FREE ESSAY ON FRANCHISING

FRANCHISING

"Franchising can be defined as a system based on a close and ongoing collaboration whereby
a company, the franchisor, gets into partnership with one or several companies, the
franchisee(s). Its prime aim is to develop a franchise concept designed in the first
place by the franchisor." (Internet, 1)
In order to better understand the concept of franchising I will first explain several
commonly used terms in this concept.
? Franchise is a legal agreement that allows one organization with a product, idea, name
or trademark to transmit some rights and information about a business to an independent
business owner, which in return pays a fee and royalties to the owner.
? Franchisor is a company that owns a product, service, trademark or business format and
provides this to a business owner in return for a fee. Franchisor often is the one that
makes the conditions under which a business owner operates, however he doesn't control
the business.
? Franchisee is a business owner who purchases a franchise from franchisor and operates a
business using the name, product, business format and other items provided by the
franchisor.
? Franchise fee is a one time paid fee by the franchisee to the franchisor, and is paid
for rights to use trademark, management assistance and some other services.
? Royalty fee is a fee continuously paid by the franchisee to the franchisor- usually
paid as a percent of gross revenue earned. 
? Franchise trade rule is a law by the Federal Trade Commission that places several legal
requirements on the franchisors
? Trademark is a distinctive name or/and symbol used to distinguish a particular product
or service from all the others.
In practice we have four types of franchising- Product Franchise, Manufacturing
Franchises, Business Opportunity Ventures, and Business Format Franchising. In the case
of Product Franchise, manufacturers use the product franchise to govern how a retailer
distributes their product. The manufacturer grants an owner of the store the authority to
distribute goods by the manufacturer and he is allowed to use the name and trademark of
the manufacturer. In return the storeowner has to pay a fee or purchase some inventory of
stock in return for the rights given. Manufacturing Franchises provide an organization
with the right to manufacture a product and to sell it using the name and the trademark
provided by franchisor. This type of franchising is usually seen in food and beverages
industry.
Business Opportunity Venture usually requires that a business owner purchases and
distributes the products for one specific company, which must provide him with the
customers. In return business owner has to pay a fee or some other type of compensation.
Finally, the Business Format Franchising, the most popular type, is the approach where a
company provides a business owner with a proven method for operating a business using the
name and the trademark. The company has to provide assistance to the owner of the
business at the beginning, and the business owner has to pay a fee in return.
Usually people are asking what makes one company to offer a franchise, so it is important
to understand the franchisor's perspective. First of all, franchising is an opportunity
for more rapid expansion. Many companies may experience of lack of capital and skilled
employees, so the franchisee can offer all of that. At the beginning the franchisor
assists a franchisee with obtaining financing for a new business, however the franchisee
is liable for repayment of the funds. Franchisor is selecting its franchisees by their
experience and skills, and in that way he/she is minimizing its risks. Another reason for
franchising is higher motivation. This is because when the company franchises its
operations it acquires a group of new, motivated managers, which are more accountable for
actions since as an owners they are completely responsible for business outcomes. Further
more capital is another reason for getting involved in franchising. The company, by
franchising, is raising the money without selling an interest in the business, and the
franchisor is using the franchisee money for further business expansion. This way the
company is avoiding the risks, which may come out from issuing stock and taking the
loans. 
The company's image and name are at certain risk when sold to other individual. So, a
franchisor is very particular about the standards that franchisees are obliged to meet,
and therefore franchisor indicate specific practices that other party must follow.
Because of all that risk the franchisor reserves the right to buy back the franchise
operation. On the other hand franchisees can take comfort in the fact that most
franchisors want to see them succeed, which is motivation for providing necessary help.
Another disadvantage for franchisor is the sacrifice of profits, because a company's
owned shop is much more profitable than a franchise. Also the franchisee has to have in
mind the future ambitions of the franchisor-if the franchisor is expecting to buy back
the business after a period of time, when the franchisee has already invested the time
and the money in the business. Franchising business also has the liability of training
the competitors. This is because the franchisee may acquire know how and than decide to
open the same kind of business on his/her own under the different name. The good
franchisor will try to establish good relationship with its franchisees in order to avoid
this kind of problems in the future. 
Furthermore it is important to look at the situation from the franchisee's point of view,
concerning the benefits and costs. Some of the major benefits of franchising are the
following:
? Lower Risks-according to the expert opinion and some statistics the franchising
business is more likely to succeed and less risky.
? Established product and service- the product offered is already established and sold in
the market so comparing to the independent business, that is based on untried idea and
operation, is much better. However franchisee should look at the number of franchisees in
business, for how long they are operating, and the number of franchisees that have failed
in conducting the successful business.
? Experience of Franchisor- the experience, often-offered trough the training of the
employees, that franchisor has increased the possibility for success.
? Name Recognition- the franchisee is getting the name that is already well recognized
locally or internationally. 
? Management Assistance- this is the benefit because the franchisor is providing the
franchisee with necessary professional helps. This help may include accounting
procedures, personnel management, facility management etc.
? Business Plan- very often franchisor is providing franchisee with the help in
developing business plan. 
? Start-up Assistance- since the most difficult aspect of a new business is a start-up it
is very helpful to have professional help. 
? Marketing Assistance- the franchisor can provide and pay for the development of
professional advertising campaigns.
? Assistance in Financing- new franchisee is able to get financial help from some
institutions due to the agreement between the institution and the franchisor, since the
institutions might find such the agreement profitable due to the high success rate of
franchise business.
Another issue that franchisee should keep in mind is the cost. The first cost that will
occur in this agreement is the payment of franchise fee, and it can range from few
thousands to several hundred of thousands dollars. Another fee is on going royalty fees.
This is the fee required by franchisor to be paid continuously as a percentage of the
gross income from the business. This percentage is usually less than 10%. Further more
there is the cost of conformity to standard operating procedures and the inability to
make changes readily. The franchisor may prohibit franchisee from selling products or
services other than the ones approved by him/her. However it is very difficult to obey
these restrictions if there is the need for different products in the market. 
Another issue is the duration of the relationship. Typically, there is no way to clear
away from the business other than sell it, however there might be some restrictions about
that issue. Also the future franchisee should pay attention to the question of franchisor
buying back the business.
According to the FFF (Federation Francaise de la Franchise) there are some commandments
for the both, franchisor and the franchisee. 
The 10 Commandments for the franchisor
1/ The necessary capital, you shall have.
2/ A market study, you shall make.
3/ A trademark, you shall protect.
4/ Your concept, you shall test.
5/ Your know-how and brand image, you shall develop.
6/ The first clause of the Doubin act, you shall abide by.
7/ The Code of Ethics, you shall put into operation.
8/ The franchisees, you shall carefully choose.
9/ The respect of the brand image, you shall control.
10/ The everlasting existence of the network, you shall secure.
The 10 Commandments for the franchisee
1/ The needs of the commercial world, you shall be aware of.
2/ The necessary capital, you shall have;
3/ The system of franchising, you shall learn.
4/ The spirit of franchising, you shall incorporate.
5/ The Code of Ethics, you shall assimilate.
6/ A study of the relevant brands, you shall make.
7/ With full responsability, you shall sign.
8/ The brand image, you shall represent.
9/ The network, you shall respect.
10/ The consumer, you shall satisfy.
However before commandments, in order for one to see if he is able and ready for
franchising business, one can test himself/herself by answering some basic questions
(Internet, 2) like:
? Do I prefer to limit my risk as much as possible?
? Am I willing to operate the business in exact accordance with the instructions of a
franchisor?
? Am I willing to forgo sales on new ideas and products because of franchisor
restrictions?
? Am I comfortable with sharing my success, including profits, with franchisor?
? Will I enjoy being part of a well-known organization?
? Do I feel like needing the management experience and assistance that a franchisor can
provide?
? Do I need assistance in developing a business plan?
? Is my experience in marketing limited, so the franchisor would help in overcoming this
weakness?
? Am I willing to pay a franchise fee to obtain a proven business operation?
? Am I comfortable linking my success with the success of the franchisor?
Since the franchising is very old kind of trade during the time it attracted some
inexperienced and occasionally fraudulent franchisors, so the federal government
implemented the law in order to protect the consumers. According to my Internet source
(Internet, 3) there is the basic, simple, process for evaluating and protecting the
investment. The following process, consisting five steps, can help in avoiding disastrous
mistakes made by others, and can help finding the right franchisor. First step in this
process is examining the opportunities. This step is very important because there are
hundreds of franchises in the market, in all types of businesses. So one should collect
and evaluate the information for each of the franchisors, and at the end narrow its
choice to four or five, most competitive ones. The finalist should be examined even
further with the steps 2-5.
Second step in this evaluation is examining of franchise and the franchisor. In addition
the federal government has laws specifying the information that has to be provided to
potential franchisee by the franchisor. The list of information should consist info about
franchisor and its affiliates' business experience, info about the business experience of
all the franchisors employees connected and responsible for franchise services.
Furthermore it should include the lawsuits, if any, in which the franchisor was involved,
info about any bankruptcies faced in the past, info about initial financial fee and other
obligatory payments. Information about continuing payments, restrictions on the quality
of goods and services, and description of any assistance available from the franchisor or
its affiliates in financing the purchase of the franchise should be included. After that
another necessary descriptions are the description of restriction on the goods and
services that the franchisee is permitted to sell, description on any restrictions on the
customers, description on any territorial protection that will be granted to the
franchisee.
Moreover there should be:
? Description of training programs provided by franchisor
? Description of any assistance provided by the franchisor in choosing the site for the
franchise
? Statistical information about the number of franchises, franchisees planed for future
and terminated in past
? The financial statement
? The list of addresses and names of the already existing franchisees
However the franchisor, before providing the franchisee with this information, might want
a prior approval from the franchisee. On the other hand the information must be provided
to the franchisee before signing the agreement, so he can have a chance to evaluate and
study the information. If at this point franchisor shows that he is upset, it might be
the first sign that he might not be the right person for doing business with.
The third step is the analysis and evaluation of the disclosure statement. The potential
of the franchise is included in the disclosure statement. On the other hand the
franchisor also has to be investigated in order to be sure that all the information are
truthful and accurate. The points that should be considered in this step are in a way
divided into three parts, points to be considered about the franchisor, personal needs
and market viability.
Points to be considered about the franchisors are:
? Experience of management and directors
? Number of franchisees in operations
? Number of franchises no longer in operation
? Years franchisor has been in operation
? Type and amount of training
? Financial stability
? Assistance in financing
? Site location assistance
? Planing and constructing a building
? Reputation among franchisees
? Projected operating losses
? Potential profits
Points to be considered about personal needs are:
? Equity requirements
? Interest and enthusiasm
? Business skills
Points to be considered about market viability:
? Community fit
? Location availability
? Longevity of product
? Population stability
? Competition 
? Price
? Advertising and cooperative advertising
According to my Internet source the fourth step is the investigation of the franchisor,
which is very important. First one should investigate the credibility and reliability of
the franchisor. Then one should talk with the franchisees about their experience with the
franchisor. After that one should seek advice of professionals about the franchisor and
franchise agreement, paying attention to the length and type of the contract,
restrictions, criteria, etc. Also the banker should be contacted to give his opinion on
the franchise, financial proforma and to point out the financing issues that will be
involved during the life of the contract. Also it would be useful to contact accountant
and to hear his opinion about financial information provided by franchisor and about
financial potential of the business.
The last step in selecting a franchise is a decision-making, the last but most difficult
step since there are a lot of questions to be answered and a lot of information to be
evaluated. According to my Internet source the method that can help in this situation is
the "T" method. In this method evaluator can put positive reasons on one side and
negative on the other side of the paper, assigning the numbers from 1, for unimportant,
to 3 for important. After completing the list and adding the numbers, one can be more
certain in his/her decision. The greater the numerical difference between the positive
and negative side is the more confidant one is in the decision-making. 
Bibliography
BIBLIOGRAPHY
"A Definition of Franchising" available at http//:perso.club-internet.fr/fff/def_.html
"The Ten Commandements" available at http//:perso.club-internet.fr/fff/tencom_.html
"Franchising-an Interactive Self-Test" available at
www.betheboss.com/PF2/gstarted/f101/selftest.html
"The Five Steps of Selecting a Franchise" available at
www.betheboss.com/PF2/gstarted/f101/fivestep.html
"Step 1- Examine your Opportunities" available at
www.betheboss.com/PF2/gstarted/f101/step1.html
"Step 2-Examine the Franchise and the Franchisor" available at
www.betheboss.com/PF2/gstarted/f101/step2.html
"Step 3- Analyze and Evaluate the Disclosure Statement" available at
www.betheboss.com/PF2/gstarted/f101/step3.html
"Step 4-Investigate the Franchisor" available at
www.betheboss.com/PF2/gstarted/f101/step4.html
"Step 5- Make a Decision" available at www.betheboss.com/PF2/gstarted/f101/step5.html