Franchising
[2] For the franchisor, use of a franchise system is an alternative business growth strategy, compared to expansion through corporate owned outlets or "chain stores".
Adopting a franchise system business growth strategy for the sale and distribution of goods and services minimizes the franchisor's capital investment and liability risk.
However, under specific circumstances like transparency, favourable legal conditions, financial means and proper market research, franchising can be a vehicle of success for both a large franchisor and a small franchisee.
Nevertheless, the rudiments of modern franchising date back to the Middle Ages when landowners made franchise-like agreements with tax collectors, who retained a percentage of the money they collected and turned the rest over.
As the United States shifted from an agricultural to an industrial economy, manufacturers licensed individuals to sell automobiles, trucks, gasoline, beverages, and a variety of other products.
The United States is a leader in franchising, a position it has held since the 1930s when it used the approach for fast-food restaurants, food inns and, slightly later, motels at the time of the Great Depression.
[9] Three important payments are made to a franchisor: (a) a royalty for the trademark, (b) reimbursement for the training and advisory services given to the franchisee, and (c) a percentage of the individual business unit's sales.
Franchising is one of the few means available to access venture capital without the need to give up control of the operation of the chain and build a distribution system for servicing it.
After the brand and formula are carefully designed and properly executed, franchisors are able to sell franchises and expand rapidly across countries and continents using the capital and resources of their franchisees while reducing their own risk.
[16] Often the training period – the costs of which are in great part covered by the initial fee – is too short in cases where it is necessary to operate complicated equipment, and the franchisee has to learn on their own from instruction manuals.
[22] This code requires franchisors to produce a disclosure document which must be given to a prospective franchisee at least 14 days before the franchise agreement is entered into.
The code also regulates the content of franchise agreements, for example in relation to marketing funds, a cooling-off period, termination, and the resolution of disputes by mediation.
[34] By the end of 2012, about 2,031 franchise brands were operating in Brazil, with approximately 93,000 locations,[35] making it one of the largest countries in the world in terms of number of units.
The regulations also ensure their right to form associations and launch collective action, even if they signed contracts prohibiting such moves.
In a highly diversified society, (see Demographics of India) McDonald's is a success story despite its menu differing from that of the rest of the world.
Although they have no franchise specific laws, Germany and those countries with a legal system based upon that of Germany, such as Austria, Greece and Portugal, probably impose the greatest regulatory burden on franchisors due to their tendency to treat franchisees as quasi consumers in certain circumstances and the willingness of the judiciary to use the concept of good faith to make pro-franchisee decisions.
The specific and important disclosures to be made are:[45] Initially, there was some uncertainty whether any breach of the provisions of the Doubin Law would enable the franchisee to walk away from the contract.
Under Italian law franchise[47] is defined as an arrangement between two financially independent parties where a franchisee is granted, in exchange for a consideration, the right to market goods and services under particular trademarks.
In addition, articles dictate the form and content of the franchise agreement and define the documents that must be made available 30 days prior to execution.
[48] In Russia, under chapter 54 of the Civil Code (passed 1996), franchise agreements are invalid unless written and registered, and franchisors cannot set standards or limits on the prices of the franchisee's goods.
Mr Mark Prisk MP suggested that the costs of such regulation to the franchisee and franchisor could be prohibitive and would in any case provide a system which mirrored the work already being completed by the BFA.
[55] In the 2010 case of MGB Printing v Kall Kwik UK Ltd., the High Court established that a franchisor may assume a duty of care to a franchisee in certain circumstances.
[57] Isaac Singer, who made improvements to an existing model of a sewing machine in the 1850s, began one of the first franchising efforts in the United States, followed later by Coca-Cola, Western Union,[58][59] and by agreements between automobile manufacturers and dealers.
It must include such data as the names, addresses and telephone numbers of the franchisees in the licensed territory (who may be contacted and consulted before negotiations), estimate of total franchise revenues and franchisor profitability.
In recent years, the idea of franchising has been picked up by the social enterprise sector, which hopes to simplify and expedite the process of setting up new businesses.
A number of business ideas, such as soap making, wholefood retailing, aquarium maintenance, and hotel operation have been identified as suitable for adoption by social firms employing disabled and disadvantaged people.
The most successful examples are probably the Kringwinkel second-hand shops employing 5,000 people in Flanders, franchised by KOMOSIE,[69] the CAP Markets, a steadily growing chain of 100 neighbourhood supermarkets in Germany.
[71] Social franchising also refers to a technique used by governments and aid donors to provide essential clinical health services in the developing world.
Social Franchise Enterprises objective is to achieve development goals by creating self sustainable activities by providing services and goods in un-served areas.
Home-based franchises are becoming popular as they are considered to be an easy way to start a business as they may provide a low barrier for entry into entrepreneurship.
