FRANCHISING AND ITS

ORIGIN
 BASIC CONCEPTS AND DEFINITIONS OF
FRANCHISING
 The term franchise has its origin in the French word meaning “free from servitude.”
 It is a form of business arrangement which originated from France in the 18th century.
The term franchising in French also means “a granting of right” or “an exemption.”
 Strictly from the business point of view, a franchise is a right or privilege granted to an
individual or a group. Franchises may be granted by government or private bodies.
 From the point of view of economics, a franchise is a right granted to operate a business
under the general regulation of one who grants its.
 a franchise is a legal agreement in which an owner (franchisor) agrees to grant rights or
privileges (license) to someone else (franchisee) to sell the product(s) or services under
specific conditions. This method of doing business is referred to as franchising and, like
marketing or distributing a product or service, may be adopted and used in a wide
variety of industries and businesses.
BASIC CONCEPTS AND TERMS OF
FRANCHISING
 According to the Federal Trade Commission (2007) the following terms defi ne
various legal aspects pertaining to franchising:
 Franchise means 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:
 1. The franchisee will obtain the right to operate a business that is identifi ed or
associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services,
or commodities that are identifi ed or associated with the franchisor’s trademark;
 2. The franchisor will exert or has authority to exert a signifi cant degree of control over
the franchisee’s method of operation, or provide signifi cant assistance in the
franchisee’s method of operation; and
 3. 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.
BASIC CONCEPTS AND TERMS OF
FRANCHISING
 Franchisee means any person who is granted a franchise.
 Franchisor means any person who grants a franchise and participates in the franchise
relationship. Unless otherwise stated, it includes subfranchisors. For purposes of this definition, a
“subfranchisor” means a person who functions as a franchisor by engaging in both presale
activities and post sale performance.
 Franchise seller means a person that offers for sale, sells, or arranges for the sale of a franchise.
It includes the franchisor and the franchisor’s employees, representatives, agents, subfranchisors,
and third-party brokers who are involved in franchise sales activities. It does not include existing
franchisees who sell only their own outlet and who are otherwise not engaged in franchise sales
on behalf of the franchisor.
 Parent means an entity that controls another entity directly or indirectly through one or more
subsidiaries.
 Person means any individual, group, association, limited or general partnership, corporation, or
any other entity.
BASIC CONCEPTS AND TERMS OF
FRANCHISING
 Leased department means an arrangement whereby a retailer licenses or otherwise permits a
seller to conduct business from the retailer’s location where the seller purchases no goods,
services, or commodities directly or indirectly from the retailer, a person the retailer requires the
seller to do business with, or a retailer-affi liate if the retailer advises the seller to do business
with the affi liate.
 Plain English means the organization of information and language usage understandable by a
person unfamiliar with the franchise business. It incorporates short sentences; defi nite,
concrete, everyday language; active voice; and tabular presentation of information, where
possible. It avoids legal jargon, highly technical business terms, and multiple negatives.
 Predecessor means a person from whom the franchisor acquired, directly or indirectly, the major
portion of the franchisor’s assets.
 Principal business address means the street address of a person’s home offi ce in the United
States. A principal business address cannot be a post offi ce box or private mail drop.
BASIC CONCEPTS AND TERMS OF
FRANCHISING
 Prospective franchisee means any person (including any agent, representative, or employee)
who approaches or is approached by a franchise seller to discuss the possible establishment of a
franchise relationship.
 Required payment means all consideration that the franchisee must pay to the franchisor or an
affiliate, either by contract or by practical necessity, as a condition of obtaining or commencing
operation of the franchise. A required payment does not include payments for the purchase of
reasonable amounts of inventory at bona fi de wholesale prices for resale or lease.
 Sale of a franchise includes an agreement whereby a person obtains a franchise from a franchise
seller for value by purchase, license, or otherwise.
 Signature means a person’s affirmative step to authenticate his or her identity. It includes a
person’s handwritten signature, as well as a person’s use of security codes, passwords, electronic
signatures, and similar devices to authenticate his or her identity.
 Trademark includes trademarks, service marks, names, logos, and other commercial symbols.
 Written or in writing means any document or information in printed form or in any form capable
of being preserved in tangible form and read. It includes typeset, word-processed, or handwritten
documents; information sent via email; or information posted on the Internet. It does not include
mere oral statements
The Elements of Franchising
 Types of Franchises
 JOB FRANCHISE
 This is usually a residential or low-
investment franchise acquired by an
individual who wants to establish and
operate a small franchised company by
himself. Generally, the franchisee needs
to purchase a minimum of supplies, small
stock and often a vehicle. A number of
facilities, such as travel agents, cafe truck,
home lawn facilities, drainage, washing of
sinks, industrial or domestic, mobile
phone supplies and improvements, land
services, transportation, upkeep of ponds,
corporate function management,
children's services, etc. are part of this
category. The following resources are
included.
 Types of Franchises

 PRODUCT (OR DISTRIBUTION) FRANCHISE

 Product-driven franchises are focused on
partnerships with vendors, where franchisees sell
the goods of the franchisor .. The franchisor
licenses its trademark, but it does not typically
give franchisors a full program to operate the
business. Consumer franchises are mainly
responsible for the usage of broad items, such as
vehicles and automotive repair components,
dealers, laptops, truck, appliances etc. Franchising
products are the highest share of total retail sales.
Exxon, Texaco, GoodYear Tires, Toyota, Dodge,
John Deere and other car manufacturers are well
established product marketing companies. Any
franchisor licenses not only sell but also form part
of the fabrication process, such as Coca-Cola and
Pepsi soft drink makers.
Types of Franchises

 BUSINESS FORMAT FRANCHISE

 The business format franchisee can also use

the brand of the franchisor, however, most
critically, it gets the complete system to manage
and sell the goods and/or service. In almost every
area of the company the franchisor provides
comprehensive schedules and processes, original
and continuing preparation and assistance.
Franchising in business format is the most
prominent kind of franchising method and one
that is widely used when speaking franchising.
Busily grocery, supermarket, hospitality, business
services, health and others are the most common
companies from more than 70 industry sectors.
Types of Franchises
 INVESTMENT FRANCHISE

 Generally these are big-scale ventures, such

as hotels and big restaurants, involving
substantial capital expenditures. In fact, the
franchisees spend resources and hire their own
management team or franchisors to run the
business and produce a profit and capital gain on
exit.
Types of Franchises
 CONVERSION FRANCHISE
 Conversion franchising is a modification
of standard franchise relationships. Many
franchise systems grow by converting
independent businesses in the same
industry into franchise units. The franchisees
adopt trademarks, marketing and
advertising programs, training system and
critical client service standards. They also
usually increase procurement savings. The
franchisor in this model has a potential for
very rapid growth in terms of units and
royalty fee income. Examples of industries
that extensively use conversion franchising
are real-estate brokers, florists, professional
services companies, home-services, like
plumbing, electricians, air conditioning, and
so on.
Types of Franchise Arrangements
 SINGLE UNIT FRANCHISE
 Single Unit Franchise (or Direct Unit Franchise) is the most traditional and historically the most
common form of franchising. Franchisor grants to an entity (the franchisee) the right and obligation to
establish and operate one franchise. The franchisees have to invest their own capital and apply their
own management skills (generally hands-on).
Types of Franchise Arrangements
 MULTI UNIT FRANCHISE
 Franchisor grants to an entity (the multi unit franchisee) the right and the obligation to establish and
operate more than one franchised unit. The multi unit franchisee agrees up front to open a specific
number of locations during a defined period of time. The multi unit franchisee must have the financial
and managerial capability to develop multiple units itself.
Types of Franchise Arrangements
 AREA DEVELOPMENT FRANCHISE
 This type of franchising arrangement is similar to the multi unit franchise- the franchisor grants to an
entity (the area developer) the right and the obligation to establish and operate more than one
franchised unit. The area developer agrees up front to open a specific number of locations during a
defined period of time within a defined area.
Types of Franchise Arrangements
 MASTER FRANCHISE
 Franchisor grants the right to an entity (the master franchisee) for a specific country, region or continent,
empowering the master franchisee to provide the full range of products and services of the franchisor through sub-
franchising, in just the same way that the franchisor runs its own business. The master franchisee, in addition to
having the right and obligation to open and operate a number of locations in a designated area, also has the right
(and sometimes- obligation) to recruit other franchisees. In effect, the master franchisee becomes sort of a
franchisor to those franchisees who join the system through its master franchise.
Types of Franchise Arrangements
 MASTER FRANCHISE
 Franchisor grants the right to an entity (the master franchisee) for a specific country, region or continent,
empowering the master franchisee to provide the full range of products and services of the franchisor through sub-
franchising, in just the same way that the franchisor runs its own business. The master franchisee, in addition to
having the right and obligation to open and operate a number of locations in a designated area, also has the right
(and sometimes- obligation) to recruit other franchisees. In effect, the master franchisee becomes sort of a
franchisor to those franchisees who join the system through its master franchise.
Advantages of Franchising

1. Promotes Multi-Unit Expansion

2. Creates Capital for Expansion

3. Supplies Managerial Talent

4. Promotes Economies of Scale

5. Creates New Revenue Streams

Disadvantages of Franchising

1. Cost

2. Regulation

3. Franchise Sales are Competitive

4. Less Control

5. Requires Time