-wide product marketing measures, providing Master/Area Rep with new
developments to be introduced to the market, conducting annual convention, etc.
• Typical transfer and right of first refusal provisions should be included.
• Typical default provisions should be included.
• Typical choice of law and venue provisions should be included.
• Typical confidentiality and non-compete provisions should be included.
7.4 Trademarks in International Franchising

Following are the aspects to be considered while dealing with trademarks in international franchise.
7.4.1 Protection of Trade Marks Internationally
One of the first realisations typically made by a franchisor attempting to expand his activities into other countries is
that foreign laws are often derived from legal traditions and systems different from his own, frequently resulting in
frustrating delays and seemingly incomprehensible restrictions on planned expansion. Certainly the area of trademarks
is no exception to this observation, and these differences as they relate to trade marks should be carefully assessed
along with financial and marketing considerations.
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• The prudent franchisor will turn his attention to the protection of trademarks internationally long before a final
decision is taken to export his franchise system. The issue of protection should certainly be addressed before
the franchisor commences discussions with a third party to grant a franchise, master franchise, or development
rights for a foreign country.
• This is particularly so in view of the fact that what would otherwise constitute piracy of a trade mark in some
countries is merely viewed as sound business practice in others. Thus, the first experience in international
franchising for many well-known franchisors is that they are forced to acquire the rights to their trademarks
previously registered by third parties.
7.4.2 Availability of Trade Marks

Searches are recommended before a franchisor proceeds to file for registration or commences use of his trademarks
internationally. However, the cost of conducting searches will have to be taken into account in assessing the viability
of international expansion. It may well be that potential franchisees will require a search opinion concerning a trade
mark’s availability as of the date negotiations are undertaken, if no registration has been obtained.
• Assuming registration has not been obtained at the time of execution of a franchise agreement, the franchisor
may consider passing onto the franchisee the risks associated with the possible rejection of an application. This
can be accomplished by including in the franchise agreement provisions to the effect that no warranty is given
against possible infringement of third party marks or that registration of the mark will issue.
• The agreement should also provide for the consequences associated with the potential inability of the franchisor
to obtain registration of the mark. Furthermore, consideration should be given to matters such as who will pay the
cost of changing over the franchisee’s signs, stationery, and other materials bearing the trade mark if need be.
• It should be noted that in most countries a franchisor’s trade mark need not be registered before he can license
its use and begin to franchise. However, in certain countries such as Taiwan, approval from the appropriate
agency for the entering into of an international franchise agreement will not be forthcoming until registration
of the trade mark has issued.
7.4.3 Weak versus Strong Trade Marks

Generally speaking, the inherent distinctiveness or “strength” of a trade mark will very much determine whether it
is likely to be accepted for registration in a particular foreign country. Inherently distinctive trademarks are the most
easily cleared for use and registration. Such marks include “coined” terms created by or for a franchisor, which are
words without a dictionary meaning and as such are generally attributed wider protection.
• Similarly, trademarks which have a dictionary meaning unrelated to the goods or services of interest will also be
viewed as relatively “strong.” In order to obtain greater promotional impact, many franchisors prefer to select
marks which suggest a characteristic or quality of the goods or services to be introduced.
• In brief, suggestive marks make registrability and enforceability more problematic. Steps may be taken, however,
to strengthen somewhat descriptive marks by adding distinctive matter including a fanciful script or design
feature.
• The weakest trademarks are those which, for example, clearly describe or deceptively mis- describe a
characteristic, quality, or function of the goods or services, or their origin. In some countries, an element which
is viewed as clearly descriptive is not registrable as part of the trade mark.
• Other countries permit registration of the trade mark as a whole, provided the applicant disclaims his right to
the exclusive use of the descriptive word. It should be remembered that “word” trademarks, which possess
little inherent distinctiveness may be registrable if they are combined with a distinctive design feature and a
disclaimer is entered. Furthermore, if an unregistrable mark is used to a significant extent in a given country, it
may acquire sufficient distinctiveness to ultimately become registrable.
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7.4.4 International Classification of Goods and Services

It should be borne in mind that most countries adhere to the International Classification of Goods and Services, one
which divides all products into thirty-four classes, with eight additional classes reserved for services. An applicant
then selects the classes to be included in his applications and often must specify the goods or services of interest
in each class.
• A franchisor whose trade mark is to be used in association with a long list of goods or services may find that
they fall within more than one class, thus requiring the payment of additional class fees. Furthermore, if both
goods and services are involved, this usually implies the need for filing of separate applications.
• Thus, the cost factor becomes important, and a franchisor may have to decide what his principal products and
services of interest are in order to cut down on the number of classes to be included. On the other hand, it is
advisable to claim as wide as possible a range of classes and goods and services within each specific class, as
infringement in foreign jurisdictions is often determined only in respect of the classes, or goods or services
claimed within a particular class and not similar ones.
• There are still some countries which have their own classification system rather than adhere to the International
Classification, although more and more countries are moving toward the adoption of the latter approach.
7.4.5 Registration Procedures

There are a number of countries which adhere to a “first to register” as opposed to a “first to use” system for
protecting trademarks. Under a first to register regime, applications may be filed and registrations obtained before
use has commenced, thus enabling protection in a timely fashion. While a number of countries do not require use at
the time of application or registration, cancellation may be possible if use is not affected within a prescribed period
of time following registration.
• Registration procedures vary greatly from country to country. In some cases, there is no examination to determine
whether confusingly similar third-party marks might prove to be a barrier to registration. In other countries, there
is no proceeding available to third-party trade mark owners to oppose applications for registration. Recourse
in such cases typically may only be had through the courts. In Canada and the United States of America for
example, a trade mark application is examined prior to being published for purposes of opposition, while in
Spain, the substantive examination occurs after the opposition period has passed.
• Trade mark examiners in the Scandinavian countries have had a practice of citing against pending applications
what are said to be confusingly similar trade marks registered or applied for in respect of what are only remotely
related goods. Although it is possible to obtain consent from these third-party owners, it is obviously not a
satisfactory situation.
• It should be remembered that national treatment of unethical practices, including misappropriation of trade marks
as well as counterfeiting, is often less than satisfactory in the absence of a validly registered trade mark.
7.4.6 Other Considerations

A franchisor should also consider registration of the transliterated version of his trade mark to prevent third parties
from infringing the foreign form by adopting the local equivalent. Among other considerations, numbers and letters
are deemed unregistrable subject matter in certain countries. There are exceptions where registration is permitted
for a trade mark that has acquired considerable reputation and goodwill through use over the years. Also noteworthy
is that registration of a trade mark is not permitted in some European countries on goods considered outside the
franchisor’s scope of business activity.
Further, in such countries, a franchisor that proposes to franchise his trade mark but does not maintain a business
enterprise concerned with either the production or sale of the products may risk having his trade mark invalidated.
Accordingly, trade marks in the name of holding companies are particularly at risk in such countries.
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7.5 Advantages of International Franchising
It is important for a franchisor to enter into a dialogue with his counsel to explore what particular difficulties might
be encountered in each foreign country of interest. A franchisor should consider whether the meaning of his trade
mark, when translated, might offend potential foreign customers and whether it is suitable for the same trade mark
to be used in all countries.
International Franchising Advantages in a Tough Economy
• A big advantage in looking overseas during tough economic times is the

foreign master franchise owners.
• They are able to bankroll the entire investment themselves.
• Master franchise owners in foreign countries pay significant, up front fees of
$100,000 to $1 million or more to acquire a territory or country where they
operate as a mini-franchise company, selling franchises, training owners,
overseeing those units and collecting royalties.
• The master franchise owner, a native of the country, is more knowledgeable
about local laws, customs and consumer needs.
• They are able to thus avoid the pitfalls and problems that international
franchising might bring without their assistance.
• Even smaller franchise chains can benefit from international franchise
expansion.
Fig. 7.1 Advantages of international franchising
7.6 International Franchise Market

Assessing the economic potential in emerging markets is important for international franchisors because it allows
the franchisor to prioritise expansion opportunities. Some of the most commonly used factors in this assessment
include,
Commonly used factors in this assessment in

international franchise
• GDP per capita(Gross Domestic Product
divided by the level of population)
• Level of population
• Growth rate of the target economy
Fig. 7.2 Assessment of international franchise
• GDP per capita is often used to classify emerging markets because it signifies the level of income and the state
of the economic and political stability of a country. However, if interpreted incorrectly, it can distort the view of
the country’s economic potential. Therefore, it is important to adjust GDP per capita relative to the purchasing
power of the population of an emerging market to accurately compare one emerging market with another.
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• Level of population is another factor used to measure the economic potential in emerging markets. However, the
franchisor must carefully consider the demographics of the population of an emerging market, and not assume
that a large population equates to a large franchise growth potential. Nevertheless, the majority of the population
in these countries does not earn sufficient income to afford western-style products and services, and does not
live in the major urbanized areas in which international franchisors are often accessible.
• The economic rate of growth should be analysed in assessing the merits of franchising in an emerging market.
While developed markets exhibit very low, single-digit growth rate, and many emerging markets sustain high
levels of growth, both in the GDP and in the GDP per capita.
7.7 Regulating International Franchising

While no country imposes as many presale restrictions on franchisors as the United States, many countries do have
pre-sale regulations. Currently, there are at least twenty-four countries which specifically regulate franchising.
Types of Laws
• pre-sale disclosure
• requiring franchisors to provide
to a prospective franchisees
• prior to sale
• a disclosure document setting
forth required information
Fig. 7.3 Regulating laws
Some countries also require that the disclosure document be filed with a specific government agency. In addition to
pre-sale disclosure regulation, international franchising is affected by a wide range of laws, including those which
relate to trademark, antitrust, contract, tax, and technology transfer issues, currency control, foreign investment,
import and export restrictions, and dispute resolution. A prospective franchisee should seek assistance in such laws
which include U.S. federal and state statutes and regulations, laws of the foreign nations where the franchise will
be located, and even any bilateral or multilateral treaties which may apply.
In addition, fifteen states in the United States have franchise sales laws that also require a franchisor to provide
certain disclosures to a prospective franchisee at the time a franchise is offered or sold. These state franchise laws
may also apply to an international franchise transaction.
However, unlike disputes which arise when franchisor and franchisee are in the same country, a dispute involving two
different legal systems can become a difficult and costly problem for all concerned. Issues such as which country’s
law governs the franchisor-master franchisee agreement, and where a dispute is to be resolved, are important factors
to be considered by a prospective international franchisee. A prospective international franchisee should consider
whether the laws which govern include any specific franchise regulation at all.
7.8 International Franchising Opportunities

Internationally, the general trend toward globalisation has also played a role in fuelling overseas franchise growth
in both directions. With the ever-increasing reach of the Internet during the past 15 years, and the upsurge in
international travel for several decades.
However, despite the opportunities, operating a franchise overseas also comes with a unique set of obstacles. These
include not only different laws, languages, and cultural differences in how business is conducted, but also different
tastes, dietary restrictions, and quality and supply chain problems.
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The most successful approach has been to partner with a local business owner with a strong track record, preferably
in the same industry as the brand. The most common form of agreement is to license the country or a large city
to such a partner in the form of a master or sub-franchisor agreement, with the franchisor delegating the signing,
training, and most other responsibilities to the overseas partner.
• Once an international
market is identified, one Structuring relationship
effective way to target
• many legal issues must
prospective franchising • Once an international be considered
partners within that market market is identified, one
is the trade mission • the franchisor also
effective way to target
needs to select and hire
• An option for franchisors prospective franchising
competent legal counsel
interested in international partners within that market
in the relevant country.
expansion is the use of is the trade mission
brokers. • An option for Implementing
franchisors interested in franchise agreement
international expansion
Identifying Partners
is the use of brokers.
Fig. 7.4 Important steps in international franchising
7.8.1 Expanding Emerging Markets: India

India is a large market with a thriving class of more than 500 million potential consumers.
• India has no specific legislation regulating franchise arrangements, but there are a number of areas of the law
that affect the franchisor-franchisee relationship. Intellectual property, taxation, labour, competition, property,
and exchange control regulations all influence franchising.
• The government of India permits foreign franchisors to charge royalties up to one percent for domestic sales
and two percent on exports for use of the foreign franchisor’s brand name or trade mark, without a transfer of
technology.
• In effect, this means that by lending just their brand name or trademark to an Indian company, foreign companies
can receive royalties.
• However, a foreign company must approach the Reserve Bank of India—India’s banking regulatory authority
(which is also responsible for exchange control regulations)—if royalties exceeding prescribed limits are
sought.
• The government of India has also specified a formula for calculation of royalties that must be adhered to before
the foreign company can remit funds out of India.
• If the franchise agreement proposes royalties or lump sum fees beyond the specified limits, the approval of the
Foreign Investment Promotion Board is required.
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7.9 Precautions in International Franchising

• International franchisors face a number of risks that should be taken into account before entering a target
market.
• The goodwill associated with the franchise in the U.S. may be non-existent in another country, and consumers
may be biased against foreign brands for certain products and services.
• The franchisor’s net revenues from international franchising are often lower than domestic net revenues due to
increased expenses and sharing of revenues with master franchisees.
• Revenues from international franchising may also be affected by international tax treaties and fluctuations in
currency exchange rates.
• International franchising may require more management resources than the franchisor can spare.
• In addition, supporting and supplying international franchisees can be more difficult and expensive.
7.10 Social and International Franchising

To enter a foreign market, several options are possible. In the simplest case, the franchisor gives the franchisee the
right to operate one single-unit franchise or a multiple-unit franchise.
However, U.S. franchises have typically expanded internationally through the use of ‘master franchise contracts,’
of which there are four types. These contracts grant the right to investors to become a franchisee or local franchisor
in a specific geographic locale. Territories range from small countries to regional divisions of larger countries. The
four types of master franchise contacts are as follows:
Types of Interntional franchise
• The Traditional Master

License
• The Area Developer
• The Joint Venture
• The Public-Private Hybrid
Fig. 7.5 Types of international franchise
• The traditional master license: The franchisor grants a master license to an individual or group of franchise
investors in a particular geographic area. A pilot or flagship store is often launched for training purposes and
to guarantee a quality assurance ‘yardstick’ exists in the country. This is the preferred model for the franchisor
because it minimises financial risks, allows for some measure of oversight and ensures that a minimum number
of units will be developed in a given region.
• The area developer: The franchisor empowers a middleman, or ‘area developer’, to sell franchise units in a
clearly specified region. This is an uncommon model for international franchising because the franchisor has
little control over who owns and operates its businesses. It is, however, the quickest way to open markets and
generates revenue.
• The joint venture: The parent franchise company invests in their own franchise business overseas, effectively
becoming a passive investor in its own expansion. While not common, this is sometimes done when no investor
can be found with enough capital to invest into the master license.
• The public-private hybrid: The franchisor issues a license to a government in a state-controlled economy.
This model is rarely used, though there are examples of socialist and communist regimes using franchises to
generate revenue for the government.
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7.10.1 International Social Franchising
In general, social franchising can be defined as using “the structure of a commercial franchise to achieve social
goals.
A non-profit owned business, which utilises franchising to further their mission. In this model, the non-profit
franchisee funnels their profits toward their mission activities, or uses the business itself to serve their beneficiaries
(i.e. through job training) in addition to generating income. These definitions highlight the two different objectives
of international social franchising,
• Achieving social benefits and generating revenue
• In various relationships and frameworks.
While these goals do not have to be mutually exclusive, the varying models indicate there is little consensus on
whether to prioritise earning revenue to fund a social mission, serving a nonprofits clientele, or a mixture of both.
7.11 Economic Potential of International Franchising

International franchising has grown significantly since the 1960s because of both push and pull factors. Domestic
saturation, increased competition and diminishing profits at home have pushed franchisors to examine their
opportunities abroad, while favourable macroeconomic, demographic and political conditions abroad pulled them
into specific markets. The initial expansion of U.S.-based franchisors was to culturally-similar, politically stable,
and economically rich countries such as Canada and Western Europe. In recent years, however, opportunities have
diminished in these countries as well, and international franchisors have begun to seek development opportunities
in emerging markets.
For the effective and efficient international franchising, one thing which should be followed by most of the franchise
companies is to bend and change to the cultural experiences of each individual country. Each country’s culture rules
with their own commonalities and thus in order to succeed- the franchises must adjust for the sales volume and
personalisation of the retail items.
The economic rate of growth is a variable that needs to be emphasised in analysing the market potential of developing
markets. While developed markets exhibit very low single-digit growth rate, many emerging markets sustain
high levels of growth both in the GDP and in the GDP per capita. Such statistics should be viewed favourably by
international franchisors because they parallel the development of pent-up demand for western-style goods, lessen
the political risk and social discontent of the citizenry, and point at an emergent middle class.
According to the World Outlook on Franchising report, Europe and the Middle East followed by Asia have the highest
worldwide market potential for franchising. By continent, the countries that have the greatest market potential for
franchising are South Africa, China, Germany, Brazil, Australia and the U.S. Our interviewees by and large echoed
these sentiments, and all of the countries above were singled out in conversation. Bill Edwards (Edwards Global
Services) thought that Mexico and Vietnam would be included on the list, while David Messenger (Service Master
International) mentioned that his company had just expanded their business to Turkey.
The IFA estimates that “well over 500 companies are franchising internationally, and an additional 100 companies
are looking to begin their international expansion every year.
In terms of industries that are ripe for expansion, service, training, education, healthcare, technology, food service
and retail were all singled out as growth areas by the various interviewees, though the cost of the master franchise
contract in certain industries can be onerous.
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Summary
• In general, social franchising can be defined as using “the structure of a commercial franchise to achieve social
goals.
• A non-profit owned business, which utilises franchising to further their mission. In this model, the non-profit
franchisee funnels their profits toward their mission activities, or uses the business itself to serve their beneficiaries
(i.e. through job training) in addition to generating income.
• International franchising is both an offensive and defensive strategy used by large and small companies to diversify
into foreign markets - making the firm increasingly less dependent on home country revenues and demand.
• Marketing programs, training and support are necessary for international franchising. There is a need to come
up with the practical programs that will make it easier to implement the concept of the franchise in a foreign
country.
• The most common form of franchisor-franchisee international franchise relationship is the master franchise,
also known as sub-franchisor.
• Another form of international franchisor-franchisee relationships is the Area Development Franchise. Like
the master franchise discussed above, the franchisor grants the Area Developer the right to develop an entire
country or part of it.
• It should be noted that in most countries a franchisor’s trade mark need not be registered before he can license
its use and begin to franchise. The agreement should also provide for the consequences associated with the
potential inability of the franchisor to obtain registration of the mark.
• Registration procedures vary greatly from country to country.
• Assessing the economic potential in emerging markets is important for international franchisors because it
allows the franchisor to prioritise expansion opportunities.
• GDP per capita is often used to classify emerging markets because it signifies the level of income and the state
of the economic and political stability of a country. Level of population is another factor used to measure the
economic potential in emerging markets. The economic rate of growth should be analyzed in assessing the
merits of franchising in an emerging market.
• The government of India permits foreign franchisors to charge royalties up to one percent for domestic sales
and two percent on exports for use of the foreign franchisor’s brand name or trade mark, without a transfer of
technology.
• The economic rate of growth is a variable that needs to be emphasised in analyzing the market potential of
developing markets. While developed markets exhibit very low single-digit growth rate, many emerging markets
sustain high levels of growth both in the GDP and in the GDP per capita.
• According to the World Outlook on Franchising report, Europe and the Middle East followed by Asia have the
highest worldwide market potential for franchising.
References
• Wright, R. & Relf, S., International Franchising, [pdf] Available at: <http://www.michbar.org/journal/pdf/
pdf4article945.pdf> [Accessed 8 May 2012].
• Bleyer, S., 2009, International social Franchising, Community wealth ventures Inc.
• Maddok, T., 2011, Tony Maddock - 9th International Franchise and Retail Show 2011, [Video Online] Available
at: <http://www.youtube.com/watch?v=Zcwq_IFYU6c> [Accessed 8 May 2012].
• Hussain, S., 2012, Franchise India, 9th International Franchise & Retail Show 2011: Part I, [Video Online]
Available at: <http://www.youtube.com/watch?v=nxJcyOMo0W8> [Accessed 8 May 2012].
• Vevstad, V., International Expansion [Online] Available at: <http://www.internationalexpansion.org/international-
franchising/international-franchising/> [Accessed 8 May 2012].
• Murphy, K. B., 2006. The Franchise Handbook: A Complete Guide to All Aspects of Buying, Selling Or Investing
in a Franchise, Atlantic Publishing Company.
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Recommended Reading
• Hero, M., 2010, International Franchising, Globe Law and Business.
• Konigsberg, A., 1991, International Franchising, Juris Pub Inc.
• Diane, H. & Alon, I., 2005, International Franchising in Industrialized markets, CCH Inc.
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Self Assessment
1. The most common form of franchisor-franchisee international franchise relationship is the __________.
a. master franchise
b. social franchise
c. registration
d. sub- franchisor
2. What is also known as international franchising?

a. Social franchise
b. Master franchise
c. Regional franchise
d. Foreign franchise
3. A big advantage in looking overseas during tough economic times is the foreign__________ owners.
a. franchise
b. trademark
c. master franchise
d. market

a. A franchisor should also consider registration of the transliterated version of his trade mark to prevent third
parties from infringing the foreign form by adopting the local equivalent.
b. Registration procedures do not vary greatly from country to country.
c. A franchisor whose trade mark is to be used in association with a long list of goods or services may find that
they fall within more than one class, thus requiring the payment of additional class fees.
d. International franchising and distribution usually differ substantially from domestic programs.

a. Growth per capita is often used to classify emerging markets because it signifies the level of income and
the state of the economic and political stability of a country.
b. Level of pollution is another factor used to measure the economic potential in emerging markets.
c. The economic rate of stability should be analyzed in assessing the merits of franchising in an emerging
market.
d. Assessing the economic potential in emerging markets is important for international franchisors because it
allows the franchisor to prioritise expansion opportunities.
6. The master franchise________, a native of the country, is more knowledgeable about local laws, customs and
consumer needs.
a. buyer
b. owner
c. franchisor
d. product
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7. _________ is the franchisor’s identifying marks, brand name and logo that are licensed to the franchisee.
a. Trademark
b. Object
c. Encapsulation
d. Inheritance
8. Some countries also require that the___________ be filed with a specific government agency.
a. discloser document
b. registration forms
c. pre-sale discloser
d. legal documents
9. The most successful approach has been to partner with a_________ business owner with a strong track record,
preferably in the same industry as the brand
a. general
b. patent
c. international
d. local
10. The __________ franchisee is trained by the franchisor.

a. general
b. master
c. market
d. trademark
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Chapter VIII
Social Franchising
Aim
• explain social franchising
• elucidate significance of social franchising
• explicate social franchise formats
Objectives
• explain the key elements of social franchising
• elucidate the differences between social and commerce franchising
• discuss considerations of social franchise
Learning outcome
• understand the meaning of social franchise
• enlist the future of social franchise
• identify the benefits and difficulties of social franchising
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8.1 Social Franchising
When social businesses want to expand and grow there are a number of options to think about in terms of replication,
expansion or franchising of the business. Planning the growth of social business requires analysis. Many of the
important decisions will depend on the vision for business. Some may be purely money-orientated and lead to a
commercial model that maximises profit to support social aims.
Social Franchising involves the purchase of a business model (a franchise) which operates using a successful,
established brand and proven operating system for an upfront charge. The franchisee can use these under license in
a defined geographical area. Continuing support and management services provided by the franchisor for an ongoing
fee. Where this differs from traditional franchising is that a clear social or environmental benefit is defined by the
objectives of the business, or by how any profits are distributed. Following are the advantages and disadvantages
of social franchising.
• Revenue stream from the • Franchisor loses total

franchisee control over the business
• Franchisee purchases • Franchisee expected
a proven, successful to follow the business
business model processes and brand
• Capital from sales of maintenance of the
franchises franchise, which can be
restrictive.
• Potential for fast growth
• Profits shared between
the franchisor and the
franchisee
Fig. 8.1 Advantages and disadvantages of social franchising
8.2 Significance of Social Franchising

Social franchising means using and developing the franchising method to achieve social goals. It is about spreading
experience from successful social enterprises so that more people become employed. And that these companies
apply democracy in such a way that the potential of all employees is developed. Social franchising also builds a
community by stimulating contacts among employees in different companies and efforts toward common goals.
8.2.1 Community
In social franchising, there is a founder, just like in any franchise. The starting point for the franchisor is to spread its
ideas, share its experiences, and build a community. The social goals are fundamental, and often include contributing
to the creation of more jobs. In this form of franchising, exchange and learning through contacts with those who
started earlier are important for the entrepreneurs.
8.2.2 Various Forms

The founder builds up a franchise system and becomes a franchisor. The forms vary among different systems. They
can be cooperatives when this is appropriate, but the franchisor always enters into an agreement with the franchisee
that regulates rights and obligations. Through involvement, knowledge, and fees, the franchisee contributes to the
development of the business concept.
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8.2.3 Knowledge Transfer

By defining the keys to success and documenting them in manuals, and by developing training courses based on
them, a group of entrepreneurs can gain access to knowledge and experience.
In social franchising, an important aspect is training as a source of support for entrepreneurs. Training, forms of
management and routines are designed so they empower the employees. As a part of every company’s founding,
everyone is involved in the design of the organisation.
8.2.4 Handles the Competition Better

By cooperating in a franchise organisation, competitiveness is improved. Joint development and quality efforts offer
better prospects. Even the social enterprise must survive the ever-faster change in its environment.
8.3 Establishing a Social Franchising System

The path to social franchising as a rule consists of the following steps:
• One has operated one’s business with success for several years.
• An analysis of the company that includes its market, the products, the strength of the brand, administrative
routines, and (not least) a financial analysis.
• That one defines one’s keys to success and reflects about how these can best be disseminated.
• A handbook is written that described how sales, the design of services or products, and the organisation and
administration should take place, and the requirements placed upon them.
• A business plan and establishment plan for the franchisor, with finances that make it possible to support the
local companies and develop the concept further.
• An agreement between the franchisor and franchisee is drafted.
• A profile of criteria for the franchisee plus how the recruiting and staff selection should take place.
• Contact the Companion and/or a franchising consultant to see if your venture can be spread and in this way
create a larger network.
8.4 Social Franchising Formats
Marketing and image
Business concept & brand name
Catalogue of services
Directives and control price
System Development product

service
Information and Fees
System Compliance
FRANCHISOR FRANCHISEE CUSTOMER
System Loyalty
Fig. 8.2 Relationship between franchise, franchisor and customer

Source: (http://www.stiftungen.org/fileadmin/bvds/de/Projekte/Projekttransfer/Social_Franchise_Manual_
Englisch.pdf)
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Generally, social franchising can be defined as the “adapted usage of techniques from commercial franchising for
projects ,which benefit the social aims of the non-profit sector. More specifically, social franchising can be understood
as contract-based cooperation of decentralised entrepreneurial units with a central support unit, uniform quality
standards and supported by a common philosophy.
A pilot project that is developed by the franchisor is replicated by a number of franchisees subject to defined
guidelines. These are usually laid down in the form of a manual and communicated to the franchisees through
training offered by the franchisor.
Social marketing indicates the systematic effort of a group (the change agent) to encourage others (the target group)
to embrace, amend or give up certain conceptions, attitudes, habits or behaviour, through using commercial marketing
tools. The idea is that challenges, such as in health-care, relating, for instance, to family planning and so on, can be
solved more efficiently by using marketing instruments.
Potential social franchise formats range from commercial franchises with intended social effects to non-profit
replication systems with franchising elements.
Three formats can be identified in principle:

A commercially organised franchise system for achieving social benefits. The sole difference from commercial
franchising is the focus of the system as a whole on social benefits and the absence of the primary goal of generating
a profit for private individuals.
A subsidised franchise system to make services available at lower cost than commercial solutions. This may include
profit-making entrepreneurs at the franchisee level.
A non-profit replication system which includes core elements of franchising, but without the classical fee and profit
elements. In the following sections, we will concentrate on this format.
Firstly, so-called network franchising entails multiplying or replicating complete solution networks, instead of
individual outlets. A solution network means that each member of the network is part of a solution, each takes
over a particular element of the work that amounts to one product or service. With network franchising, it is not a
simple product or service that is franchised, but the management method as a whole and configuration of a network.
In such cases, the franchisee coordinates this vertical network. Since non-profit projects often entail a number of
complex elements in order to achieve the desired outcome, this form of franchising lends itself very well to the
social sector.
Furthermore, master franchising is a potentially viable concept for the social sector. The franchise system is
supplemented by an additional level. In addition to the franchisor, there is the master franchisee, which is responsible
for coordinating the franchisees in a specific area. Especially international projects that are implemented in diverse
or large geographic regions, can benefit from this type of franchising.
8.5 Key Elements of Social Franchising

A business model, with associated systems and processes, which has been codified into an operations manual.
• A legally-binding franchise agreement
• A common brand (usually trademarked); often a centralised marketing budget
• Training and support provided from the centre (at start-up and ongoing)
• Demand (or need) for the model to be replicated elsewhere, from potential franchisees, investors or end-users
• Quality assurance system (including monitoring performance)
• Clear franchise fee structure (initial and ongoing)
• Learning culture (openness to feedback, innovation, new practice)
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Social franchising is the use of a commercial franchising approach to replicate and share proven organisational
models for greater social impact.
Social franchising is part of a spectrum of replication strategies, which range from the very flexible and loosely
controlled (dissemination, giving away for free, and open source) to the more restrictive and tightly controlled
(wholly-owned by central organisation). Social franchising sits between these two extremes, but does demand a
larger degree of involvement and control from the parent organisation than partnerships or licensing.
The initial definition above does require us to understand what we mean by commercial franchising. The most usual
form of commercial franchising is business format franchising.
Growth and replication strategies
DISSEMINATION PARTNERSHIP LICENSING SOCIAL JOINT WHOLLY-OWNED

FRANCHISING VENTURES
Flexibility Control
Fig. 8.3 Social franchising strategies

(Source: http://www.socialenterprise.org.uk/uploads/files/2011/11/social_franchising_manual.pdf)
Licensing: Licensing usually involves being granted a license to provide a service or sell a product, rather than an
entire business format or system. The relationship between a licensing organisation and licensee is also looser than
its franchising equivalent. This usually means a much smaller package of training and support (and not ongoing),
and often no ongoing fees payable after the initial license purchase. Moreover, licensees will usually not receive
exclusive territorial rights, and the granted rights are usually more limited.
This is not to say that franchising is preferable to licensing; it may be that the lower upfront development costs
and lower ongoing costs (of fees) are preferable to the licensee. Similarly, the licensing company’s reduced level
of involvement and support provision may be preferable for models that require less control or for an organisation
with less capacity.
Joint venture: A contractual agreement joining together two or more parties for the purpose of executing a particular
business undertaking, often for a finite period. The parties share control over the enterprise, and agree to share in
the revenues, costs and assets.
Partnership: An agreement or arrangement in which two or more parties agree to work together for mutual benefit
or to advance their interests. Partnership can vary in complexity or involvement, and it is helpful to also think about
a partnership continuum.
8.6 Difference between Social Franchising and Commerce Franchising

The primary difference between social franchising and commercial franchising is very similar to the difference
between social enterprise and commercial enterprise: that the aims are not purely financial (to make profits), but
also social (and/or environmental). Indeed, the social impact and mission of the organisation will often be primary,
with profits reinvested to further the social mission.
• This raises interesting questions where franchising is concerned, as commercial franchising is powered by
financial incentives.
• The franchisee takes up the business for themselves to earn a living, and the more profit they make, the better
off they will be personally; and
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• The franchisor receives fees from the franchisee which are usually directly related to the financial success of
that franchise (e.g., percentage of turnover); the franchisor is therefore also financially incentivised to provide
excellent training and ongoing support to those starting up and running the business.
In short, the interests of both parties are aligned around the financial bottom line: growth benefits all. This becomes
more complicated in social franchising, which involves a double or triple bottom line, and raises some key questions
or challenges for those considering the social franchising approach, such as:
• Can the interests of both parties be aligned around two or three different areas?
• Can incentives be developed which marry the financial and the social objectives?
• Can only social enterprises with a business model that makes an evident profit (or surplus) adopt a franchising
approach to replication?
Developing incentives which drive good behaviours from franchisees (and franchisors) in relation to both social
and financial objectives is a critical issue: are the incentives related to financial growth, quality of performance,
social impact measures, or a combination? For example, a franchisor may choose to link serving more beneficiaries
(growth of social impact) to a reduction in franchise fees (lower financial cost).
8.6.1 Franchisee Selection

There are also some differences in relation to franchisee selection between the commercial and the social. For
example:
• Commercial franchisees can quite often be an individual, rather than an organisation; this is less likely in social
franchising, given the type of products and services being replicated
• As discussed above, in social franchising, the franchisees must share all of the objectives of the franchisor,
including not only the financial ones, but also the social objectives that flow from the organisation’s mission;
this will often form a key part of the selection criteria for franchisees in social franchising
• Social franchisors may be more likely to place an emphasis on the values and culture that underpin their approach,
and make this a key part of the selection criteria and training
• Social franchisors may decide, as part of the above mission alignment, to only select franchisees which have a
similar (non-profit) legal structure.
8.6.2 Social Impact Measurement

As with social enterprises, it is not only measuring the financial bottom line that is important in social franchising,
but also measuring the social impact. This would obviously not be a part of a traditional commercial franchise.
Social franchises should ensure their evaluation framework for measuring social impact is established before
replication, as it will form part of the systems that are being utilised by franchisees. Social franchisors may collect
such data centrally as part of their quality assurance procedures, and offer overall evaluation work (collation and
analysis of data) as an additional central service to franchisees. This emphasis on shared evaluation also helps
ensure that:
• The focus remains on achieving social impact (the original reason for replication);
• The focus remains on the experience of the end user / customer / client; and
• There is a system for continuous improvement.
8.6.3 Finance and Funding

Commercial franchising is often viewed by mainstream banks as less risky and a safer option for investment,
because the business model is proven and there will often be other franchisees as direct evidence of that fact. Social
franchising is in its infancy, and there are currently too few examples for mainstream financiers and investors to take
much notice. Similarly, social investors have been slow to identify the opportunities, or have made the judgement
that there are not enough proven and credible models to justify investment.
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8.7 Considerations for Social Franchising

The following points highlight pre-conditions for implementing franchising:
• Is there an existing under-employed private sector?
• Is it sufficiently widespread that it justifies the cost of building an umbrella franchise organisation?
• Are clients willing and able to pay for the services/products being franchised? Most curative services offered
in urban areas will meet this criterion, but it has been well established that people rarely pay for preventative
services or cures requiring long-term treatment regimes.
• A franchise can only be developed where there exists sufficient local capacity to build and manage a large
organisation, working in an effectively for-profit manner.
In order to answer these questions, there needs to be an understanding of:

• Market structure;
• Comparative advantage of different parties to take on different roles in the franchise system.
8.7.1 Market Structure

It is appropriate for the government to consider market structure because it should aim to find gaps in the market
where the new, franchised services can improve upon existing services or product quality, prices, or geographic
coverage. It would be a waste of resources for the government to use public money to enter a market where customer’s
needs are already well met; this is especially the case if the franchised products and/or services are subsidised. This
could lead to exit of private sector (none franchised) operators from the market, and in the long term, could decrease
competition2 and availability to consumers.
The issues that need to be understood include:

• What percentage of different types of health care (especially RH) is provided and financed by the state and what
percentage by the private sector (non-profit, commercial, ‘traditional’ practitioners)?
• How does each compare, in a particular region, in terms of service or product quality, price, product range,
geographic coverage, market segment strategy? What gaps exist in the market?
• Are there a sufficient number of suppliers (example, healthcare personnel with the right specialisation) for
a new service to be offered? Or would the new service end up poaching existing healthcare personnel from
competitors?
• If new RH services or products are offered, do these complement or substitute for existing RH care services?
8.7.2 Comparative Advantage: Roles and Responsibilities

The most common model in social franchising is for a non-profit organisation to act as franchisor,
• with for-profit entities (small clinics/pharmacies/outlets) as franchisees.4 India has been an exception,
• when it comes to social marketing; the government has been involved in managing social marketing
• Programmes for many years, and it may continue this kind of involvement in franchising as well.
8.8 Regulations and Social Licensing

In return for the advantages the franchisee obtains from being part of the network, the franchisee has a contractual
obligation to abide by certain rules and standards. These may include any of the following:
• Meeting sales quotas
• Maintaining service quality, including a high service orientation (counselling and health information) and
compulsory good dispensing practice
• Paying franchise fees
• Adhering to a standardised retail outlet design and colour and a uniform system of display and retail
management
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• Offering a standard range or price of services and goods
• Providing transparency to the patient: services/products with price lists clearly displayed
• Gathering public health statistics to provide to the franchisor
• Participating in health information and promotion campaigns
• Abiding by standardised stock management, sales reporting, and patient monitoring systems.
8.8.1 Quality Monitoring

It is important for the franchisor to monitor service quality since it is difficult for patients to accurately assess the
quality of the healthcare received. The Planned Parenthood Federation of America conducts extensive evaluations
and re-certifications of its local affiliates every four years in order to assure that their service quality; pricing and
financial management fits with the Planned Parenthood brand.
The nature of services offered in medical care makes standardisation difficult, quality evaluation imprecise and
monitoring costly. Quasi-franchises like the Planned Parenthood affiliate programme choose to deal with this by
monitoring and controlling only a fraction of the services offered by the affiliates – those services that are under
the brand umbrella.
In health service franchising, only those aspects of service quality that are observable and verifiable are typically
measured and monitored. Routine ‘quality checklist’ visits and periodic mystery client surveys are often the verifying
mechanism. Items verified might include:
• Record keeping
• Compliance with standardised procedures, such as: sterilisation of equipment, cleanliness of consulting and
operating rooms, and proper disposal of single-use needles
• Availability of medicines and other materials
• Knowledge of potential side effects associated with the franchised services/products and compliance with
treatment protocols.
• Quality control of service provision typically will not extend beyond this limited range of standardised procedures.
The more advanced the service is, the more difficult is quality monitoring and standardisation, and the more
difficult it is to offer it as part of a franchised system.
8.8.2 Implications of Commercial Franchising for Social Franchisors

The most obvious way a franchise network differs from other forms of business association is in the use of a common
name or brand. The brand provides its customers with the reassurance that they will receive a consistent product
wherever they purchase it. It provides new franchisees with a pre-existing pool of customers prepared to purchase
their product and services on the basis of their previous experience of the brand. Because of this mutual dependence
on a common brand, the operation of a franchise network necessitates a high degree of control and regulation, which
are underpinned by legal agreements.
• Standing this situation on its head, we might concur that social enterprises wishing to franchise could obviate
the need for legal agreements with their franchisees simply by dispensing with a common brand. After all, it
could be argued that in many cases their customers – the beneficiaries of their social services – do not consume
their products in different locations and therefore have no need of brands and the reassurance they provide.
• This may be true, but any organisation on the scale of a social franchise will have other stakeholders for whom
a recognised brand is important – donors, grant-makers, sponsors and investors, as well as volunteers, partners,
suppliers, assessors and public bodies – will all draw comfort from knowing a social enterprise is a member of
a wider, better-known network. All members of such a network would be at constant risk without any controls
to govern the performance and behaviour of individual franchisees.
• Franchisees pay to join a franchise network. They do so in the expectation that the franchise business will repay
their investment through future profits. The more profitable the franchisor’s business model, the more franchisees
value it and are prepared to pay for it.
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8.9 Future of Social Franchising

Social Pioneers is an advocate of, and leading expert in, Social Franchising as a preferred approach to growing and
reproducing high performance public services. By developing new social franchises in areas such as environment,
criminal justice and Local Authority services, we help our clients and communities resolve the dilemma of being
true to localism whilst achieving economies of scale in provision.
Social Franchising has five key features:

• Proven successful format delivering social and commercial value
• Easily duplicated
• Simple skill transfer
• Income and ‘profit’ for both parties
• Culture of mutual support
Core components of social franchising
• Social (value):Building social capital delivering public

services expanding community enterprise
• Business (sustainability):Commercial disciplines
sustainable income generation best value and values
• Franchising (replication):Trading in successful business
formulas delivering social improvements capturing what
works with sound ethics
Fig. 8.4 Core components of social franchising
8.9.1 Potential Difficulties of Social Franchising

Despite the many advantages that social franchising offers as a replication model, various problems may nonetheless
prevail.
Risk of changing initial mission

• Initiatives are often set up with a specific geographic focus in mind.
• Adapting it to local peculiarities might alter the original mission. In the worst case, this might alienate the
organisation’s core stakeholders.
• Additionally, the franchisees’ goals might differ from those pursued by the franchisor, as well as those of other
franchisees. Franchisees do not have to provide start-up-capital, because the initial investments are usually
provided by the franchisor or a donor. Consequently, because franchisees fear less capital loss, they might
behave opportunistically and the motivation to adhere to the system might be lower.
Risk of negative reputation

• Operating under the same name, the various units in a social franchise system are perceived as one organisation.
Consequently, the reputation of one affiliate has an impact on the organisation as a whole.
• Franchisees might present themselves in a way which is inconsistent with the central unit. Therefore, the franchisor
has to ensure an appropriate level of control over the franchisees. Since the independence of franchisees is such
an important element of social franchising, this is a difficult balancing act.
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Difficulties of monitoring and evaluation
• Monitoring and evaluating franchisee performance is important, because of the risk of negative reputation.
• However, this is difficult to achieve in practice because abstract achievements cannot easily be quantified, as
in the case of units sold in conventional commercial franchising.
• Consequently, the question arises of how to measure the achievements of the system.
Difficulties in standardisation
• Standardisation is a core element of a social franchise system.
• However, because the essential knowledge and skills are often tacit, the standardisation of non-profit projects
can be difficult.
• Also, the success of an initiative is often dependent on specific geographic or cultural peculiarities. Excessive
standardisation might therefore lead to inflexibility, making it more difficult to adapt the project at other locations.
It is thus important to find the right balance between standardisation and flexibility.
Competition over fundraising

• We have learned that, on the one hand, a social franchise system can tap the full potential of national and local
donors.
• However, devolution of fundraising activities to the local franchisees might lead to inefficiency and
ineffectiveness.
• Assuming that each of the franchisees serves the same basic purpose and individually solicits contributions from
more or less the same donor pool, the effort of one franchisee may entail a reduction in fundraising productivity
and thus an increase in the costs of fundraising for the other franchisees.
8.9.2 Rights of Social Franchisors

In return for the right to use the turnkey concept, social franchisors have the right to monitor franchisees and to take
any action to ensure system compliance that efforts are made and that franchisees have sufficiently high quality
standards. This might for example include the request for regular and extensive information from franchisees in order
to continuously improve the system and project concept. In case of non-compliance, the franchisor can discipline
the franchisee and even terminate the contract. While commercial franchisors additionally have the right to collect
franchise fees, social franchisors will not always have this option.
8.9.3 Duties of Social Franchisors

The franchisor has three main duties with the aim of contributing to the success of local sites and the system:
Duties of social
franchisor
The franchisor must

The franchisor must
ensure performance and
ensure an exchange of The franchisor must
the fulfilment of the
know-how within the provide central services
social mission of the
network
system
Fig. 8.5 Duties of social franchisor
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The franchisor must ensure performance and the fulfilment of the social mission of the system:
• He is required to precisely define the social mission as well as medium and long-term objectives.
• He needs to provide a successful turnkey project concept, usually in form of a manual.
• He coordinates the players of the system: franchisor, franchisees, donor and recipients.
• He is responsible for the quality management of the system.
• He must ensure the economic efficiency of the system.
The franchisor must ensure an exchange of know-how within the network:

• He needs to offer guidelines and standards for franchisees.
• He must provide initial and advanced training, support and consulting.
• He is responsible for system development.
• He is responsible for research and development of the services.
• He must provide franchisees with project know-how, for example, in the form of a manual.
• He has to offer a framework that encourages communication among franchisees.
• The franchisor must provide central services:
• He must analyse the market and environment and inform franchisees about relevant developments.
• He is responsible for coordinating national and regional marketing.
• He must coordinate the logistics, finance, and distribution, etc. of the system.
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Summary
• Social Franchising involves the purchase of a business model (a franchise) which operates using a successful,
established brand and proven operating system for an upfront charge.
• Social franchising means using and developing the franchising method to achieve social goals. It is about
spreading experience from successful social enterprises so that more people become employed.
• In social franchising, an important aspect is training as a source of support for entrepreneurs. Training, forms
of management and routines are designed so they empower the employees.
• Social franchising can be defined as the “adapted usage of techniques from commercial franchising for projects
which benefit the social aims of the non-profit sector.
• Licensing usually involves being granted a license to provide a service or sell a product, rather than an entire
business format or system. The relationship between a licensing organisation and licensee is also looser than
its franchising equivalent.
• The primary difference between social franchising and commercial franchising is very similar to the difference
between social enterprise and commercial enterprise: that the aims are not purely financial (to make profits),
but also social (and/or environmental).
• Commercial franchising is often viewed by mainstream banks as less risky and a safer option for investment,
because the business model is proven and there will often be other franchisees as direct evidence of that fact.
• The most obvious way a franchise network differs from other forms of business association is in the use of a
common name or brand.
• The core components of social franchising are: Social (value): Building social capital delivering public services
expanding community enterprise, Business (sustainability): Commercial disciplines sustainable income
generation best value and values, franchising (replication): Trading in successful business formulas delivering
social improvements capturing what works with sound ethics.
• In return for the right to use the turnkey concept, social franchisors have the right to monitor franchisees and to
take any action to ensure system compliance that efforts are made and that franchisees have sufficiently high
quality standards.
• Following are the duties of social franchisor: The franchisor must ensure performance and the fulfilment of the
social mission of the system, The franchisor must ensure an exchange of know-how within the network, The
franchisor must provide central services.
References
• Prof. Dr. Ahlert, D. & Dr. Ahlert, M., 2008, Social Franchising, Bundesverband Deutscher Stiftungen.
• Volery, T. & Hackl, V., A promise of social Franchising as a model to achieve social goals, University of St.
Gallen.
• Firestone, R. & Charman, N., 2011. Video: Social Franchising and Health, [Video Online] Available at: <http://
www.youtube.com/watch?v=9mZAjjB0mdY > [Accessed 10 May 2012].
• Sir Feachem, R., 2012.First Global Conference on Social Franchising Video, [Video Online] Available at <http://
www.youtube.com/watch?v=UjRDgIzgcpc> [Accessed 10 May 2012].
• Social Franchising, [Online] Available at: <http://www.socialpioneers.com/what-we-do/social-franchising/>
• Temple, N., 2011, The Social Franchising Manual, [Online] Available at: <http://www.socialenterprise.org.uk/
uploads/files/2011/11/social_franchising_manual.pdf> [Accessed 10 May 2012].
Recommended Reading
• Kickul, J. & Lyons, T., 2012, Understanding Social Entrepreneurship, 1st ed., Routledge.
• Cross, R. & Thomas, R., 2009, Social Networks, 1st ed., Jossey-Bass.
• Birkeland, P., 2004, Franchising dreams, 1st ed., University of Chicago Press.
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Self Assessment
1. Social franchising means using and developing the franchising method to achieve _______ goals.
a. universal
b. personal
c. social
d. public
2. What of the following is defined as licensing?

a. It usually involves being granted a license to provide a service or sell a product, rather than an entire business
format or system.
c. A contractual agreement joining together two or more parties for the purpose of executing a particular
business undertaking, often for a finite period.
d. An agreement or arrangement in which two or more parties agree to work together for mutual benefit or to
advance their interests.
3. The most common model in social franchising is for a non-profit organisation to act as ________.
a. distributor
b. franchisor
c. franchisee
d. social worker

a. Initiatives are often set up with a specific geographic focus in mind.
b. Operating under different names, the various units in a social franchise system are perceived as one
organisation.
c. Monitoring and evaluating franchisee performance is important, because of the risk of negative
reputation.
d. Standardisation is a core element of a social franchise system.

a. The franchise is required to precisely define the social mission as well as medium and long-term
objectives.
b. The franchise is responsible for coordinating national and regional marketing.
c. Commerce franchisors have the right to monitor franchisees and to take any action to ensure system
compliance that efforts are made and that franchisees have sufficiently high quality standards.
d. A franchise can only be developed where there exists sufficient local capacity to build and manage a large
organisation, working in an effectively for-profit manner.
6. _________ franchising can be understood as contract-based cooperation of decentralised entrepreneurial units

with a central support unit, uniform quality standards and supported by a common philosophy
a. Social
b. Commerce
c. International
d. Master
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7. The franchisor receives fees from the_________ which are usually directly related to the financial success of
that franchise
a. franchisee
b. object
c. franchise
d. owner
8. Social franchisors may be more likely to place an emphasis on the _____ and _____that underpin their approach,
and make this a key part of the selection criteria and training.
a. franchise and franchisor
b. profit and loss
c. value and culture
d. owner and consumer
9. It is important for the________ to monitor service quality since it is difficult for patients to accurately assess
the quality of the healthcare received.
a. franchisor
b. owner
c. customer
d. social worker
10. _______________is a core element of a social franchise system.

a. Standardisation
b. Licensing
c. Monitoring
d. Evaluating
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Case study I
McDonald’s Restaurants
When the McDonald brothers, Dick and Mac opened their first restaurant in 1940 in San Bernardino, California,
they could never have imagined the phenomenal growth that their company would enjoy. From extremely modest
beginnings, they hit on a winning formula selling a high quality product cheaply and quickly. However, it was
not until Ray Kroc, a Chicago based salesman with a flair for marketing, became involved that the business really
started to grow. He realised that the same successful McDonald’s formula could be exploited throughout the United
States and beyond.
This case study examines the success of franchising and investigates the special three way relationship that exists
between the franchisee, the franchisor and the suppliers.
McDonald’s views the relationship between franchisor, franchisee and supplier to be of paramount importance to the
success of the business. Ray Kroc recognised the need very early on for franchisees that would dedicate themselves
to their restaurants. He wanted people who had to give up another job to take on the franchise venture, relying on
their franchise as their sole source of income and would therefore be highly motivated and dedicated. Consequently,
McDonald’s will not offer franchises to partnerships, consortia or absentee investors. The initial capital has to come
from the franchisee as a guarantee of their commitment. The selection process is rigorous to ensure that McDonald’s
only recruits the right people.
Franchising
McDonald’s is an example of brand franchising. McDonald’s, the franchisor, grants the right to sell McDonald’s
branded goods to someone wishing to set up their own business, the franchisee. The licence agreement allows
McDonald’s to insist on manufacturing or operating methods and the quality of the product. This is an arrangement
that can suit both parties very well.
Under a McDonald’s franchise, McDonald’s owns or leases the site and the restaurant building. The franchisee buys
the fittings, the equipment and the right to operate the franchise for twenty years. To ensure uniformity throughout
the world, all franchisees must use standardised McDonald’s branding, menus, design layouts and administration
systems.
Selling a well established, high quality product

In this case, the product is recognised all over the world. A large proportion of new businesses and new products
fail, often due to costs of the research and development needed. The McDonald’s formula, however, has been
successfully tried and tested. Ray Kroc’s insistence that all McDonald’s outlets sold the same products and achieved
the same quality has led to a standardisation of the process and great attention to detail. The cooking processes in
McDonald’s restaurants are broken down into small, repetitive tasks, enabling the staff to become highly efficient
and adept in all tasks.
This division of labour and the high volume turn over of a limited menu allows for considerable economies of scale.
For the franchisee, this can considerably reduce the risk of setting up own business. There is no need to develop the
product or do expensive market research. Nor will they have sleepless nights wondering if the product will appeal
to the consumer. McDonald’s carries out regular market research.
Intensive initial training

Every franchisee has to complete a full-time training programme, lasting about nine months, which they have to fund
themselves. This training is absolutely essential. It begins with working in a restaurant, wearing the staff uniform
and learning everything from cooking and preparing food to serving customers and cleaning.
Further training at regional training centres focuses on areas such as business management, leadership skills, team
building and handling customer enquiries. The franchisee will have to recruit, train and motivate their own workforce,
so they must learn all the skills of human resource management. During the final period, the trainee learns about
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stock control and ordering, profit and loss accounts and the legal side of hiring and employing staff. Consequently,
no McDonald’s franchisee would have to ask a member of his or her staff to do something that they couldn’t do
themselves. Knowing this, can also be a powerful motivator for the staff.
Continuous support
McDonald’s commitment to its franchisees does not end with the training. It recognises that the success and
profitability of McDonald’s is inextricably linked to the success of the franchises. A highly qualified team of
professional consultants offer continuous support on everything from human resources to accounting and computers.
The field consultant can become a valued business partner and a sounding board for ideas.
Benefit from national marketing carried out by McDonald’s

The phenomenal growth of McDonald’s is largely attributed to the creation of its strong brand identity. McDonald’s
trademark, the Golden Arches, and its brand name has become amongst the most instantly recognised symbol in
the world.
In the UK, McDonald’s recognised the need for a co-ordinated marketing policy. In order to be successful, an
organisation must find out what the customers want, develop products to satisfy them, charge them the right price and
make the existence of the products known through promotion. Cinema and television advertising have played a major
part in McDonald’s marketing mix. McDonald’s is now the biggest single brand advertiser on British television.
Radio and press advertisements are used to get specific messages across emphasising the quality of product ingredients.
Promotional activities, especially within the restaurant, have a tactical role to play in getting people to return to the
restaurants regularly. All franchisees benefit from any national marketing and contribute to its cost, currently a fee
of 4.5 percent of sales.
Forecasting
Another major problem for a new business is predicting how much business it might enjoy, running the risk of
either cash flow problems or the difficulties associated with overtrading. The turnover and profit from any outlet will
vary, depending on a wide range of internal and external variables. Each franchisee is expected to take a positive
approach to building up sales, although an average rate of return of over 20 percent is generally expected over the
lifetime of the franchise.
The advantages for the franchisor

McDonald’s recognises the benefits of a franchised operation. Franchises bring entrepreneurs, full of determination
and ideas, into the organisation. Franchising enables McDonald’s to enjoy considerably faster growth and the creation
of a truly global brand identity. The more restaurants there are, the more McDonald’s can benefit from economies
of scale.
On the financial side, McDonald’s receives a monthly rent, which is calculated on a sliding scale based on the
restaurant’s sales, i.e. the higher the sales, the higher the percentage and visa versa. There is also a service fee of
5 percent of sales in addition to the contribution to marketing. The purchase price of a restaurant is based on cash
flow and is generally about £150,000 upwards. The new franchisee is expected to fund a minimum of 25 percent of
this from their own unencumbered funds.
Dynamic innovation
Whilst the franchisees have to agree to operate their restaurants in the McDonald’s way, there still remains some scope
for innovation. Many ideas for new items on the menu come from the franchisees responding to customer demand.
Developing new products is crucial to any business, even one which has successfully relied on a limited menu for
many years. Consumer tastes change over time and a company needs to respond to these changes. Innovation injects
dynamism and allows the firm to exploit markets previously overlooked or ignored.
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The three-legged stool - the suppliers

A third group of stakeholders, critical to the success of the franchise operation, is the suppliers. As McDonald’s
considers the quality of its products to be of absolute importance, it sets standards for suppliers that are amongst
the highest in the food industry. The supplier’s work closely with McDonald’s to develop and improve products
and production techniques. This close interdependency is described as a three-legged stool principle, and involves
McDonald’s, the franchisees and the suppliers. Suppliers that are able to meet the quality standards set down by
McDonald’s have been able to share in the growth and success of McDonald’s.
(Source: The route to fast food franchising: case study [Online] Available at<http://businesscasestudies.co.uk/
mcdonalds-restaurants/the-route-to-fast-food-franchising/conclusion.html> [Accessed 14 May 2012]).
Questions
1. Enlist the advantages in buying a Mc Donald’s franchise.
Answer
McDonald’s, the franchisor, grants the right to sell McDonald’s branded goods to someone wishing to set up their
own business, the franchisee. Following are the advantages of buying a franchise named Mc. Donald’s.Being
their own bossSelling a well established, high quality productIntensive initial trainingContinuous supportBenefit
from national marketing carried out by McDonald’s.
2. The phenomenal growth of McDonald’s is largely attributed to the creation of its strong brand identity.
Justify.
Answer
In this case, the product is recognised all over the world. A large proportion of new businesses and new products
fail, often due to costs of the research and development needed. The McDonald’s formula, however, has been
successfully tried and tested. A brand is a name, term, sign, symbol or design, (or a combination of these)
which identifies one organisation’s products from those of its competitors. McDonald’s is an example of brand
franchising. They’ve got massive international exposure, a relatively safe business, only moderate leverage,
extremely shareholder friendly management, and a good dividend yield.
3. How is the future business estimated in Mc Donald’s?

Answer
The business is forecasted by running the risk of either cash flow problems or the difficulties associated with
overtrading. The turnover and profit from any outlet will vary, depending on a wide range of internal and external
variables. Each franchisee is expected to take a positive approach to building up sales, although an average rate
of return of over 20 percent is generally expected over the lifetime of the franchise.
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Case study II
Barka- Social development, Integration and Entrepreneurship
At the time of writing, there are just fewer than 60 social franchises in Europe employing over 13,000 people.
This is one of a number of case studies produced by ESFN to demonstrate the impact social franchises are having
across Europe, share learning and raise the profile of this important approach to growing and developing social
cooperatives/enterprises.
Barka
The Barka Foundation is a non-governmental organisation; its purpose is social development of marginalised groups,
giving them a chance to rebuild their lives by creating a program of mutual assistance, education, entrepreneurship
and development of civil society. Barka has focused its efforts on the new accession countries and the countries
which have been regaining independence.
The Foundations aim is to create support systems for integration of socially marginalised groups, which consists
of programs covering around 5 000 people per year (this number is constantly growing). The main purpose of the
Barka Foundation development program is to create a pro-active social system in Poland. But the demand for their
knowledge and business models had increased in the last years and now Barka is expanding in Europe.
Spreading the business to other countries

Since 2007 when Barka started in London, they have been approached several times by different actors in large
European cities. Today Barka is in the process of starting centres in Stockholm, The Hague and Utrecht, Berlin and
Bremen.
Barka first adopted a franchise model in 1989 – 2008 within Poland by establishing 20 associations and 20 social
cooperatives which have been assembled into a network.
Nowadays Barka has been working in 40 sub-regions of Poland on a franchising basis creating partnerships with
councils, entrepreneurs as well as organisations in the government projects.
Key success factors of the business idea

The Barka organisation is today growing to become an important player within the area of”social work” in Europe.
There are a lot of successes factors, key success factors are among others:
• Methodology, in theory and practice, has been developed under a long time by professionals.
• Knowledge about vulnerable and excluded people is profound within the Barka organisation.
• Working models and business models has been developed and proven since the start
• 1989.
• Top management, including the Sadowska family, is very dedicated and professional.
The services provided by Barka UK are as follows:

Voluntary return
Barka Leaders/Assistants make contact with Eastern European migrants who have become homeless to offer them
the opportunity to return home. They support the individuals in their journey from exclusion to inclusion through
an organised program of reconnection.
”During outreach on the streets, Barka Leaders & Assistants invite Eastern European rough sleepers to day centres
for the homeless. Here they share stories of their path from exclusion to integration.
Through building relationships based on trust, they encourage and prepare clients for reconnection. Barka also helps
people to obtain passports and transportation. When appropriate, Barka support the individuals to reconnect with
their communities and families with the help of the local organisations.
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Social economy centre

The goal with this programme is to guide people out on the working market and help them gain and maintain
employment in the host country. This programme targets people who are haven’t yet hit the bottom of human
existence and do not have to return home for rehabilitation. Few of the people that Barka staff meets within the
Social Economy Centre are ready to undertake employment at once. The majority however, needs an on-going work
with therapists, job advisor, enterprise development worker and psychologist as well as accessing support groups
such as Alcoholics Anonymous to prepare for employment. The Barka team at the Social Economy Centre are in
the process of establishing the model for employment support centres for migrants/refugees.
Education services & study visits

During the last years Barka has drawn a lot of interest on the working models and frameworks used in the integrated
programmes within Barka. More than 200 study groups has visited Barka programmes in Poland to learn more
about the success criteria’s when working with people guiding them back to a life within the society and back to
the labour market.
Within the Barka concept, professionals can now receive a-few-week- formation-training in”Barka models” of
social work.
Services provided by the franchisor

Barka Foundation cooperates with Barka UK and its other franchisees in every step of the business development.
Since starting new branch offices/franchisees is a new concept for Barka, the business model is not fully developed,
but Sadowska, the chief executive at Barka UK is very aware that establishing a new franchisee in a new place and
in a "new” country is very time consuming and takes a lot of work. Today Barka has a lot of professional and skilled
people within the organisation, people who can transfer the working models to a franchisee.
Usually there is a request/invitation from a local civil social organisation – like the City Mission in Hamburg - and
a local authority, which can provide local resources/people at start up. Barka can provide the working models and a
management with work experience from the work done in Poland and the UK. Barka also provides training and the
network of local Barka schools, centres, enterprises, cooperatives in Poland, UK, Lithuania and the Czech Republic,
The Ukraine and Romania.
(Source: Barka- Social development, Integration and Entrepreneurship, [pdf] Available at: <http://www.
socialfranchising.coop/uploaded/Barka_ESFN_Case_Study_6.pdf>[Accessed 21 May 2012]).
Questions
1. Define social franchising using the above case study.
2. Social attributes should be considered while establishing a franchise in multiple countries. Justify.
3. Laws and regulations in social franchising vary in different countries.Justify
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Case Study III
The International Franchising
This client was a small, family run business that was a victim of its own success and made a classic franchising
mistake. Fortunately we were able to put things right and guide them to great success.
Customers of the business can make personalised jewellery inspired by their children. It is a charming and highly
popular product which instantly hit the mark with the public. It was inevitable that at some point someone from
overseas would see the concept and ask if they could franchise the business in their country.
Many businesses get into international franchising via such ad hoc approaches and they often end in disaster because
of insufficient preparation. As with any form of franchising, international franchising should be based on a sound
financial and operating model that can be rolled out in multiple territories.
The owners were so excited that someone on the other side of the world wanted to bring the concept in to their country
that they had a master license agreement hastily put together and dived headlong into international franchising. At
the time the company contacted us, things were going wrong but they were getting more enquiries to franchise into
other countries.
We worked with the client to develop a properly structured international offering, restructured the existing international
operation and helped them roll out an international franchise programme based on the new model. The client has
since achieved good international growth based on sound, sustainable franchising principles and even achieved
recognition in the category “Best International Franchise”, coming second only to McDonalds. The lesson was that
the client would have achieved success and the associated financial rewards sooner and avoided the initial costly
mistakes if they had invested the necessary time and money in getting their international franchising package right
in the first place. International franchising is very exciting and the idea of spreading your brand around the world
is very attractive. Whilst we help our clients achieve this, we also have a great deal of experience in international
expansion and bring an outside view and different perspective to the project.
This particular client in the domiciliary care market was seduced by the prospect of international growth. As requested,
we worked with them to develop an international offering and operating structure. The client went on to recruit their
first international franchisee and all went well.However, during the process it became clear to us that they still had
huge potential for growth within the UK. After bringing this to their attention and helping them review their overall
business growth strategy, they decided to concentrate on domestic growth in the short term.
There was no pressing strategic reason for the company to achieve international growth and the “Low hanging fruit”
was certainly the UK market which offered the most obvious route to quick, profitable growth. However, they were
now in the nice position of knowing that when the next good enquiry from an international market came, they had
the structure and documentation in place to proceed in the right way with a now tried and tested system.
Our long experience of working with businesses of all sizes means we have more to offer our clients than just
producing documentation. We become part of the strategic planning process, offer new ideas and contribute in many
ways to helping our clients achieve their overall goals.
(Source: The International Franchising [Online] Available at: <http://www.theinternationalfranchisingcentre.com/

international_franchising/Case_Studies.php> [Accessed 21 May 2012]).
Questions
1. International franchising is a task that needs to work with best interest. Explain.
2. Is branding a problem in international franchising?
3. Above example can be converted into international social franchising, mention the aspects.
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Bibliography
References
• 2009. Franchising-Entrepreneurial Opt Q&A, [Video Online] Available at <http://www.youtube.com/
watch?v=SCW9nf74Ku0> [Accessed 9 May 2012].
• 2011. Multiunit franchise conference, [Video Online] Available at: <http://www.youtube.com/
watch?v=5V5jtEC51Cg> [Accessed 3 May 2012].
• Allen, G., 2011.Franchise Broker, [Video Online] Available at <http://www.youtube.com/watch?v=hFqblXZEu-
w&feature=related> [Accessed 2 May 2012].
• Andrew, O., 2011. What is the best way to buy a franchise? [Video Online] Available at: <http://www.youtube.
com/watch?v=SRrvUXLoHGM&feature=related> [Accessed 9 May 2012].
• Archar, D., 2011. Free Franchise Seminars sponsored by Lloyds TSB, [Video Online] Available at: <http://www.
youtube.com/watch?v=7fplEaFutZs> [Accessed 24 April 2012].
24 April 2012].
25April 2012].
• Bleyer, S., 2009, International social Franchising, Community wealth ventures Inc.
• Campbell, D. & Netze, A., 2007. International franchising, Kluwer Law International.
• Coldwell, D. And Williams, A., Franchise law [pdf] Available at: <http://www.haynesboone.com/files/
Publication/9d6259b1-357f-4a92-8823-0391c371fe6b/Presentation/PublicationAttachment/7c00f7e5-8c26-
4b11-9ead-1114e670ba9e/Franchise_Law_SMU.pdf> [Accessed 29 April2012].
• Deering, J., 2011.Jim Deering on multiunit franchise operators, [Video Online] Available at: <http://www.
youtube.com/watch?v=3EZ3074GSUo> [Accessed 3 May 2012].
• Dr Michael, S. C., 2011.The Ins and Outs of Franchising, [Video Online] Available at <http://www.youtube.
com/watch?v=EPI6ef29CDE> [Accessed 24 April2012].
• Firestone, R. & Charman, N., 2011. Video: Social Franchising and Health, [Video Online] Available at: <http://
www.youtube.com/watch?v=9mZAjjB0mdY > [Accessed 10 May 2012].
• Franchise buyers guide, [Online] Available at : <http://www.franchising.com/franchisebuyersguide/> [Accessed
30 April 2012].
• Franchise know how, [Online] Available at: <http://www.franchiseknowhow.com/operations/> [Accessed 30
April 2012].
• Goldstein, J., 2012. Franchise law obligations, [Video Online] Available at: <http://www.youtube.com/
watch?v=I8FfbDrBNnc> [Accessed 29 April 2012].
• Gray, D., 2008, Franchise legal consultants Darwin gray solutions [Video Online] Available at: <http://www.
youtube.com/watch?v=8eK7DxfThoE> [Accessed 29 April 2012].
• Grunhagen, M., 1998, Multiunit franchising, [pdf] Available at: <http://www.sbaer.uca.edu/research/asbe/2001/06.
pdf > [Accessed 3 May 2012].
• Gupta, A., 2012.The Indian education council, [Video Online] Available at <http://www.youtube.com/
watch?v=8CemMXmp51E> [Accessed 30 April2012].
• Hussain, S., 2012, Franchise India, 9th International Franchise & Retail Show 2011: Part I, [Video Online]
Available at: <http://www.youtube.com/watch?v=nxJcyOMo0W8> [Accessed 8 May 2012].
• Indian Franchisee: An outlook, Indian franchise association.
112/JNU OLE
• Kalinins, A. & Lafontaine, F., Characteristics of multiunit ownership in Franchising, [Online] Available at:
<http://ideas.repec.org/p/nbr/nberwo/5859.html> [Accessed 3 May 2012].
• King, P., 2011, VR business brokers franchise Brokerage for Business Sales and Mergers & Acquisitions, [Video
Online] Available at : <http://www.youtube.com/watch?v=bwn7NJzNy6s&feature=related> [Accessed 2 May
2012].
• Libava, J., All about franchising, [Online] Available at: <http://www.biz2credit.com/b2c-ebook-franchise.pdf>
• Libava, J., Multiunit Franchising: What you need to know, [Online] Available at: <http://smallbiztrends.
com/2009/10/multi-unit-franchising-what-you-need-to-know.html> [Accessed 3 May 2012].
• Maddok, T., 2011, Tony Maddock - 9th International Franchise and Retail Show 2011, [Video Online] Available
at: <http://www.youtube.com/watch?v=Zcwq_IFYU6c> [Accessed 8 May 2012].
• Meany, J., 2004, How to buy a franchise, Sphinx publishing.
• Mendelsohn, M., A guide to Franchising, [pdf] Available at: <http://books.google.co.in/books?id=v_RandL
SSDAC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false> [Accessed 25
April2012].
• Mendelsohn, M., A guide to Franchising, [pdf] Available at: <http://books.google.co.in/books?id=v_RandL
SSDAC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false> [Accessed 25
April2012].
• Multiunit owners study, 2002, IFA Publications.
• Murphy, K. B., 2006. The Franchise Handbook: A Complete Guide to All Aspects of Buying, Selling Or Investing
in a Franchise, Atlantic Publishing Company.
• Prof. Dr. Ahlert, D. & Dr. Ahlert, M., 2008, Social Franchising, Bundesverband Deutscher Stiftungen.
• Ramco, O., 2011. Franchise operations management, [Video Online] Available at: <http://www.youtube.com/
watch?v=6Oryu5j_kYE > [Accessed 30 April 2012].
• Sherman, A. J., 2011. Franchising & Licensing, 4th ed., AMACOM Div American Mgmt Assnn.
• Sir Feachem, R., 2012.First Global Conference on Social Franchising Video, [Video Online] Available at <http://
www.youtube.com/watch?v=UjRDgIzgcpc> [Accessed 10 May 2012].
• Social Franchising, [Online] Available at: <http://www.socialpioneers.com/what-we-do/social-franchising/>
• Sun, S., 2011, Grow Smart Risk less, Green book press.
• Temple, N., 2011, The Social Franchising Manual, [Online] Available at: <http://www.socialenterprise.org.uk/
uploads/files/2011/11/social_franchising_manual.pdf> [Accessed 10 May 2012].
• Vevstad, V., International Expansion [Online] Available at: <http://www.internationalexpansion.org/international-
franchising/international-franchising/> [Accessed 8 May 2012].
• Volery, T. & Hackl, V., A promise of social Franchising as a model to achieve social goals, University of St.
Gallen.
• Wild, D., How to Franchise: Franchise sales, [Online] Available at: <http://www.2012businessopportunities.
com/component/content/article/1-latest-news/51-how-to-franchise-franchise-sales> [Accessed 2 May 2012].
• Wright, R. & Relf, S., International Franchising, [pdf] Available at: <http://www.michbar.org/journal/pdf/
pdf4article945.pdf> [Accessed 8 May 2012].
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International_Development/Resources/India%20laws.pdf> [Accessed 29 April 2012].
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Recommended Reading
• Alon, I., 2012, Global Franchising: Operations and management, 1st ed., FT press.
• Bennet, J., 2008, Franchise times, Sterling.
• Better business bureau, 2007, Buying a Franchise, Planning shop.
• Birkeland, P., 2004, Franchising dreams, 1st ed., University of Chicago Press.
• Charles. M., Business Franchise Secrets, Kindle publication.
• Cross, R. & Thomas, R., 2009. Social Networks, 1st ed., Jossey-Bass.
• Diane, H. & Alon, I., 2005, International franchising in Industrialized markets, CCH Inc.
• Genn, A., 2008, So you want to Franchise your business? 1st ed., Entrepreneur Press.
• Green, S. and Dawn, R., 2009, Law and order, Benbella books.
• Hero, M., 2010, International Franchising, Globe Law and Business.
• Kestenbaum. H., 2008, Franchise Your Business, 1st ed., Entrepreneur Press.
• Keup, E., 2007. Franchise Bible, 6th ed., Kindle publication.
• Kickul, J. & Lyons, T., 2012, Understanding Social Entrepreneurship, 1st ed., Routledge.
• Konigsberg, A., 1991, International Franchising, Juris Pub Inc.
• Kwansa, F. & Parsa, H., 2002. Quick service restaurants, franchising and multiunit chain management, 4th
ed., Routledge.
• Lafiura, D., 2011, Franchise litigation handbook, American bar association.
• Mathew, J., Debolt, D. & Prevical, D., 2011. Street Smart Franchising, 2nd ed., Entrepreneur press
• Perkins, E., 2008. Fundamentals of franchising your business, Perkin law PLLC.
• Seid, M. & Dave, T., 2006. Franchising for dummies, 2nd ed., Wiley Publishing.
• Sherman, A., 2011, Franchising and Licensing, 4th ed., Amacom publication.
• Tomzack, M & Bond, R., 1999, Tips and Traps when buying Franchise, 2nd ed., Source book Publication.
• Windspreger, J., 2004, Economics and networks of Franchise networks, 1st ed., Physica-verlag HD.
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Self Assessment Answers
Chapter I
1. d
2. b
3. a
4. c
5. a
6. a
7. a
8. a
9. c
10. a
Chapter II
1. c
2. a
3. b
4. d
5. a
6. a
7. a
8. b
9. a
10. a
Chapter III
1. b
2. a
3. b
4. d
5. a
6. a
7. c
8. b
9. c
10. a
Chapter IV
1. a
2. a
3. c
4. a
5. a
6. d
7. b
8. a
9. a
10. a
115/JNU OLE
Chapter V
1. a
2. d
3. c
4. a
5. c
6. a
7. b
8. c
9. a
10. a
Chapter VI
1. a
2. a
3. a
4. d
5. c
6. b
7. a
8. b
9. c
10. a
Chapter VII
1. a
2. b
3. c
4. b
5. d
6. b
7. a
8. a
9. d
10. b
Chapter VIII
1. c
2. a
3. b
4. b
5. d
6. a
7. a
8. c
9. a
10. a
116/JNU OLE

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Franchise Management and Operations

This book is a part of the course by Jaipur National University, Jaipur.

The content in the book is copyright of JNU. All rights reserved.

II. List of Figures...........................................................VI

III. List of Tables......................................................... VII

IV. Abbreviations........................................................ VII

V. Case Study.............................................................. 106

VI. Bibliography.......................................................... 112

VII. Self Assessment Answers................................... 115

• elucidate common franchising terms

• enlist the advantages and disadvantages of owning a franchise

• discuss alternative to franchising

• elucidate the legal issues in franchising

• explicate different examples in franchising

• understand the meaning of franchise

• enlist the types of franchise

• identify the legal issues in franchising

1.1 What is a Franchise?

Owns trademark or trade name Uses trademark or trade name

Fig. 1.1 An introduction to franchising

1.2 Types of Franchises

1.2.1 Product Distribution Franchises

1.2.2 Business Format Franchises

Ten most popular franchising opportunities are in these industries:

Some popular business format franchises include:

Restaurants Health & Beauty Maintenance/Cleaning Real Estate

Fig. 1.2 Examples of business format franchises

1.3 Types of Franchise Arrangements

Multi unit Single unit

Area Master franchise

Fig. 1.3 Types of franchise arrangement

1.3.1 Single-unit (direct-unit) Franchise

1.3.2 Multi-unit Franchise

1.4 Common Terms in Franchise

Fig. 1.4 Alternatives to franchise

1.6 Advantages and Disadvantages of Owning a Franchise

• Franchises offer important pre-opening support:

1.7 Legal Issues of Franchising

Franchising legal document

• The Disclosure Document, which may be

Fig. 1.5 Types of franchising legal documents

1.7.1 The UFOC

1.7.2 The Franchise Agreement

• The franchise system, such as use of trademarks and products

Fig. 1.6 Contents of franchising documents

2. What is also known as UFOC?

3. _______________ is one of the alternatives to franchise.

4. Which of the following statements is false?

5. Which of the following statement is true?

8. A_________ is the license or agreement between two legally independent parties.

10. The franchisee is not completely_________.

• elucidate to begin different option to begin business

• explain key subjects in franchise agreement

• elucidate financial statement

• investigate business options

• describe criteria for selecting franchise

• understand franchise agreement

• enlist key items in the discloser document(UFOC)

• enlist help options