CHAPTER 15

Franchising : is a form of business organization in which a fir that already has a succesful product or service (franchisor) licenses its trademark and method of doing business to other businesses (franchises) in exchange for an initial franchise fee and an ongoing royalty. The word franchise comes from an old dialect of French and means "privilege" or "freedom".

How does franchising work?

It is a form of growth that allows a business to get its products or services to market through the efforts of business partners or "franshisees". A franchise is an agreement between a franchisor and a franchisee. There are 2 distinctly different types of franchise systems :

• A Product and trademark franchise is an arrangemet under which the franchisor grants to the franchisee the right to buy its products and use its trade name.
• The business format franchise, is by far the more popular approach to franchising and is mre commonly used by entrepreneurs an entrepreneurial ventures.

The most common type of franchise arrangement is an individual frandhise agreement. An individual franchise agreemennt involves the sale of a single franchise for a specific location. An area franchise agreement allows a franchisee to own and operate a specific number of outlets in a particular geographic area. Finally, a master franchise agreement is similar to an area franchise agreement, with one major difference. The people who buy franchises from master franchisees are typically called subfranchisees. A person who owns and operated more than one outlet of the same franchisor, twhether through an area or a master franchise agreement, is called a mutiple-unit franchisee.

• Steps to franchising a business

Before deciding to franchise, a firm should consider the following :

• The uniqueness of its product or service
• The consistent profitability of the firm
• The firm's year-round profitability
• The degree of refinement of the firm's business systems
• The clarity of the business proposition

The cost of Franchise

The initial cost of a business format franchise varies, depending on the franchise fee, the capital needed to start the business and the strength off the franchisor. The followin costs are typically associated with buying a business format franchise :

• Initial franchise fee
• Capital requirements
• Continuing royalty payment
• Advertising fees

Advantages and Diadvantages of buying a franchise

Advantage :

• An established marketing network
• Availability of financing
• Potential for busines growth

Disadvantage :

• Cost of franchise
• Restrictions on creativity
• Potential for failure

Steps in purchasing a franchise

Common misconceptios about franchising

• Franchising is a safe investement
• A strong industy ensures franchise success
• A franchise is a "proven" business system
• There is no need to hire a franchis attorney or an accountant
• The best systes growth rapidly, and it is best to be a part of a rapid
• I can operate my franchise outlet for less than franchisor predicts
• The franchisor is a nice person - he'll help me out if i need it.

Legal aspects of the franchise relationship

• Federal rules and regulations : Except for the automobile an petroleum industries, federal laws do not directly address the franchisor-franchisee relationship. Instead, franchise disputes are matters of contract law and are litigated at the state level.
• State rules and regulations : The franchise investement laws require franchisors to provide presale disclosures, known as "offering circulars", to potential franchisees.

More about franchising

• Franchise ethics :
• The et-rich-quick mentality
• The false assumption that buying a franchise is a guarantee of business success
• Conflicts of interest between franchisors and their franchisees
• International franchising. Some of the steps to take before buying a franchise in a foreign country :
• Consider the value of the franchisor's name in the foreign country
• Work with a knowledgeable lawyer
• Determine whether the product or service is salable in a foreign country
• Uncover whether the franchisor has experience in international markets
• Find out how much training and support you will  receive from the franchisor
• Evaluate currency restrictions