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What is a franchise?

Franchising is from an Old French word franchise that means free. It has many definitions. In business, franchising is a method of doing business wherein a franchisor licenses trademarks and methods of doing business to a franchisee in exchange for a recurring royalty fee.

Meanings of Franchise

  • Full rights of citizenship given by a country or a town, especially suffrage (political franchise)
  • In a wider sense: any right or privilege granted by constitution or statute.
  • Franchising - a business model.
  • In government, franchise may also mean the granting of permission by a government to a service provider to use the public right-of-way. Examples include sewer pipes, water pipes, telecommunications conduit, gas pipes, electrical lines, and garbage collection. Franchises may be exclusive (such as garbage collection where everyone receives refuse collection from the same company or agency) or nonexclusive (such as telecommunications from multiple carriers).
  • In sport, a franchise is a club given permanent rights to play in a specific league. This concept is standard in the United States and Canada, but is foreign to sport structures in most of the rest of the world.
  • A company involved in franchising as an expansion model is often referred to as a franchise .

Overview

The parties involved typically enter a franchise agreement. This is an arrangement whereby someone with a good idea for abusiness (the franchisor), sells the rights to use the businesses name and sell a product or service to someone else (the franchisee), in a given territory. The agreement is usually arranged by contract.

 

A franchise agreement will usually specify the given territory the franchisee can use, as well as the extent to which the franchisee will be supported by the franchisor, such as through training and marketing campaigns.

The term "franchising" is used to describe a wide variety of business relationships which may or may not fall into the legal definition provided above. For example, a vending machine operator may receive a franchise for a particular kind of vending machine, including a trademark and a royalty, but no method of doing business.

Advantages

As practiced in retailing, franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators).

As long as their brand and formula are carefully designed and properly executed, franchisors are able to expand their brand very rapidly across countries and continents, and can reap enormous profits in the process, while the franchisees do all the hard work of dealing with customers face-to-face. See customer service. Additionally, the franchisor is able to build a captive distribution network, with no or very little financial commitment.

For some consumers, having franchises offer a consistent product or service makes life easier. They know what to expect when entering a franchised establishment.

Disadvantages

For franchisees, the main disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, and marketing, the franchisee is required to follow the system and get approval of changes with the franchisor.

In response to the soaring popularity of franchising, an increasing number of communities are taking steps to limit these chain businesses and reduce displacement of independent businesses through limits on "formula businesses."

Another problem is that the franchisor/franchisee relationship can easily give rise to litigation if either side is incompetent (or just not acting in good faith). For example, an incompetent franchisee can easily damage the public's goodwill towards the franchisor's brand by providing inferior goods and services, and an incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits.

Because litigation is expensive, the majority of franchisors have inserted mandatory arbitration clauses into their agreements with their franchisees. Since 1980, the U.S. Supreme Court has dealt with cases involving direct franchisor/franchisee conflicts at least three times, and two of those cases involved a franchisee who was resisting the franchisor's motion to compel arbitration. Both of the latter cases involved large famous restaurant chains (Subway and Burger King).

Legal aspects

In the United States, franchising falls under the jurisdiction of a number of state and federal laws. Contrary to what might be expected, there is no federal registry of franchising or any federal filing requirements for information, but franchisors are required by the Federal Trade Commission to have a Uniform Franchise Offering Circular to disclose potential franchisees about their purchase. Instead, states are the primary collectors of data on franchising companies, and enforce laws and regulations regarding their spread.

In Russia, under ch. 54 of the Civil Code (passed 1996), franchise agreements are invalid unless written and registered, and franchisors cannot set standards or limits on the prices of the franchisee’s goods. Enforcement of laws and resolution of contractual disputes is a problem: Dunkin Donuts chose to terminate its contract with Russian franchisees that were selling vodka and meat patties contrary to their contracts, rather than pursue legal remedies.

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