Franchising

Definition:

A form of business organization in which a firm, which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisee) operating under the franchisor's trade name and usually with the franchisor's guidance, in exchange for a fee.

Two Parties :

FranchiseeAn entrepreneur whose power is limited by a contractual

agreement with a franchisor

FranchisorThe party in the franchise contract that specifies the

methods to be followed and the terms to be met by the other party

Authority and Control..

Control is with the parental company (Franchisor).

The Franchisor have the Authority to cancel the contract of a franchisee whenever they want.

Growth of Franchising

Franchising originated afterthe First World War withthe development of petrol stations and motor vehicledealerships. Today there are many examples of franchising, and it is particularly prominent in the food, service and retail industries.

Continued……

Singer Sewing Machine – first franchise (mid-19th century)

Automobile (e.g. Ford)Petroleum products (e.g. Shell)Soft drinks (e.g. Coca Cola)Food and restaurants (e.g. McDonald’s,

Starbucks)

Reasons for franchising …..

Home markets saturated – attractive opportunities overseas

Relaxation of regulations in most countries

Expansion of international tradeExposure to international media

The 20 Fastest-Growing Franchises -

1. Subway: Submarine sandwiches & salads

2. McDonalds: Hamburgers, chicken, salads

3. Liberty Tax Service: Income-tax preparation

4. Sonic Drive-In Restaurants: USA (44 franchises)

5. Inter Continental Hotels:

6. Ace Hardware:Home improvement store

7. Pizza Hut: Pizza, pasta, wings

8. Circle K: Convenience store

9. Papa John’s Intl: Pizza

11. Jiffy Lube Intl: Fast oil change

12. Instant Tax Service:

13. Baskin-Robbins USA: Ice cream

14. KFC Corp: Chicken

15. Jani-King: Commercial cleaning

16. Dairy Queen:

17. Super 8: Hotels

18. Arby’s: Sandwiches

19. Jan-Pro: Commercial cleaning

20. Taco Bell: Quick-service Mexican

Top 12 Low-Cost Franchises - 2010

H & R Block Tax preparation and electronic filing

$26,427 - $84,094

Jani-King Commercial cleaning $11,400 - $35,050

Jan-Pro Intl Commercial cleaning $3,145 - $50,405

Kumon Math Centers Supplemental education $32,958 - $131,070

Stratus Building Solutions Commercial cleaning $3,450 -$57,750

Jazzercise Inc Dance fitness classes $2,980 - $75,500

Instant Tax Service Retail tax preparation $39,000 - $89,000

Vanguard Cleaning Commercial cleaning $8,125 - $38,100

ServiceMaster Clean Disaster cleaning $20,926 - $132,623

Bonus Building Care Commercial cleaning $9,000 - $15,000

Merry Maids Residential cleaning $24,750 - $59,450

Anago Cleaning Systems Commercial cleaning $8,543 -$55,306

Categories of Franchising

Four main categories:

Product and trade name franchises

Manufacturing and production franchises Business format or system

franchises Management franchising

1.Product and trade name Franchises

Product and trade name franchises are arrangements where franchisees are granted the right to distribute a manufacturer's product within a specified territory or at a particular location, using the manufacturer's trade mark or trade name, in exchange for fees or royalties. Petrol stations are a prime example of this.

2.Manufacturing and production Franchises

A process or manufacturing franchise is an arrangement where a franchisor provides an essential ingredient or know-how to a processor or manufacturer. Franchises of this nature are common, for instance, in the soft-drink industry.

Examples of famous Manufacturing and production franchises

2.Manufacturing and production franchises

Example: Produces the syrup

Sells the syrup

FRANCHISEE Produces the final drink

Retail Stores

Restaurants & F&B Outlets

Vending Machine

Operators

3.Business format or system Franchises

Business format or system franchises add an extra layer, including a business plan, management system, location, appearance, image, and quality of goods and services.

Famous Examples

3.BUSINESS FORMAT FRANCHISING

outlet in Sale, Australia

outlet in Marseille, France

4.Management Franchising

A form of service agreement.

The franchisor provides the management expertise, format and procedure for conducting the business.

Famous Examples

An Attractive Franchise Opportunity Includes:

Registered trademarks

Successful prototype stores with a track record of profitability and a positive reputation

A business that can be systematized so that it can be easily replicated.

A product or service that can be successful in many different geographic regions.

Advantages of franchising

The Franchisor: Less capital required Rapid expansion Retaining control Dedicated owner operators Benchmarking

The Franchisee: A proven system Start up assistance Ongoing assistance Joint advertising Easier to obtain finance

Disadvantages of Franchising

The Franchisor: High operating cost Reduced income per unit Poor franchisee selection

The Franchisee: Bad decisions by the Franchisor Restrictions on the sale of the business Restrictions on expansion/growth

Franchising is more than distributorship

Extends to an entire operation or method of business

Greater assistance, control and longer duration

Distributor merely re-sells products to retailers or customers