Franchise

A form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor's trade name and usually with the franchisor's guidance, in exchange for a fee. Some of the most popular franchises in the United States include Subway, McDonalds, and 7-Eleven.

FranchisingArrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications. The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as royalty, and gains (1) immediate name recognition, (2) tried and tested products, (3) standard building design and décor, (4) detailed techniques in running and promoting the business, (5) training of employees, and (6) ongoing help in promoting and upgrading of the products. The franchiser gains rapid expansion of business and earnings at minimum capital outlay.

History of franchising

Earliest Franchising

Many believe that Albert Singer, founder of the Singer sewing machine, was the initiator of franchising. He was actually the earliest person recognized by most as being associated with franchising. However, the concept of franchising really began long before. 

The term 'franchising' derived from ancient French, is defined as holding a particular privilege or right. 

Back in the middles ages, local leaders would designate privileges to citizens. Some of these rights included conducting fairs, running markets, and operating ferries. The franchising idea then carried forward to the practice of Kings yielding rights to conduct activities such as beer brewing and road building. In addition, the expansion of the church is known as a form of franchising.

The Evolution of Franchising

During the 1840's, several German ale brewers granted rights to particular taverns to market their ale. This was the beginning of the type of franchising that became familiar to most of us in the twentieth century.

Franchising then traveled from European brewers into the United States. Before franchising there was not much in the way of chain operations, which would eventually form the basis of franchising in the U.S.

Peddlers in early American history, selling items from town to town, were also considered a form of franchising. Licenses were provided to general stores at military outposts as well. These exclusive territorial rights are described in written literature, however specific names are not.

Albert Singer came on the scene in 1851 with the Singer Sewing Machine Company. Singer made use of franchising to distribute his machines over a widespread geographic area. He is the first actual name recognized as an early franchisor. Additionally, Singer was the first to prepare franchise contracts. These documents then became the basis for the modern version of franchise agreements.

In the late 1800's and early 1900's many other forms of franchising took place. Some examples included monopolized franchises for several utilities as well as street car companies. Then as oil refineries and auto manufacturers found that they could sell their products over a larger geographical area, they began to franchise. 

Transportation and increasingly mobile Americans were the basis for the establishment of retail and restaurant chains/franchises. As time went on a large number of establishments began to franchise. Some of the well-known franchises include Kentucky Fried Chicken in 1930, Dunkin Donuts in 1950, Burger King in 1954, and McDonald's in 1955.

Modern Franchising

The modern leading form of franchising, known as business format franchising, became popular post World War II. At that time, those serving in the war returned home and had huge desires for many products and services. Subsequently, the baby boomers became the leaders of the economy and are expected to continue as the driving force for quite some time.

As franchising expanded rapidly in the 1960's and 1970's, also came a large amount of oppressive activity to contend with. There were several companies that were under-funded and poorly managed, therefore going bankrupt leaving many franchisees in a lurch. More upsetting were the fraudulent companies who literally took peoples' money for nothing. 

These unfortunate events led to the formation of the International Franchise Association (IFA) in order to regulate the franchising industry. The IFA continuously works in conjunction with the US Congress and Federal Trade Commission (FTC) on improving the industry's relations with franchisees. In 1978, the FTC created the Uniform Offering Circular (UFOC) requiring franchise companies to provided detailed information to potential franchisees. This document was updated in 2007 and renamed the Franchise Disclosure Document (FDD).

Franchising continues to be a highly regulated industry in an effort to promote the healthy growth of the economy. 

franchisee

Definition: A franchisee is an individual who purchases the rights to use a company’s trademarked name and business model to do business. The franchisee purchases a franchise from the franchisor. The franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases the franchisee must pay an ongoing franchise royalty fee to the franchisor.

Franchisee

One who purchases a franchise. The franchisee then runs that location of the purchased business. He or she is responsible for certain decisions, but many other decisions (such as the look, name, and products) are already determined by the franchisor and must be kept the same by the franchisee. The franchisee will pay the franchisor under the terms of the agreement, usually either a flat fee or a percentage of the revenues or profits, from the sales transacted at that location.

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Franchisor

Definition: The franchisor owns the overall rights and trademarks of the company and allows its franchisees to use these rights and trademarks to do business. The franchisor usually charges the franchisee an upfront franchise fee for the rights to do business under the franchise name. In addition, the franchisor usually collects an ongoing franchise royalty fee from the franchisee.

The company that allows an individual (known as the franchisee) to run a location of their business.The franchisor owns the overarching company, trademarks, and products, but gives the right to the franchisee to run the franchise location, in return for an agreed-upon fee. Fast-food companies are often franchised.

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Franchisors are available in every industry / sector to work with entrepreneurs (the Franchisee) to help them develop successful business opportunities (franchises). The franchisor typically provides marketing, sales assistance and lends corporate credibility. 

The word Franchise comes from the Old French meaning freedom or privilege. In the middle ages of Europe, the local lord would grant rights to hold markets or fairs. In essence, the monarch gave someone the right for a certain type of activity. They were the first Franchisors – and did not know it.

In 1851, Isaac Singer accepted fees from independent salesmen to acquire territorial rights to sell his recently invented sewing Machine. The Singer Company began granting distribution franchises and was the first Company to write franchise contracts. In the late 1880′s Cities began giving franchises to newly established electricity companies. Around the turn of the Century oil companies and automobile manufacturer began to grant rights to sell their new inventions. White Castle was the first fast food hamburger franchise chain in America, opening 1921 and sold since then over 12 billion hamburgers. A&W started franchising their root beer stands in 1921.

Business format franchising, which is the dominant mode of franchising today, started after the Second World War. In the 1950′s all kind of services and products started to franchise in the USA. In 1955, a certain Ray Kroc came to the idea of franchising a then little known fast food place named “McDonald’s” – and in the meantime they sold more than a 100 billion of hamburgers worldwide! Many well-known restaurant franchises started during this time. Colonel Harlan Sanders initiated his first KFC franchise, so did Dairy Queen and Dunkin Donuts.

Franchising has powerfully transformed the entire perception of business culture and practice. In the USA over a trillion $ in revenues is generated by more than 5,000 Franchisors and their Franchisee yearly. The “American Dream” is becoming a dynamic reality for hundreds of thousands of additional entrepreneur around the world. In the Philippines, where Business Format Franchising started in the 1970′s (except A&W, who was earlier here), one of the first was again was “McDo”, who opened its first outlet in 1981. To that time, a small chain of ice cream joints began selling burgers – “Jollibee”, which is today our number one Franchise Company in the Country. The success of Jollibee is a mystery to the top guys of McDonald’s in Chicago, since they are the number one in fast food in every Country they operate – except the Philippines.

Today, more than 950 Franchisors, majority local, operate in the Country and the number keeps growing to the advantage for the consumer – more competition, more choice, more bargains. Almost all of them in the food business offer some kind of value meal combinations. Some of them are exporting their Franchise System to other Countries. As example, 25 of the more than 360 Franchisor clients of RK Franchise

Consultancy are already franchising in foreign Countries throughout Asia, the Middle East, Europe and America.

FRANCHISING has become an easy and convenient way to deliver goods and services to consumers. Aside from usual food and beverage establishments, other services such as salons, hotels, and many others are now also open for franchising.

Clearly, consumers are not the only ones benefiting from the welcome convenience offered by quick services or from the wider range of products and services made available to them.

Franchisers, in turn, also reap the benefits through profit.

It would be interesting to know what is behind franchising and how it exploded in the market.

Origins

Franchising has had a long history, but the concept is widely believed to have started from sewing manufacturer, Albert Singer.

The idea came about to address one common problem in business: funding.

In the 1850s, the Singer Company produced sewing machines, but could not pay its salesmen their salaries. As an alternative, the company created a network of dealers who paid Singer a fee to sell the machines. These first franchise owners made money for each sewing machine they bought from Singer and eventually resold within their particular territories.

Other prominent examples abound in history. Coca-Cola, for example, was originally created as a fountain drink until Benjamin Thomas and Joseph Whitehead obtained permission in 1899 to bottle the soda. Upon realizing that they alone could not afford to create a bottling company, the two created a franchise company that sold the right to bottle the cola to individual plants.

In the Philippines, franchising also traces its roots to the Singer Sewing Machine. In that period franchising was limited only to foreign businesses and public utilities services until the Philippine Franchising Association was created in 1995. During that time, there were only 111 franchise concepts which eventually grew to 967 concepts in 2007.

Lucrative business

Over the years, franchising has become a lucrative enterprise.

In the Philippines, the number of franchise concepts has grown by 19.8% in a span of 12 years to 2007.

In the same year, of the total number of franchise concepts, 43% are in the food sector, 28% and 21% involve retail and services, respectively, and 3% are engaged in specialized services such as hotel services and memorial services.

According to Philippine Chamber of Commerce and Industry President Samie Lim, franchising is a promising venture given the country’s growing consumer market and rising per capita incomes and rate of urbanization.

The emergence of the business-process outsourcing industry also gives opportunities for establishments to extend their operating hours to cater to different workers throughout the day, especially to those working in graveyard shifts.

According to Philippine Franchise Association (PFA) President Robert F. Trota, franchising remains a good business option amid the economic slowdown.

The continued inflow of OFW remittances also provides adequate support from both the supply and demand side. Remittances enable some households or persons to venture into franchising; at the same time, remittances also boost the consumption of goods and the patronage of various services that franchised establishments offer.

The overall effects on the economy have been substantial. In the latest PFA study presented by the chairman emeritus Samie Lim, income from franchising represents some five percent of the country’s gross domestic product from 2005 to 2007, which translates to approximately P106.75 billion for the economy. It is also an important means to create enterprise and generate employment, creating an estimated 200,000 franchise outlets and employing almost a million of Filipinos nationwide.

Department of Trade and Industry Undersecretary Zenaida Maglaya has noted that franchising is a sure and secure way to a successful business due to the availability of technology, formula, and the process, giving the entrepreneur an advantage since he or she will not necessarily start from scratch.

Prospects

In addition to the emergence of the business process outsourcing units, the franchising industry also sees tourism as a road to market expansion for local businesses.

According to Franchising in the Philippines in 2008: Country Report, tourist inflows afford franchisers an opportunity to acquire concepts from the country where these foreigners come from to cater their needs and preferences.

In addition, the franchising industry can capture more investment in the forward and

backward linkages in the tourism industry; in this case, they can venture into travel and transport services, hotel and other accommodation services, food and beverage, and others.

The franchising industry also boasts a competitive stance in franchising operations abroad. In fact, the Philippines ranked 4th in the world when it comes to franchising concepts (and 1st among ASEAN nations). With its success in the local market, some brands such as Jolibee, Bench, Max’s Restaurant, etc. have penetrated and established their grounds in the foreign market.

Indeed, the franchising industry has proven to be a successful business in the country, surviving even in tough economic times. Further, this business has indeed provided starting entrepreneurs a good head start in the world of business, given the readily available technology and process of running the franchise. With its growth in the local market and penetration in the international market, this venture is indeed a good business prospect.

20 years of franchising in the Philippines

(Source: The Philippine Star News Online - 07/29/12)

Manila, Philippines - Some 20 years back, the then infant franchising industry in the Philippines only had less than 50 players, with 80 percent of them foreign brands. Now, under the stewardship of the founders of the Philippine Franchise Association (PFA), franchising in the country exploded into an $11 billion industry that consists of over 1,300 franchise concepts, more than 124,000 franchisees and employee base of 1.1 million. “In the past 20 years, the Philippine franchising industry is likened to an hourglass, wherein entrepreneurs and retail concepts squeeze through the small ‘ring of purification’ to become a franchise, which can now go forth and multiply and create thousands of SMEs and millions of jobs,” Samie Lim, the acknowledged father of Philippine franchising, emphasized. The success story of the industry dates back to the early ’90s when Lim toured the United States and Europe as head of the Federation of Asian retailers. In the conferences that he attended, Lim learned that franchising is the fastest growing industry. So in 1993, realizing the potential of franchising as a major economic growth catalyst for the Philippines, Lim and industry pioneers such as Jose T. Pardo and Vicente T. Paterno joined hands and held the country’s first franchise expo. The event grew bigger the following year, giving the then industry bigwigs the reason to create an industry association. That time, the Top 10 franchisers in the country were only meeting among themselves regularly where they talk about best practices. This small group was convinced by Lim, Pardo and Paterno to spearhead the establishment of the Philippine Franchise Association in 1995. Lim, although he was not a franchiser then, served as the founding father, which is a testament to the efforts he put in to bring together the industry players. PFA then approached the USAID, through the Private Investment and Trade Opportunities headed by Sergio Ortiz-Luis, and obtained a $10,000-funding support for the creation of an industry master plan using the American example. “The gist of that study is we identified the 10 different sectors that are best suited for franchising, and we focused on them. With that came the development of local and foreign franchises like Jolibee,” Lim

explained. With homegrown business concepts sprouting, PFA included an incubation pavilion at the annual franchise expo to support the high potential business ideas. Those who got the nod of the PFA screening committee got free booths, thus, giving them free exposure to prospective buyers, investors and partners. The PFA also talked to the colleges and universities like the University of Asia & the Pacific and Ateneo School Management to dedicate areas for food stalls that were conceptualized by students. And through the Philippine Chamber of Commerce and Industry (PCCI), PFA also launched the Business Ideas Development Award (BIDA). It awarded the best business ideas that were sent by students and gave them free space again at the expo. Then came the next big thing – financing. “Out of 100 who come forward to say they want to franchise, only five are really qualified because the rest do not have enough money. So we brought in the banks and now we have BPI Family Savings Bank, Banco de Oro, Philippine National, Planters Bank, SB Corp., Development Bank of the Philippines, and PS Bank as the top lenders to the industry,” Lim said. With funding no longer a problem, Lim said franchisers and franchisees are now also able to acquire multi-brands. And now, the Philippines is being used as staging point of foreign franchises that are establishing presence in Asia. And more importantly, Filipino brands such as Max’s, Jolibee and Potato Corner are now doing good in the international arena. The strong growth of the industry was mainly private sector-led as in contrast to the other countries that provide numerous support schemes to their franchisers, the PFA toiled on its own, and even turned it into an advantage. “Since we are basically private sector-led, we are more consistent, unlike the others where policies change when there is a change of government,” Lim further explained. The Philippines also benefited a lot from PFA’s membership in the World Franchise Congress as the country is able to get experts that give valuable pointers to the industry players during the annual Franchise conference. “As of this year, we have the largest franchise exhibit in the world — the Franchise Asia Philippines (FAP) 2012. We are able to do this because we are consistently growing. With last year’s World Franchise Conference hosted by the Philippines, the word is now out that if you want to go to Asia, you should go to the Philippines. We are building from last year and I hope we can sustain that,” Lim stressed. This year’s International Franchise Expo, which is one of the four major components of FAP 2012, will have about 500 firms exhibiting at the 10,000- square meter SMX Convention Center exhibition halls, with over 50,000 visitors expected. Visitors and exhibitors are expected from US, Canada, Guam, Africa, Pakistan, Bangladesh, Middle East, Thailand, Malaysia, Taiwan, China, Japan and Korea. Lim said he is now seeking to harness the programs of Tesda director general Joel Villanueva to further boost the potential of Philippine franchising. Lim noted he agrees with Villanueva that Filipinos should change their notion that college diploma is important to be able to land a good job. Lim hopes to partner with Villanueva in launching nationwide several short courses that will serve the employment requirements of the franchising industry. These include short courses for baristas, waitering, and even basic housekeeping. “With Tesda’s help, we can improve the competitiveness of Philippine franchise concepts because we will have workers that have standardized knowledge and skills. That is what franchising is all about, having professionalized and standardized operations,” Lim added.

4 types of franchising

Single-Unit

A single-unit franchise is the most common type of franchise available. It is a franchise that the franchisee purchases directly from the franchiser or an appointed agent of the franchiser, and is for a single business unit in one physical location. The franchisee is sometimes assigned a territory by the franchiser, or the franchisee may already have a location in mind that will require approval from the franchiser. In many cases, the franchiser will protect a territory for a franchisee within a certain radius to avoid inter-company competition.To become a single-unit franchisee, it is recommended that you have a basic understanding of how business works, or that you have strong team in place to advise you. A franchisee is expected to be very hands-on with running his or her business unit.

Multi-Unit

A multi-unit franchise occurs when the same franchisee is granted multiple units by the same franchiser. These units can be within a specific geographic region negotiated between the two parties, or it can be multiple units with random geographic locations. In many cases, a franchiser will offer multiple units to a successful single-unit franchisee, and then offer discounts in licensing fees to start more locations. In some cases, franchisers may award multi-unit franchises to new franchisees who have displayed a competence for running multiple business units with other franchise opportunities.

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Area Development

An area development franchise agreement is typically offered to companies or individuals that have already set up successful franchises for other franchisers. A franchisee is given a geographic territory and must begin to develop units within that territory. Normally there is a established schedule between the franchiser and franchisee as to how many units must be set up within a predetermined time period. The geographic area can vary depending on the business and the agreement. It can be a region the size of a county, or it could be an entire state. If the franchisee does not live up to the unit development schedule, his or her license could be revoked and he or she may be subject to fines. Normally the franchiser offers special licensing pricing and ongoing royalty pricing to area development franchisees.

Master Agreement

The master franchise agreement is rare, but it is something that many franchisees look to have. A master franchise owner is similar to an area

development franchiser in that he or she is given a geographic region and cost breaks for the agreement, but the master franchisee can also sell franchises on behalf of the franchiser and collect part of the regular royalty for the franchise as well. The master franchise owner speaks as the appointed representative of the franchisee for their region, and the region is normally larger than one given to an area development franchisee.

Absentee Franchisee

There is one other kind of franchise agreement, which allows someone to start a franchise but not have to be the hands-on manager. In this case of the absentee franchisee, the agreement is made in advance that the franchisee will not be the day-to-day operator of the franchise, but that he or she will be responsible for reporting royalties and income to the franchiser. This allows people to have a franchise without leaving their regular employment.

Read more: Four Types of Franchising | eHow.com http://www.ehow.com/about_5366989_four-types-franchising.html#ixzz2Cx8CeLhp

There are three basic types of franchises:

Product Franchises. Manufacturers use the product franchise to govern how a retailer distributes their product. The manufacturer grants a franchisee the authority to distribute goods by the manufacturer and allows the owner to use the name and trademark owned by the manufacturer. The franchisee must pay a fee or purchase a minimum inventory of stock in return for these rights. Examples of Product Franchises include: Mobil, Goodyear, Baskin Robbins, and Ford Motor Company.

Business Format Franchising. This is the most popular form of franchising. In this approach, a company provides a franchisee with a proven method for operating a business using the name and trademark of the company. The company will usually provide a significant amount of assistance to the business owner in starting and managing the company. The franchisee pays a fee or royalty in return. Examples of Business Format Franchises include: McDonalds, Dunkin Donuts, Carvel, AMMCO and Fantastic Sam’s.

Manufacturing Franchise. These types of franchises provide an organization with the right to manufacture a product and sell it to the public, using the franchisor's name and trademark. This type of franchise is found most often in the food and beverage industry, but can be applied to other industries. Examples of Manufacturing Franchises include: Coca-Cola, and Sealmaster.

Five methods of franchisingThough further variations are possible, most franchise systems draw from five common methods of franchising. To help illustrate each method we can consider a scenario involving Jean of Jean’s Camera Shop and Jim Burton. Jean has decided to franchise her successful Camera business in the hope of building a nationwide network of Jean’s

Camera stores. In this instance, Jean assumes the role of the franchisor. Jim is interested in buying a franchise. The type of franchise Jim could buy from Jean depends on which of the five methods Jean uses for her franchise system.

Single-unit franchisingThe method of franchising most people are familiar with would involve Jim (or another person, partnership or company) buying a franchise business from the franchisor (Jean). Jim would then operate the business in a particular location or area. This is called single-unit franchising. The result is often a franchisor (like Jean) with a number of franchisees (like Jim) owning and operating individual stores in different locations.

Sequential franchisingSequential franchising is an alternative type of franchising arrangement. In our case, Jean may allow Jim to purchase a second, and perhaps even a third, Jean’s Camera franchise. Using sequential franchising, these additional franchises are granted on a one-at-a-time basis. In other words, after establishing the second franchise, Jim would need to prove he was capable of operating both stores, before being allowed a third franchise. The implication of this type of arrangement is that it becomes increasingly difficult for Jim to maintain direct involvement in each of his businesses. Therefore he would need to hire and manage employees to run the different stores.

Area developmentA variation on sequential franchising is area development. If Jean used this method of franchising Jim (as a franchisee) would become an "area developer." Unlike sequential franchising where Jim could gain an additional franchise only after proving his capability, Jean from the outset would give Jim (in return for a fee) the rights to multiple franchises. Jean would then expect to Jim to establish and manage these stores himself, with the assistance of hired employees. Using this method of franchising (and the following two), Jean may also require Jim to establish a certain number of stores within an agreed time frame.

SubfranchisingThe fourth method of franchising is termed subfranchising. Often called master franchising, subfranchising involves two levels of franchises: subfranchisors (often called master franchisees) and subfranchisees. Subfranchisors are like a franchisor in that they will often be responsible for recruiting and providing ongoing support to operating franchisees. However, in contrast to the franchisor with nationwide interests, they are responsible for a smaller area. For example, Jean could offer Jim a master franchise for the Canterbury area. Within this area Jim could be expected to attract, select, train and provide ongoing support to owner-operating franchisees (subfranchisees). Jean may also have master franchisees responsible for other regions, such as Wellington and Auckland. Jean would then manage the subfranchisors who, in turn, manage a number of subfranchisees in their respective regions.

Area representationLess common than subfranchising is area representation. Like subfranchising area representation has two levels of franchisees. The main difference is that the master franchisees (called area representatives in this instance) are delegated less responsibility than subfranchisors by the franchisor. Specifically, the franchisor will often play an important role in recruiting and providing ongoing support to franchisees, within an area representative’s region.