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Research paper topic: Franchising Can Be Defined As A System Based On A Close And Ongoing Collaboration Whereby A Company, The Franchisor, Gets Int - 1354 words
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"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 doesnt 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 franchisors 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 companys 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 companys 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 franchisees 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 ...
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