Franchising

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Franchising

  1. 1. FranchiseA form of business organization in which a firm which already has asuccessful product or service (the franchisor) enters into acontinuing contractual relationship with other businesses (franchisees) operating underthe franchisors trade name and usually with the franchisors guidance, in exchange fora fee. Some of the most popular franchises in the United States include Subway,McDonalds, and 7-Eleven.FranchisingArrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark ortrade-name as well as certain business systems and processes, to produce and market a good or service according tocertain specifications. The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as royalty,and gains (1) immediate name recognition, (2) tried and tested products, (3) standard building design and décor,(4) detailed techniques in running and promoting the business, (5) training of employees, and (6) ongoing help inpromoting and upgrading of the products. The franchiser gains rapid expansion of business and earnings atminimum capital outlay.History of franchisingEarliest FranchisingMany believe that Albert Singer, founder of the Singer sewing machine, was the initiator offranchising. He was actually the earliest person recognized by most as being associated withfranchising. However, the concept of franchising really began long before.The term franchising derived from ancient French, is defined as holding a particular privilege orright.Back in the middles ages, local leaders would designate privileges to citizens. Some of these rightsincluded conducting fairs, running markets, and operating ferries. The franchising idea then carriedforward to the practice of Kings yielding rights to conduct activities such as beer brewing and roadbuilding. In addition, the expansion of the church is known as a form of franchising.The Evolution of FranchisingDuring the 1840s, several German ale brewers granted rights to particular taverns to market theirale. This was the beginning of the type of franchising that became familiar to most of us in thetwentieth century.Franchising then traveled from European brewers into the United States. Before franchising there wasnot much in the way of chain operations, which would eventually form the basis of franchising in theU.S.Peddlers in early American history, selling items from town to town, were also considered a form offranchising. Licenses were provided to general stores at military outposts as well. These exclusiveterritorial rights are described in written literature, however specific names are not.Albert Singer came on the scene in 1851 with the Singer Sewing Machine Company. Singer made useof franchising to distribute his machines over a widespread geographic area. He is the first actual
  2. 2. name recognized as an early franchisor. Additionally, Singer was the first to prepare franchisecontracts. These documents then became the basis for the modern version of franchise agreements.In the late 1800s and early 1900s many other forms of franchising took place. Some examplesincluded monopolized franchises for several utilities as well as street car companies. Then as oilrefineries and auto manufacturers found that they could sell their products over a larger geographicalarea, they began to franchise.Transportation and increasingly mobile Americans were the basis for the establishment of retail andrestaurant chains/franchises. As time went on a large number of establishments began to franchise.Some of the well-known franchises include Kentucky Fried Chicken in 1930, Dunkin Donuts in 1950,Burger King in 1954, and McDonalds in 1955.Modern FranchisingThe modern leading form of franchising, known as business format franchising, became popular postWorld War II. At that time, those serving in the war returned home and had huge desires for manyproducts and services. Subsequently, the baby boomers became the leaders of the economy and areexpected to continue as the driving force for quite some time.As franchising expanded rapidly in the 1960s and 1970s, also came a large amount of oppressiveactivity to contend with. There were several companies that were under-funded and poorly managed,therefore going bankrupt leaving many franchisees in a lurch. More upsetting were the fraudulentcompanies who literally took peoples money for nothing.These unfortunate events led to the formation of the International Franchise Association (IFA) in orderto regulate the franchising industry. The IFA continuously works in conjunction with the US Congressand Federal Trade Commission (FTC) on improving the industrys relations with franchisees. In 1978,the FTC created the Uniform Offering Circular (UFOC) requiring franchise companies to provideddetailed information to potential franchisees. This document was updated in 2007 and renamedthe Franchise Disclosure Document (FDD).Franchising continues to be a highly regulated industry in an effort to promote the healthy growth ofthe economy.franchiseeDefinition: A franchisee is an individual who purchases the rights to use a company‘s trademarkedname and business model to do business. The franchisee purchases a franchise from the franchisor.The franchisee must follow certain rules and guidelines already established by the franchisor, and inmost cases the franchisee must pay an ongoing franchise royalty fee to the franchisor.FranchiseeOne who purchases a franchise. The franchisee then runs that location of the purchased business. He or she is responsiblefor certain decisions, but many other decisions (such as the look, name, and products) are already determined bythe franchisor and must be kept the same by the franchisee. The franchisee will pay the franchisor under the terms ofthe agreement, usually either a flat fee or a percentage of the revenues or profits, from the sales transacted at thatlocation.
  3. 3. Read more: http://www.businessdictionary.com/definition/franchisee.html#ixzz2Cx4cakYUFranchisorDefinition: The franchisor owns the overall rights and trademarks of the company and allows itsfranchisees to use these rights and trademarks to do business. The franchisor usually charges thefranchisee an upfront franchise fee for the rights to do business under the franchise name. In addition,the franchisor usually collects an ongoing franchise royalty fee from the franchisee.The company that allows an individual (known as the franchisee) to run a location oftheir business.The franchisor owns the overarching company, trademarks, and products, but gives theright to the franchisee to run the franchise location, in return for an agreed-upon fee.Fast-food companies are often franchised.Read more: http://www.businessdictionary.com/definition/franchisor.html#ixzz2Cx5DdDPMFranchisors are available in every industry / sector to work with entrepreneurs (theFranchisee) to help them develop successful business opportunities (franchises). Thefranchisor typically provides marketing, sales assistance and lends corporate credibility.The word Franchise comes from the Old French meaning freedom or privilege. In themiddle ages of Europe, the local lord would grant rights to hold markets or fairs. Inessence, the monarch gave someone the right for a certain type of activity. They werethe first Franchisors – and did not know it.In 1851, Isaac Singer accepted fees from independent salesmen to acquire territorialrights to sell his recently invented sewing Machine. The Singer Company begangranting distribution franchises and was the first Company to write franchise contracts.In the late 1880′s Cities began giving franchises to newly established electricitycompanies. Around the turn of the Century oil companies and automobile manufacturerbegan to grant rights to sell their new inventions. White Castle was the first fast foodhamburger franchise chain in America, opening 1921 and sold since then over 12 billionhamburgers. A&W started franchising their root beer stands in 1921.
  4. 4. Business format franchising, which is the dominant mode of franchising today, startedafter the Second World War. In the 1950′s all kind of services and products started tofranchise in the USA. In 1955, a certain Ray Kroc came to the idea of franchising a thenlittle known fast food place named “McDonald’s” – and in the meantime they sold morethan a 100 billion of hamburgers worldwide! Many well-known restaurant franchisesstarted during this time. Colonel Harlan Sanders initiated his first KFC franchise, so didDairy Queen and Dunkin Donuts.Franchising has powerfully transformed the entire perception of business culture andpractice. In the USA over a trillion $ in revenues is generated by more than 5,000Franchisors and their Franchisee yearly. The “American Dream” is becoming a dynamicreality for hundreds of thousands of additional entrepreneur around the world. In thePhilippines, where Business Format Franchising started in the 1970′s (except A&W,who was earlier here), one of the first was again was “McDo”, who opened its first outletin 1981. To that time, a small chain of ice cream joints began selling burgers –“Jollibee”, which is today our number one Franchise Company in the Country. Thesuccess of Jollibee is a mystery to the top guys of McDonald’s in Chicago, since theyare the number one in fast food in every Country they operate – except the Philippines.Today, more than 950 Franchisors, majority local, operate in the Country and thenumber keeps growing to the advantage for the consumer – more competition, morechoice, more bargains. Almost all of them in the food business offer some kind of valuemeal combinations. Some of them are exporting their Franchise System to otherCountries. As example, 25 of the more than 360 Franchisor clients of RK Franchise
  5. 5. Consultancy are already franchising in foreign Countries throughout Asia, the MiddleEast, Europe and America.FRANCHISING has become an easy and convenient way to deliver goods and services toconsumers. Aside from usual food and beverage establishments, other services such assalons, hotels, and many others are now also open for franchising.Clearly, consumers are not the only ones benefiting from the welcome convenience offeredby quick services or from the wider range of products and services made available to them.Franchisers, in turn, also reap the benefits through profit.It would be interesting to know what is behind franchising and how it exploded in themarket.OriginsFranchising has had a long history, but the concept is widely believed to have started fromsewing manufacturer, Albert Singer.The idea came about to address one common problem in business: funding.In the 1850s, the Singer Company produced sewing machines, but could not pay itssalesmen their salaries. As an alternative, the company created a network of dealers whopaid Singer a fee to sell the machines. These first franchise owners made money for eachsewing machine they bought from Singer and eventually resold within their particularterritories.Other prominent examples abound in history. Coca-Cola, for example, was originally createdas a fountain drink until Benjamin Thomas and Joseph Whitehead obtained permission in1899 to bottle the soda. Upon realizing that they alone could not afford to create a bottlingcompany, the two created a franchise company that sold the right to bottle the cola toindividual plants.In the Philippines, franchising also traces its roots to the Singer Sewing Machine. In thatperiod franchising was limited only to foreign businesses and public utilities services untilthe Philippine Franchising Association was created in 1995. During that time, there wereonly 111 franchise concepts which eventually grew to 967 concepts in 2007.
  6. 6. Lucrative businessOver the years, franchising has become a lucrative enterprise.In the Philippines, the number of franchise concepts has grown by 19.8% in a span of 12years to 2007.In the same year, of the total number of franchise concepts, 43% are in the food sector,28% and 21% involve retail and services, respectively, and 3% are engaged in specializedservices such as hotel services and memorial services.According to Philippine Chamber of Commerce and Industry President Samie Lim,franchising is a promising venture given the country‘s growing consumer market and risingper capita incomes and rate of urbanization.The emergence of the business-process outsourcing industry also gives opportunities forestablishments to extend their operating hours to cater to different workers throughout theday, especially to those working in graveyard shifts.According to Philippine Franchise Association (PFA) President Robert F. Trota, franchisingremains a good business option amid the economic slowdown.The continued inflow of OFW remittances also provides adequate support from both thesupply and demand side. Remittances enable some households or persons to venture intofranchising; at the same time, remittances also boost the consumption of goods and thepatronage of various services that franchised establishments offer.The overall effects on the economy have been substantial. In the latest PFA study presentedby the chairman emeritus Samie Lim, income from franchising represents some five percentof the country‘s gross domestic product from 2005 to 2007, which translates toapproximately P106.75 billion for the economy. It is also an important means to createenterprise and generate employment, creating an estimated 200,000 franchise outlets andemploying almost a million of Filipinos nationwide.Department of Trade and Industry Undersecretary Zenaida Maglaya has noted thatfranchising is a sure and secure way to a successful business due to the availability oftechnology, formula, and the process, giving the entrepreneur an advantage since he or shewill not necessarily start from scratch.ProspectsIn addition to the emergence of the business process outsourcing units, the franchisingindustry also sees tourism as a road to market expansion for local businesses.According to Franchising in the Philippines in 2008: Country Report, tourist inflows afford
  7. 7. franchisers an opportunity to acquire concepts from the country where these foreignerscome from to cater their needs and preferences.In addition, the franchising industry can capture more investment in the forward andbackward linkages in the tourism industry; in this case, they can venture into travel andtransport services, hotel and other accommodation services, food and beverage, and others.The franchising industry also boasts a competitive stance in franchising operations abroad.In fact, the Philippines ranked 4th in the world when it comes to franchising concepts (and1st among ASEAN nations). With its success in the local market, some brands such asJolibee, Bench, Max‘s Restaurant, etc. have penetrated and established their grounds in theforeign market.Indeed, the franchising industry has proven to be a successful business in the country,surviving even in tough economic times. Further, this business has indeed provided startingentrepreneurs a good head start in the world of business, given the readily availabletechnology and process of running the franchise. With its growth in the local market andpenetration in the international market, this venture is indeed a good business prospect.20 years of franchising in the Philippines(Source: The Philippine Star News Online - 07/29/12)Manila, Philippines - Some 20 years back, the then infant franchising industry in the Philippines only had lessthan 50 players, with 80 percent of them foreign brands.Now, under the stewardship of the founders of the Philippine Franchise Association (PFA), franchising in thecountry exploded into an $11 billion industry that consists of over 1,300 franchise concepts, more than124,000 franchisees and employee base of 1.1 million.―In the past 20 years, the Philippine franchising industry is likened to an hourglass, wherein entrepreneursand retail concepts squeeze through the small ‗ring of purification‘ to become a franchise, which can now goforth and multiply and create thousands of SMEs and millions of jobs,‖ Samie Lim, the acknowledged fatherof Philippine franchising, emphasized.The success story of the industry dates back to the early ‘90s when Lim toured the United States and Europeas head of the Federation of Asian retailers. In the conferences that he attended, Lim learned thatfranchising is the fastest growing industry.So in 1993, realizing the potential of franchising as a major economic growth catalyst for the Philippines,Lim and industry pioneers such as Jose T. Pardo and Vicente T. Paterno joined hands and held the country‘sfirst franchise expo. The event grew bigger the following year, giving the then industry bigwigs the reason tocreate an industry association.That time, the Top 10 franchisers in the country were only meeting among themselves regularly where theytalk about best practices. This small group was convinced by Lim, Pardo and Paterno to spearhead theestablishment of the Philippine Franchise Association in 1995. Lim, although he was not a franchiser then,served as the founding father, which is a testament to the efforts he put in to bring together the industry
  8. 8. players.PFA then approached the USAID, through the Private Investment and Trade Opportunities headed by SergioOrtiz-Luis, and obtained a $10,000-funding support for the creation of an industry master plan using theAmerican example.―The gist of that study is we identified the 10 different sectors that are best suited for franchising, and wefocused on them. With that came the development of local and foreign franchises like Jolibee,‖ Limexplained.With homegrown business concepts sprouting, PFA included an incubation pavilion at the annual franchiseexpo to support the high potential business ideas. Those who got the nod of the PFA screening committeegot free booths, thus, giving them free exposure to prospective buyers, investors and partners.The PFA also talked to the colleges and universities like the University of Asia & the Pacific and AteneoSchool Management to dedicate areas for food stalls that were conceptualized by students. And through thePhilippine Chamber of Commerce and Industry (PCCI), PFA also launched the Business Ideas DevelopmentAward (BIDA). It awarded the best business ideas that were sent by students and gave them free spaceagain at the expo.Then came the next big thing – financing. ―Out of 100 who come forward to say they want to franchise, onlyfive are really qualified because the rest do not have enough money. So we brought in the banks and nowwe have BPI Family Savings Bank, Banco de Oro, Philippine National, Planters Bank, SB Corp., DevelopmentBank of the Philippines, and PS Bank as the top lenders to the industry,‖ Lim said. With funding no longer aproblem, Lim said franchisers and franchisees are now also able to acquire multi-brands.And now, the Philippines is being used as staging point of foreign franchises that are establishing presencein Asia. And more importantly, Filipino brands such as Max‘s, Jolibee and Potato Corner are now doing goodin the international arena.The strong growth of the industry was mainly private sector-led as in contrast to the other countries thatprovide numerous support schemes to their franchisers, the PFA toiled on its own, and even turned it into anadvantage. ―Since we are basically private sector-led, we are more consistent, unlike the others wherepolicies change when there is a change of government,‖ Lim further explained.The Philippines also benefited a lot from PFA‘s membership in the World Franchise Congress as the countryis able to get experts that give valuable pointers to the industry players during the annual Franchiseconference.―As of this year, we have the largest franchise exhibit in the world — the Franchise Asia Philippines (FAP)2012. We are able to do this because we are consistently growing. With last year‘s World FranchiseConference hosted by the Philippines, the word is now out that if you want to go to Asia, you should go tothe Philippines.We are building from last year and I hope we can sustain that,‖ Lim stressed. This year‘s InternationalFranchise Expo, which is one of the four major components of FAP 2012, will have about 500 firmsexhibiting at the 10,000- square meter SMX Convention Center exhibition halls, with over 50,000 visitorsexpected. Visitors and exhibitors are expected from US, Canada, Guam, Africa, Pakistan, Bangladesh, MiddleEast, Thailand, Malaysia, Taiwan, China, Japan and Korea.Lim said he is now seeking to harness the programs of Tesda director general Joel Villanueva to furtherboost the potential of Philippine franchising.Lim noted he agrees with Villanueva that Filipinos should change their notion that college diploma isimportant to be able to land a good job. Lim hopes to partner with Villanueva in launching nationwideseveral short courses that will serve the employment requirements of the franchising industry. These includeshort courses for baristas, waitering, and even basic housekeeping.―With Tesda‘s help, we can improve the competitiveness of Philippine franchise concepts because we willhave workers that have standardized knowledge and skills. That is what franchising is all about, havingprofessionalized and standardized operations,‖ Lim added.
  9. 9. 4 types of franchising Single-Unit A single-unit franchise is the most common type of franchise available. It is a franchise that the franchisee purchases directly from the franchiser or an appointed agent of the franchiser, and is for a single business unit in one physical location. The franchisee is sometimes assigned a territory by the franchiser, or the franchisee may already have a location in mind that will require approval from the franchiser. In many cases, the franchiser will protect a territory for a franchisee within a certain radius to avoid inter- company competition. To become a single-unit franchisee, it is recommended that you have a basic understanding of how business works, or that you have strong team in place to advise you. A franchisee is expected to be very hands-on with running his or her business unit. Multi-Unit A multi-unit franchise occurs when the same franchisee is granted multiple units by the same franchiser. These units can be within a specific geographic region negotiated between the two parties, or it can be multiple units with random geographic locations. In many cases, a franchiser will offer multiple units to a successful single-unit franchisee, and then offer discounts in licensing fees to start more locations. In some cases, franchisers may award multi-unit franchises to new franchisees who have displayed a competence for running multiple business units with other franchise opportunities. Sponsored Linkso Hotel Investment Property Fully Managed Hotel Investment. with up to 14% Guaranteed ROI. Principalinternational.co.uk/Invest Area Development An area development franchise agreement is typically offered to companies or individuals that have already set up successful franchises for other franchisers. A franchisee is given a geographic territory and must begin to develop units within that territory. Normally there is a established schedule between the franchiser and franchisee as to how many units must be set up within a predetermined time period. The geographic area can vary depending on the business and the agreement. It can be a region the size of a county, or it could be an entire state. If the franchisee does not live up to the unit development schedule, his or her license could be revoked and he or she may be subject to fines. Normally the franchiser offers special licensing pricing and ongoing royalty pricing to area development franchisees.
  10. 10. Master AgreementThe master franchise agreement is rare, but it is something that many franchisees look tohave. A master franchise owner is similar to an area development franchiser in that he orshe is given a geographic region and cost breaks for the agreement, but the masterfranchisee can also sell franchises on behalf of the franchiser and collect part of the regularroyalty for the franchise as well. The master franchise owner speaks as the appointedrepresentative of the franchisee for their region, and the region is normally larger than onegiven to an area development franchisee.Absentee FranchiseeThere is one other kind of franchise agreement, which allows someone to start a franchisebut not have to be the hands-on manager. In this case of the absentee franchisee, theagreement is made in advance that the franchisee will not be the day-to-day operator of thefranchise, but that he or she will be responsible for reporting royalties and income to thefranchiser. This allows people to have a franchise without leaving their regular employment.Read more: Four Types of Franchising | eHow.com http://www.ehow.com/about_5366989_four-types-franchising.html#ixzz2Cx8CeLhpThere are three basic types of franchises:Product Franchises.Manufacturers use the product franchise to govern how a retailer distributes their product. The manufacturergrants a franchisee the authority to distribute goods by the manufacturer and allows the owner to use thename and trademark owned by the manufacturer. The franchisee must pay a fee or purchase a minimuminventory of stock in return for these rights. Examples of Product Franchises include: Mobil, Goodyear,Baskin Robbins, and Ford Motor Company.Business Format Franchising.This is the most popular form of franchising. In this approach, a company provides a franchisee with aproven method for operating a business using the name and trademark of the company. The company willusually provide a significant amount of assistance to the business owner in starting and managing thecompany. The franchisee pays a fee or royalty in return. Examples of Business Format Franchises include:McDonalds, Dunkin Donuts, Carvel, AMMCO and Fantastic Sam‘s.Manufacturing Franchise.These types of franchises provide an organization with the right to manufacture a product and sell it to thepublic, using the franchisors name and trademark. This type of franchise is found most often in the food andbeverage industry, but can be applied to other industries. Examples of Manufacturing Franchises include:Coca-Cola, and Sealmaster.Five methods of franchisingThough further variations are possible, most franchise systems draw from five common methods of franchising. Tohelp illustrate each method we can consider a scenario involving Jean of Jean’s Camera Shop and Jim Burton. Jean
  11. 11. has decided to franchise her successful Camera business in the hope of building a nationwide network of Jean’sCamera stores. In this instance, Jean assumes the role of the franchisor. Jim is interested in buying a franchise. Thetype of franchise Jim could buy from Jean depends on which of the five methods Jean uses for her franchise system.Single-unit franchisingThe method of franchising most people are familiar with would involve Jim (or another person, partnership orcompany) buying a franchise business from the franchisor (Jean). Jim would then operate the business in a particularlocation or area. This is called single-unit franchising. The result is often a franchisor (like Jean) with a number offranchisees (like Jim) owning and operating individual stores in different locations.Sequential franchisingSequential franchising is an alternative type of franchising arrangement. In our case, Jean may allow Jim to purchasea second, and perhaps even a third, Jean’s Camera franchise. Using sequential franchising, these additionalfranchises are granted on a one-at-a-time basis. In other words, after establishing the second franchise, Jim wouldneed to prove he was capable of operating both stores, before being allowed a third franchise. The implication of thistype of arrangement is that it becomes increasingly difficult for Jim to maintain direct involvement in each of hisbusinesses. Therefore he would need to hire and manage employees to run the different stores.Area developmentA variation on sequential franchising is area development. If Jean used this method of franchising Jim (as afranchisee) would become an "area developer." Unlike sequential franchising where Jim could gain an additionalfranchise only after proving his capability, Jean from the outset would give Jim (in return for a fee) the rights tomultiple franchises. Jean would then expect to Jim to establish and manage these stores himself, with the assistanceof hired employees. Using this method of franchising (and the following two), Jean may also require Jim to establish acertain number of stores within an agreed time frame.SubfranchisingThe fourth method of franchising is termed subfranchising. Often called master franchising, subfranchising involvestwo levels of franchises: subfranchisors (often called master franchisees) and subfranchisees. Subfranchisors are likea franchisor in that they will often be responsible for recruiting and providing ongoing support to operatingfranchisees. However, in contrast to the franchisor with nationwide interests, they are responsible for a smaller area.For example, Jean could offer Jim a master franchise for the Canterbury area. Within this area Jim could be expectedto attract, select, train and provide ongoing support to owner-operating franchisees (subfranchisees). Jean may alsohave master franchisees responsible for other regions, such as Wellington and Auckland. Jean would then managethe subfranchisors who, in turn, manage a number of subfranchisees in their respective regions.Area representationLess common than subfranchising is area representation. Like subfranchising area representation has two levels offranchisees. The main difference is that the master franchisees (called area representatives in this instance) aredelegated less responsibility than subfranchisors by the franchisor. Specifically, the franchisor will often play animportant role in recruiting and providing ongoing support to franchisees, within an area representative’s region.

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