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Franchising – what is it?

Franchising has become a very popular term. Briefly, it is used by many business people to describe certain types of licensing arrangements. Thus, we speak of a franchise granted for the running of a television station, a franchise granted by a car manufacturer to dealers and a franchise to run a railway. Many distributorship and agency arrangements are also described as franchises. On a more popular basis, there is character merchandising in which a well-known person, or the owner of an invented character (e.g. Mickey Mouse, Buzz Lightyear, the Simpsons), grants franchises (licences) to others, entitling them to make use of a name. We even have the film industry calling the name of a film a franchise.

These arrangements are quite common. They have been with us for many years and no change has been made in these traditional relationships which would justify them now being called franchises, rather than continuing to be termed agency, distributorship or licence arrangements or whatever else they were previously called.

The more popular use of the word franchise has arisen from the development of what is called the business format franchise. Some also call it a trade mark/trade name franchise. The former name is preferred because it is so descriptive. It is the business format franchise with which this particular booklet is concerned.

The business format franchise is the grant of a licence by one person (the franchisor) to another (the franchisee), which entitles (and usually requires) the franchisee to carry on business under the trade mark/trade name of the franchisor and in doing so to make use of an entire package (know-how), comprising all the elements necessary to establish a person previously untrained and inexperienced in the conduct of a business to run the business developed by the franchisor under the brand and, after training, to run the business on a predetermined basis with continuing assistance.

These business format elements comprise:-

  • The entire business concept.
  • A process of initiation and training in all aspects of the running of the business, according to the concept.
  • A continuing relationship with the franchisor providing assistance and guidance.

The entire business concept
This involves the development by the franchisor of a successful way of carrying on the business in all its aspects which comprises the basis of its know-how. The franchisor will develop what may be described as a blueprint for conducting the business. This blueprint should:-

1. Eliminate so far as possible the risks inherent in opening a new business. For example, the product range (or service) and all operational aspects of the business should be thoroughly market tested in pilot operations run by the franchisor. The resulting business should be identified with the brand developed by the franchisor. This ensures that the franchisee new to the business does not make the mistakes which would be made by a non-franchised new business person.

2. Enable a person, who has never before opened or operated a business, to open up in business on his own account, not only with a pre-established format, but with the backing of an organisation (i.e. the franchisor is analogous to a head office support team) which would not otherwise be available to him and at a price which that person can afford.

3. Set out in detail exactly how the business should be run.

Process of initiation and training
The franchisee must be trained in the business methods which are necessary to operate the business, according to the blueprint. This may involve training in the use of specialised equipment, marketing methods, preparation of the product, application of processes and/or delivery of services. The franchisee should be trained so that he is relatively expert in all the spheres which are necessary for the operation of the particular business. This will include, where appropriate, stock selection, staff utilisation, staff selection and training, business management techniques, accounting and reporting methods, marketing and promotion. The franchisee should also be assisted in the selection of premises (if appropriate), or the defining of a trading area (for mobile franchises) and in all the steps necessary to establish and open the business.

Continuing process of assistance and guidance
The franchisor will in many cases provide the sort of services included in the list below on a continuing basis, depending, of course, upon the particular type of business:-

  • Regular visits from, and access to, field support staff of the franchisor to assist in correcting or preventing deviations from the blueprint which may cause trading difficulties for the franchisee.
  • Liaison between the franchisor, the franchisee, and all other franchisees to exchange ideas and experiences.
  • Product or concept innovation, including the investigation of marketability and compatibility with the existing business.
  • Training and re-training facilities for the franchisee and his staff.
  • General market research.
  • National and local advertising and promotion.
  • Bulk purchasing opportunities benefitting from the aggregate buying power of the network of franchisees.
  • Management and accounting advice and services.
  • Publication of a newsletter.
  • Research into materials, processes and business methods.

It will be seen that the business format franchise is a comprehensive and continuing relationship in which the initial concept is always being developed. The resources available for such development are contributed by the franchisor and all franchisees, and are, therefore, much more considerable than any one individual could reasonably afford, or command.

As has been pointed out earlier, the expression franchise is now popularly used to describe all those transactions in which one person permits another to do something with its property rights. For example, petrol filling stations, car dealerships, the use of a sportsman’s or an entertainer’s name, are commonly called franchisee.

It is important to recognise what sort of franchise is being offered and it will then be clear as we shall see from later chapters what should be built into the franchise system and contract.

The word, franchising, can be used as a vehicle for abuse and indeed it has been in the past. It is the sort of transaction which readily lends itself to fraudulent practices. Invariably, the transaction falls into two stages:- the first is the provision of pre-opening services; the second, the continuing relationship thereafter.

If the franchisor charges too much at stage one, and is not there to provide stage two, the scope for fraud is obvious. A fraud could also be committed by franchising an untried and undeveloped concept, resulting in a franchisee being charged fees for the right to conduct a business which in reality does not exist.

In addition to this sort of abuse, there is the more sinister use of the word “franchise” to describe trading schemes which are not franchises in order to attract interest to what is a fraud. It is often not recognised that the use of the word “franchise” to describe some spurious business system is in itself a fraud, resulting in unfair criticism of bona fide franchising.

The most frequently seen fraud invariably involves the distribution of a product or products for which little market exists. The “victim” will be expected to pay relatively large sums of money to secure exclusive sales rights to a territory and to purchase a stock of the products. The problem is that no-one in the territory knows of the products and invariably they are too highly priced. At best, the fraudulent operator is using capital generated from the sale of territories to establish a business when he should be using his own capital for the purpose. At worst, he will disappear with the money and leave his “victims” high and dry.

The British Franchise Association (BFA) with its ethical code and accreditation and re-accreditation of members has been material in raising standards and in granting access to members who are committed to behave ethically.

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