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| What is Franchising? | ||
Franchising is the practice of using another firm's successful business model. The word 'franchise' is of anglo-french derivation - from franc- meaning free, and is used both as a noun and as a (transitive) verb.For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. The franchisor's success is the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business. Overview Businesses for which franchising works best have the following characteristics: • Businesses with a good track record of profitability. • Businesses which are easily duplicated. As practiced in retailing, franchising offers franchisees the advantage of starting up quickly based on a proven trademark, and the tooling and infrastructure as opposed to developing them. There are, it can be said, three types of franchise: the small, medium and very large franchises. Although there are franchises around products – Chanel and other cosmetics, to name the prominent – by and large, the franchises revolve around service firms. At the sub-$80,000 level, they are, by far, the largest number of franchises. These allow a business, combined with family time and a location not far from home. Some franchises are available for a few thousand dollars. Two important payments are made to a franchisor: (a) a royalty for the trade-mark and (b) the training and advisory services given to the franchisee. The two fees may be combined in a single 'management' fee. The fee for the "Disclosure" is separate and is always a "front-end fee". The franchise is usually for a fixed period (broken down into shorter periods, which need renewal) and are for a specific "territory" or miles from location. There may be several such locations. Agreements typically last from five to thirty years, with premature cancellations or terminations of most contracts bearing serious consequences for franchisees. A franchise is merely a temporary business investment, involving renting or leasing an opportunity, not buying a business for the purpose of ownership. It is classified as a wasting asset due to the finite term of the license. The franchise can be an exclusive, non-exclusive or 'sole and exclusive'. Although franchisor revenues and profit may be provided in a franchise disclosure document, no laws require the estimate of franchisee profitability, which depends on how intensively the franchisee will 'work' the franchise. Therefore, franchisor fees are always based on 'gross revenue from sales' and not on profits realized. Obligations of the Parties Each party to a franchise has several interests to protect. The franchisor is most involved in securing protection for his trademark, controlling the business concept and securing his know-how. This requires the franchisee to carry out the services for which the trademark has been made prominent or famous. There is a great deal of standardization proposed. The place of service have to carry the franchisor's signs, logos and trademark in a prominent place. The uniforms worn by the staff of the franchisee have to be of a particular shade and colour. The service has to be in accordance to the pattern followed by the franchisor in his successful operations. The franchisee must carefully negotiate the license. He, along with the franchisor must develop a marketing plan or business plan. The fees must be fully disclosed and there should not be any hidden fees. The start-up and costs and working capital must be known before taking the license. There must be assurance that additional licensees not crowd the "territory" if the franchise is worked to plan. The franchisee must be seen as an independent merchant. He must be protected by the franchisor from any trademark infringement by third-parties. A franchise attorney is required to assist the franchisee during negotiations. It should also be noted that franchise agreements carry no guarantees or warranties and the franchisee has little or no recource to legal intervention in the event of a dispute. Franchise contracts tend to be unilateral contracts in favor of the franchisor; they are generally protected from lawsuits from their franchisee because of the non-negotiable contracts that require franchisees to acknowledge, in effect, that they are buying the franchise knowing that there is risk, and that they have not been promised success or profits by the franchisor. Contracts are renewable at his sole option. Most franchisors make franchisees sign agreements waiving their rights under federal and state law, and in some cases allowing the franchisor to choose where and under what law any dispute would be litigated |
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| Monday, May 10, 2010 | ||
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