Franchise Management and Operationsjnujprdistance.com/assets/lms/LMS JNU/MBA/MBA... · Franchise Management and Operations 2/JNU OLE 1.1 What is a Franchise? A franchise is the license

Franchise Management and Operations

This book is a part of the course by Jaipur National University, Jaipur.This book contains the course content for Franchise Management and Operations.

JNU, JaipurFirst Edition 2013

The content in the book is copyright of JNU. All rights reserved.No part of the content may in any form or by any electronic, mechanical, photocopying, recording, or any other means be reproduced, stored in a retrieval system or be broadcast or transmitted without the prior permission of the publisher.

JNU makes reasonable endeavours to ensure content is current and accurate. JNU reserves the right to alter the content whenever the need arises, and to vary it at any time without prior notice.

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Index

ContentI. ...................................................................... II

List of FiguresII. ..........................................................VI

List of TablesIII. ......................................................... VII

AbbreviationsIV. ....................................................... VII

Case StudyV. .............................................................. 106

BibliographyVI. ......................................................... 112

Self Assessment AnswersVII. ................................... 115

Book at a Glance

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Contents

Chapter I ....................................................................................................................................................... 1Introduction to Franchising ........................................................................................................................ 1Aim ................................................................................................................................................................ 1Objectives ...................................................................................................................................................... 1Learning outcome .......................................................................................................................................... 11.1 What is a Franchise? ................................................................................................................................ 21.2 Types of Franchises .................................................................................................................................. 2 1.2.1 Product Distribution Franchises ............................................................................................... 2 1.2.2 Business Format Franchises ..................................................................................................... 21.3 Types of Franchise Arrangements ............................................................................................................ 3 1.3.1 Single-unit (direct-unit) Franchise ........................................................................................... 3 1.3.2 Multi-unit Franchise ................................................................................................................ 41.4 Common Terms in Franchise ................................................................................................................... 41.5 Alternative to Franchise ........................................................................................................................... 5 1.5.1 Distributorship ......................................................................................................................... 5 1.5.2 Licensing .................................................................................................................................. 51.6 Advantages and Disadvantages of Owning a Franchise .......................................................................... 5 1.6.1 Advantages ............................................................................................................................... 5 1.6.2 Disadvantages .......................................................................................................................... 61.7 Legal Issues of Franchising ..................................................................................................................... 6 1.7.1 The UFOC ................................................................................................................................ 6 1.7.2 The Franchise Agreement ........................................................................................................ 7Summary ....................................................................................................................................................... 8References ..................................................................................................................................................... 8Recommended Reading ............................................................................................................................... 8Self Assessment ............................................................................................................................................. 9

Chapter II ....................................................................................................................................................11Aspects of Franchising ................................................................................................................................11Aim ...............................................................................................................................................................11Objectives .....................................................................................................................................................11Learning outcome .........................................................................................................................................112.1 Options to Begin a Business .................................................................................................................. 12 2.1.1 Start a New Business ............................................................................................................ 12 2.1.2 Buy a New Franchise ............................................................................................................. 12 2.1.3 Buying an Existing Franchise ................................................................................................ 132.2 The Key Subjects in the Franchise Agreement ...................................................................................... 142.3 Financial Statement ................................................................................................................................ 15 2.3.1 Balance Sheet ......................................................................................................................... 15 2.3.2 Income Statement .................................................................................................................. 162.4 Business Options .................................................................................................................................... 16 2.4.1 Type of Business .................................................................................................................... 16 2.4.2 Need of Market ...................................................................................................................... 17 2.4.3 Affordability ........................................................................................................................... 17 2.4.4 Profitability ............................................................................................................................ 182.5 Criteria for Selecting a Franchise .......................................................................................................... 18 2.5.1 Cost ........................................................................................................................................ 18 2.5.2 Training and Support ............................................................................................................. 18 2.5.3 Abilities .................................................................................................................................. 18 2.5.4 Franchisor’s Experience......................................................................................................... 19 2.5.5 Demand and Competition ...................................................................................................... 19 2.5.6 Expansion Plans ..................................................................................................................... 192.6 Investigating Franchise .......................................................................................................................... 19

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2.7 Key Items in a Discloser Document ...................................................................................................... 202.8 Help Centres ........................................................................................................................................... 20Summary ..................................................................................................................................................... 21References ................................................................................................................................................... 21Recommended Reading ............................................................................................................................. 21Self Assessment ........................................................................................................................................... 22

Chapter III .................................................................................................................................................. 24Franchise Law ............................................................................................................................................ 24Aim .............................................................................................................................................................. 24Objectives .................................................................................................................................................... 24Learning outcome ........................................................................................................................................ 243.1 Legal Definition of Franchise ................................................................................................................ 253.2 Franchise Law ........................................................................................................................................ 253.3 Procedure ............................................................................................................................................... 25 3.3.1 Choice of Law ........................................................................................................................ 26 3.3.2 Forum Selection ..................................................................................................................... 26 3.3.3 Arbitration .............................................................................................................................. 263.4 The Franchise Relationship, Termination, and Non-Renewal ............................................................... 273.5 Relevant Requirements of Franchise Law ............................................................................................. 273.6 Common Law Claims ............................................................................................................................ 28 3.6.1 Contract Issue ........................................................................................................................ 28 3.6.2 Fraud Mispresentation ........................................................................................................... 28 3.6.3 Antitrust ................................................................................................................................. 283.7 Exemptions ............................................................................................................................................ 293.8 Remedies ................................................................................................................................................ 293.9 Franchise Sales Laws and Other Laws Affecting International Franchising ......................................... 303.10 Laws and Government Agencies Regulating the Offer and Sale of Franchises .................................. 31Summary ..................................................................................................................................................... 32References ................................................................................................................................................... 32Recommended Reading ............................................................................................................................. 32Self Assessment ........................................................................................................................................... 33

Chapter IV .................................................................................................................................................. 35Franchisee and Operating Franchise ....................................................................................................... 35Aim .............................................................................................................................................................. 35Objectives .................................................................................................................................................... 35Learning outcome ........................................................................................................................................ 354.1 Becoming a Franchisee .......................................................................................................................... 36 4.1.1 Finding Good Sources of Information about Available Franchises ....................................... 36 4.1.2 Working with a Franchise Broker .......................................................................................... 37 4.1.3 Deciding Whether to Buy a New or Old Franchise ............................................................... 38 4.1.4 Franchisor’s Services ............................................................................................................ 38 4.1.5 Market Research .................................................................................................................... 384.2 Franchisee Attributes ............................................................................................................................. 38 4.2.1 The Factor Analysis ............................................................................................................... 394.3 Franchisee Profiling ............................................................................................................................... 40 4.3.1 Profiling ................................................................................................................................. 414.4 Franchisor- Franchisee Relationship ...................................................................................................... 42 4.4.1 Franchisor Support ................................................................................................................. 42 4.4.2 Relationship Factors .............................................................................................................. 444.5 Legal Issues ............................................................................................................................................ 45 4.5.1 Discloser Law ........................................................................................................................ 46 4.5.2 Relationship Laws .................................................................................................................. 464.6 Franchisee Motivation ........................................................................................................................... 46

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4.7 Trends, Opportunities and Future Prospects .......................................................................................... 48Summary ..................................................................................................................................................... 49References ................................................................................................................................................... 49Recommended Reading ............................................................................................................................. 49Self Assessment ........................................................................................................................................... 50

Chapter V .................................................................................................................................................... 52Franchise Sales and Broker ...................................................................................................................... 52Aim .............................................................................................................................................................. 52Objectives .................................................................................................................................................... 52Learning outcome ........................................................................................................................................ 525.1 Franchise Sales ....................................................................................................................................... 535.2 Franchise Brokers .................................................................................................................................. 53 5.2.1 Functions of a Franchise Broker ............................................................................................ 545.3 Duties of a Franchise Broker ................................................................................................................. 555.4 Benefits of Franchise Broker ................................................................................................................. 55 5.4.1 The Initial Steps .................................................................................................................... 56 5.4.2 Beginning the Franchise Search ........................................................................................... 56 5.4.3 Narrowing Options ............................................................................................................... 565.5 Questions Asked to the Brokers ............................................................................................................. 575.6 Origin of Franchise Sales and Regulation ............................................................................................. 575.7 Understanding the Procedure of Franchise Sales ................................................................................... 595.8 Study an Effective Franchise Sales Process ........................................................................................... 60 5.8.1 Map the Sales Process ............................................................................................................ 60Summary ..................................................................................................................................................... 62References ................................................................................................................................................... 62Recommended Reading ............................................................................................................................. 63Self Assessment ........................................................................................................................................... 64

Chapter VI .................................................................................................................................................. 66Multiunit Franchising ................................................................................................................................ 66Aim .............................................................................................................................................................. 66Objectives .................................................................................................................................................... 66Learning outcome ........................................................................................................................................ 666.1 Multiunit Franchising ............................................................................................................................ 67 6.1.1 Single Unit Franchising versus Multiunit Franchising ......................................................... 676.2 Characteristics of Multiunit Franchising ............................................................................................... 686.3 Benefits of Multiunit Franchising .......................................................................................................... 686.4 Multiunit Franchising Phenomenon ....................................................................................................... 696.5 Multi-facets of Multiunit Franchising .................................................................................................... 706.6 Advantages and Disadvantages of Multiunit Franchising ..................................................................... 716.7 Importance of Training in Multiunit Franchising .................................................................................. 726.8 Methodology of Multiunit Franchising .................................................................................................. 73 6.8.1 Master Franchisee .................................................................................................................. 73 6.8.2 Sub Franchising ..................................................................................................................... 73Summary ..................................................................................................................................................... 74References ................................................................................................................................................... 74Recommended Reading ............................................................................................................................. 75Self Assessment ........................................................................................................................................... 76

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Chapter VII ................................................................................................................................................ 78International Franchising ......................................................................................................................... 78Aim .............................................................................................................................................................. 78Objectives .................................................................................................................................................... 78Learning outcome ........................................................................................................................................ 787.1 International Franchising ...................................................................................................................... 797.2 Types of International Franchising ........................................................................................................ 797.3 International Expansion ......................................................................................................................... 807.4 Trademarks in International Franchising ............................................................................................... 80 7.4.1 Protection of Trade Marks Internationally ............................................................................. 80 7.4.2 Availability of Trade Marks ................................................................................................... 81 7.4.3 Weak versus Strong Trade Marks .......................................................................................... 81 7.4.4 International Classification of Goods and Services ............................................................... 82 7.4.5 Registration Procedures ......................................................................................................... 82 7.4.6 Other Considerations ............................................................................................................. 827.5 Advantages of International Franchising ............................................................................................... 837.6 International Franchise Market .............................................................................................................. 837.7 Regulating International Franchising ..................................................................................................... 847.8 International Franchising Opportunities ................................................................................................ 84 7.8.1 Expanding Emerging Markets: India ..................................................................................... 857.9 Precautions in International Franchising ............................................................................................... 867.10 Social and International Franchising ................................................................................................... 86 7.10.1 International Social Franchising .......................................................................................... 877.11 Economic Potential of International Franchising ................................................................................. 87Summary ..................................................................................................................................................... 88References ................................................................................................................................................... 88Recommended Reading ............................................................................................................................. 89Self Assessment ........................................................................................................................................... 90

Chapter VIII ............................................................................................................................................... 92Social Franchising ...................................................................................................................................... 92Aim .............................................................................................................................................................. 92Objectives .................................................................................................................................................... 92Learning outcome ........................................................................................................................................ 928.1 Social Franchising .................................................................................................................................. 938.2 Significance of Social Franchising ........................................................................................................ 93 8.2.1 Community ........................................................................................................................... 93 8.2.2 Various Forms ........................................................................................................................ 93 8.2.3 Knowledge Transfer .............................................................................................................. 94 8.2.4 Handles the Competition Better ............................................................................................ 948.3 Establishing a Social Franchising System ............................................................................................. 948.4 Social Franchising Formats .................................................................................................................... 948.5 Key Elements of Social Franchising ...................................................................................................... 958.6 Difference between Social Franchising and Commerce Franchising .................................................... 96 8.6.1 Franchisee Selection ............................................................................................................. 97 8.6.2 Social Impact Measurement .................................................................................................. 97 8.6.3 Finance and Funding ............................................................................................................. 978.7 Considerations for Social Franchising ................................................................................................... 98 8.7.1 Market Structure .................................................................................................................... 98 8.7.2 Comparative Advantage: Roles and Responsibilities ............................................................ 988.8 Regulations and Social Licensing .......................................................................................................... 98 8.8.1 Quality Monitoring ................................................................................................................ 99 8.8.2 Implications of Commercial Franchising for Social Franchisors .......................................... 998.9 Future of Social Franchising ................................................................................................................ 100 8.9.1 Potential Difficulties of Social Franchising ......................................................................... 100

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8.9.2 Rights of Social Franchisors ................................................................................................ 101 8.9.3 Duties of Social Franchisors ................................................................................................ 101Summary ................................................................................................................................................... 103References ................................................................................................................................................. 103Recommended Reading ........................................................................................................................... 103Self Assessment ......................................................................................................................................... 104

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List of Figures

Fig. 1.1 An introduction to franchising .......................................................................................................... 2Fig. 1.2 Examples of business format franchises ........................................................................................... 3Fig. 1.3 Types of franchise arrangement ........................................................................................................ 3Fig. 1.4 Alternatives to franchise ................................................................................................................... 5Fig. 1.5 Types of franchising legal documents .............................................................................................. 6Fig. 1.6 Contents of franchising documents .................................................................................................. 7Fig. 2.1 Option for beginning a business ..................................................................................................... 12Fig. 2.2 Advantages and disadvantages of starting a new business ............................................................. 12Fig. 2.3 Advantages and disadvantages a buying a new franchise .............................................................. 13Fig. 2.4 Advantages and disadvantages of buying an existing franchise ..................................................... 13Fig. 2.5 Financial statement ......................................................................................................................... 15Fig. 2.6 Definition and contents of balance sheet ........................................................................................ 15Fig. 2.7 Steps for beginning a business ........................................................................................................ 16Fig. 2.8 Aspects of conducting a market research ....................................................................................... 17Fig. 2.9 Parameters of affordability ............................................................................................................. 17Fig. 2.10 Detail criteria for selecting a franchise ......................................................................................... 18Fig. 2.11 Methods to investigate a franchise ............................................................................................... 19Fig. 2.12 Key items in UFOC ...................................................................................................................... 20Fig. 3.1 Procedure of law franchise ............................................................................................................. 25Fig. 3.2 Aspects of franchise relationship, termination, and non-renewal ................................................... 27Fig. 3.3 Types of common law claims ......................................................................................................... 28Fig. 3.4 Types of remedies ........................................................................................................................... 29Fig. 3.5 Different types of franchise sales law ............................................................................................. 30Fig. 4.1 Steps involved in becoming a franchisee ....................................................................................... 36Fig. 4.2 Resources of information ................................................................................................................ 36Fig. 4.3 Franchisee options .......................................................................................................................... 40Fig. 4.4 Categories of franchisee ................................................................................................................. 41Fig. 4.5 Franchisee life cycle ....................................................................................................................... 42Fig. 4.6 Franchise revenue vs. time ............................................................................................................. 43Fig. 4.7 Factors contributing to franchisee- franchisor relationship ............................................................ 44Fig. 4.8 Types of franchise laws .................................................................................................................. 46Fig. 4.9 Motivation curve for a franchisee (Source: Indian Franchisee: an outlook) .................................. 47Fig. 5.1 Services offered by broker to a franchisee ..................................................................................... 54Fig. 5.2 Functions of a broker ...................................................................................................................... 54Fig. 5.3 Broker questions ............................................................................................................................. 57Fig. 5.4 Procedure of franchise sales ........................................................................................................... 59Fig. 6.1 Forms of franchising ...................................................................................................................... 67Fig. 6.2 Advantages and disadvantages of multiunit franchising ................................................................ 71Fig. 6.3 Four basic features are common to all commercial franchise structures ........................................ 72Fig. 7.1 Advantages of international franchising ......................................................................................... 83Fig. 7.2 Assessment of international franchise ............................................................................................ 83Fig. 7.3 Regulating laws .............................................................................................................................. 84Fig. 7.4 Important steps in international franchising ................................................................................... 85Fig. 7.5 Types of international franchise ...................................................................................................... 86Fig. 8.1 Advantages and disadvantages of social franchising ...................................................................... 93Fig. 8.2 Relationship between franchise, franchisor and customer ............................................................. 94Fig. 8.3 Social franchising strategies .......................................................................................................... 96Fig. 8.4 Core components of social franchising ........................................................................................ 100Fig. 8.5 Duties of social franchisor ............................................................................................................ 101

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Abbreviations

FDD - Franchise Discloser DocumentFEMA - Foreign Exchange Management ActFTC - Federal Trade CommissionGDP - Gross Domestic ProductIFA - International Franchise Association MRTP Act - Monopolies and Restrictive Trade Practices ActMUF - Multi Unit FranchisingRBI - Reserve Bank of India ROC - Registrar of CompaniesSIA - Secretariat of Industrial Assistance SUF - Single Unit Franchising UFOC - Uniform Franchise Offering Circular

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Chapter I

Introduction to Franchising

Aim

The aim of this chapter is to:

explain franchise•

elucidate common franchising terms•

enlist the advantages and disadvantages of owning a franchise•

Objectives

The objectives of this chapter are to:

discuss alternative to franchising•

elucidate the legal issues in franchising•

explicate different examples in franchising•

Learning outcome

At the end of this chapter, you will be able to:

understand the meaning of franchise•

enlist the types of franchise•

identify the legal issues in franchising•


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1.1 What is a Franchise?A franchise is the license or agreement between two legally independent parties which gives:

A person or group of people (franchisee) the right to market a product or service using the trademark or trade •name of another business (franchisor).The franchisee the right to market a product or service using the operating methods of the franchisor.•The franchisee the obligation to pay the franchisor fees for these rights.•The franchisor the obligation to provide support and rights to franchisees.•

FRANCHISE AGREEMENT

EESIHCNARFROSIHCNARF

Owns trademark or trade name Uses trademark or trade name

ssenisub sdnapxE:troppus sedivorPwith franchisor’s support

• advertising & marketing• training

seef syaPseef sevieceR

Fig. 1.1 An introduction to franchising(Source: http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/Intro%20

to%20Franchising%20Student%20Guide.pdf)

1.2 Types of FranchisesThere are two main types of Franchises, product distribution and business format.

1.2.1 Product Distribution FranchisesProduct distribution franchises simply sell the franchisor’s products and are supplier-dealer relationships. In it, the franchisor licenses its trademark and logo to the franchisees but typically does not provide them with an entire systemforrunningtheirbusiness.Theindustrieswhereyoumostoftenfindthistypeoffranchisingaresoftdrinkdistributors, automobile dealers and gas stations. Examples of product distribution franchisee are: Coke, Exxon, Toyota motor company. Although product distribution franchising represents the largest percentage of total retail sales, most franchises available today are business format opportunities.

1.2.2 Business Format FranchisesBusiness format franchises is, not only use a franchisor’s product, service and trademark, but also the complete method to conduct the business itself, such as the marketing plan and operations manuals. Business format franchises are the most common type of franchise.

Ten most popular franchising opportunities are in these industries:Fast food•Retail•Service•Automotive•Restaurants•Maintenance•Building and construction•Retail-food•

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Business services•Lodging•

Some popular business format franchises include:

RestaurantsKFCMcDonald’sPizza HutTaco Bell

RetailBlockbuster VideoRadio ShackThe Athlete’s FootGNC Franchising

LodgingChoice HotelsBass Hotels/Holiday InnMarriott Hotels

Health & BeautyMerle Norman Costmetic

StudiosSupercutsJenny Craig InternationalCost Cutters Family Hair

Care

Business ServicesMail Boxes Etc.H & R BlockACE America Cash

ExpressKwik Kopy

Maintenance/CleaningJani-King InternationalThe ServiceMaster

CompanyMerry Maids

Automotive ServiceMeineke Discount

AAMCO TransmissionsMidas InternationalPrecision Auto Care

Education/TrainingDale Carnegie TrainingBarbizon School of

ModelingBerlitz InternationalSylvan Learning Systems

Real EstateCentury 21RE/MAX InternationalColdwell Banker

Convenience7-ElevenFamilyMart

Fig. 1.2 Examples of business format franchises(Source: http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/Intro%20

to%20Franchising%20Student%20Guide.pdf)

1.3 Types of Franchise Arrangements

Types of franchise

arrangement

Multi unit franchise

Single unit franchise

(Direct unit)

Master franchise (Sub franchise)

Area development

Fig. 1.3 Types of franchise arrangement

1.3.1 Single-unit (direct-unit) FranchiseIt is an agreement where the franchisor grants a franchisee the rights to open and operate one franchise unit. This is the simplest and most common type of franchise. It is possible, however, for a franchisee to purchase additional single-unit franchises once the original franchise unit begins to prosper. This is then considered a multiple, single-unit relationship.


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1.3.2 Multi-unit FranchiseIt is an agreement where the franchisor grants a franchisee the rights to open and operate more than one unit.Area developmentUnderanareadevelopmentfranchise,afranchiseehastherighttoopenmorethanoneunitduringaspecifictime,withinaspecifiedarea.Forexample,afranchiseemayagreetoopen5unitsoverafiveyearperiodinaspecifiedterritory.

Master franchise A master franchise agreement gives the franchisee more rights than an area development agreement. In addition to havingtherightandobligationtoopenandoperateacertainnumberofunitsinadefinedarea,themasterfranchiseealso has the right to sell franchises to other people within the territory, known as sub-franchises. Therefore, the masterfranchiseetakesovermanyofthetasks,dutiesandbenefitsofthefranchisor,suchasprovidingsupportandtraining, as well as receiving fees and royalties.

1.4 Common Terms in FranchiseFranchise: A license that describes the relationship between the franchisor and franchisee including use of trademarks, fees, support and control.Franchisor: The person or company that grants the franchisee the right to do business under their trademark or trade name.Franchisee: The person or company that gets the right from the franchisor to do business under the franchisor’s trademark or trade name.Franchising: Amethodofbusinessexpansioncharacterisedbyatrademarklicense,paymentoffees,andsignificantassistance and/or control.Business format franchise: This type of franchise includes not only a product, service and trademark, but also the complete method to conduct the business itself, such as the marketing plan and operations manuals.Disclosure statement: Also known as the UFOC, or Uniform Franchise Offering Circular, the disclosure document provides information about the franchisor and franchise system.Franchise agreement: The legal, written contract between the franchisor and franchisee which tells each party what each is supposed to do.Product distribution franchise: A franchise where the franchisee simply sells the franchisor’s products without using the franchisor’s method of conducting business.Royalty: The regular payment made by the franchisee to the franchisor, usually based on a percentage of the franchisee’s gross sales.Trademark: The franchisor’s identifying marks, brand name and logo that are licensed to the franchisee.UFOC: The Uniform Franchise Offering Circular, UFOC, is one format for the disclosure document which provides information about the franchisor and franchise system to the prospective franchisee.

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1.5 Alternative to FranchiseIn addition to franchising, there are two other popular methods by which businesses expand their market and distribution channels:

Alternative to franchise

LicensingDistributorship

Fig. 1.4 Alternatives to franchise

1.5.1 DistributorshipSome distribution arrangements are similar to franchises, and vice versa. A franchisee with a great deal of leeway in how to run the business may look like an independent distributor. A distributor may be subject to many controls by the supplier/producer and begin to resemble a franchise.

Has a contractual relationship with the supplier•Buys from the supplier in bulk and sells in smaller quantities•Is familiar with local markets and customers•May do business with many companies, more than just the supplier/producer•May not receive contractual support and training from the supplier/producer like a franchisee. Some popular •examples of distributorship: Amway, Beautiful Cosmetics, Mountain Life Spring Water, Knorr Soup, Campbell’s Soup, Vending Machines.

1.5.2 LicensingAllows a licensee to pay for the rights to use a particular trademark. Unlike franchises, in which the franchisor exertssignificantcontroloverthefranchisee’soperations,licensorsaremainlyinterestedincollectingroyaltiesandsupervisingtheuseofthelicenseratherthaninfluencingtheoperationsofthebusiness.Somepopularlicensorsinclude: Netscape Communications, Apple Computer, Canon Inc., Wool mark, and Compaq Computer.

1.6 Advantages and Disadvantages of Owning a FranchiseThe importance of owning a franchise should be carefully evaluated before deciding to purchase one. Following are the advantages and disadvantages of owing a franchise.

1.6.1 Advantages

“Owning a franchise allows you to go into business for yourself, but not by yourself.”•A franchise provides franchisees with a certain level of independence where they can operate their business.•A franchise provides an established product or service which already enjoys widespread brand name recognition. •Thisgivesthefranchiseethebenefitsofcustomerawarenesswhichwouldordinarilytakeyearstoestablish.A franchise increases your chances of business success because you are associating with proven products and •methods.Franchises may offer consumers the attraction of a certain level of quality and consistency because it is mandated •by the franchise agreement.


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Franchises offer important pre-opening support:•Site selection �Design and construction �financing(insomecases) �Training �Grand-opening program �

Franchises offer ongoing support•Training �National and regional advertising �operating procedures and operational assistance �Ongoing supervision and management support �Increased spending power and access to bulk purchasing (in some cases). �

1.6.2 Disadvantages

The franchisee is not completely independent. Franchisees are required to operate their businesses according to •the procedures and restrictions set forth by the franchisor in the franchise agreement. These restrictions usually include the products or services which can be offered, pricing and geographic territory. For some people, this is the most serious disadvantage to becoming a franchisee.In addition to the initial franchise fee, franchisees must pay ongoing royalties and advertising fees.•Franchisees must be careful to balance restrictions and support provided by the franchisor with their own ability •to manage their business.A damaged, system-wide image can result if other franchisees are performing poorly or the franchisor runs into •an unforeseen problem.The term (duration) of a franchise agreement is usually limited and the franchise may have little or no say about •the terms of a termination.

1.7 Legal Issues of FranchisingA good relationship between the franchisee and franchisor is critical for the success of both parties. Since franchising establishes a business relationship for years, the foundation must be carefully built by having a clear understanding of the franchise program. Unfortunately, understanding the legal language of franchising can be daunting. The advice of an experienced franchise attorney should be sought to help a prospective franchisee understand the legal issues and to protect them from making costly mistakes. Franchising is governed by federal and state laws that require franchisors to provide prospective franchisees with information that describes the franchisor-franchisee relationship.

Franchising legal document

The Disclosure Document, which may be •in the format known as the UFOC.Franchise agreement•

Fig. 1.5 Types of franchising legal documents

1.7.1 The UFOCThe purpose of the UFOC is to give prospective franchisees with information about the franchisor, the franchise system and the agreements they will need to sign so that they can make an informed decision. In addition to the disclosure part of the document, the UFOC includes the actual franchise agreement as well as other agreements the franchisee will be required to sign, along with the franchisor’s financialstatements.

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The UFOC is designed to give you some of the information you need in order to make an informed decision about investing in a particular franchise. By law, a franchisor cannot offer a franchise until the franchisor has presented the prospective franchisee with a Disclosure Document. In fact, 14 states require franchisors to register their UFOCs with the state or to notify them that they will offer franchises before they begin to conduct any franchising activity in the state. Receipt of the UFOC is governed by the “ten-day rule.” This is a cooling-off period in which franchisors must give prospective franchisees 10 business days to think about their decision before they are allowed to sign the franchise agreement.

1.7.2 The Franchise AgreementThefranchiseagreementismorespecificthantheUFOCaboutthetermsoftherelationshipbetweenthefranchisorandfranchisee.Thefranchiseagreementisthelegal,writtendocumentthatgovernstherelationshipandspecifiesthe terms of the franchise purchase. Like the UFOC, the franchise agreement also enjoys a “cooling off” period. Prospectivefranchiseesarelegallyentitledtohavethefinalfranchiseagreementforatleast5businessdaysbeforethey are allowed to sign. This gives them time to consider and review the terms of the agreement.

The franchisor•The company’s key staff•Management’s experience in franchise management•Franchisor’s bankruptcy and litigation history•Initial and ongoing fees involved in opening and running the franchise•Required investment and purchases•Territory rights•Responsibilities of the franchisor and franchisee•Other franchisees in the system with contact information.•

The franchise system, such as use of trademarks and products•Territory•Rights and obligations of the parties: standards, procedures, training, •assistance, advertising, etc.Term (duration) of the franchise•Payments made by the franchisee to the franchisor•Termination and/or the right to transfer the franchise•

UFOC document

Franchise agreement

Fig. 1.6 Contents of franchising documents


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SummaryA franchise is the license or agreement between two legally independent parties. The franchisee the right to •market a product or service using the operating methods of the franchisor.The franchisee the obligation to pay the franchisor fees for these rights. The franchisor the obligation to provide •support and rights to franchisees.There are two main types of Franchises, product distribution and business format. •Business format franchises is, not only use a franchisor’s product, service and trademark, but also the complete •method to conduct the business itself, such as the marketing plan and operations manuals.Franchise is arranged in two ways, viz., Single-unit (direct-unit) franchise is an agreement where the franchisor •grants a franchisee the rights to open and operate one franchise unit. A multi-unit franchise is an agreement where the franchisor grants a franchisee the rights to open and operate •more than one unit. In addition to franchising, there are two other popular methods by which businesses expand their market and distribution channels: Distributorships, Licensing.A franchise provides franchisees with a certain level of independence where they can operate their business.•A franchise provides an established product or service, which already enjoys widespread brand name recognition. •Thisgivesthefranchiseethebenefitsofcustomerawareness,whichwouldordinarilytakeyearstoestablish.The franchisee is not completely independent. Franchisees are required to operate their businesses according •to the procedures and restrictions set forth by the franchisor in the franchise agreement. The two main franchising legal documents are the: Disclosure Document, which may be in the format known •as the UFOC and franchise agreement.

ReferencesBeshe, B., • An Introduction Franchising, [pdf] Available at: <http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/Intro%20to%20Franchising%20Student%20Guide.pdf> [Accessed 24 April 2012].Mendelsohn, M., • A guide to Franchising, [pdf] Available at: <http://books.google.co.in/books?id=v_RandLSSDAC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false> [Accessed 25 April 2012].Archar, D., 2011. • Free Franchise Seminars sponsored by Lloyds TSB, [Video Online] Available at: <http://www.youtube.com/watch?v=7fplEaFutZs> [Accessed 24 April 2012].Dr Michael, S. C., 2011.• The Ins and Outs of Franchising, [Video Online] Available at <http://www.youtube.com/watch?v=EPI6ef29CDE> [Accessed 24 April 2012].Asbil, R. and Goldman, S., 2001. • Fundamentals of International Franchising, American Bar Association.Barkoff, R. M. & Selden, A. C., 2008. • Fundamentals of Franchising, 3rd ed., American Bar Association.

Recommended ReadingJudd, R. J. and Justis, R.T., 2007. • Franchising, 4th ed., Custom Publishing.Charles. M., • Business Franchise Secrets, Kindle publication.Kestenbaum. H., 2008, • Franchise Your Business, 1st ed., Entrepreneur Press.

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Self Assessment_________ is an agreement where the franchisor grants a franchisee the rights to open and operate one franchise 1. unit.

Classa. Datab. Namec. Single unit agreementd.

What is also known as UFOC?2. Royaltya. Discloser statementb. Franchisec. Objectd.

_______________ is one of the alternatives to franchise.3. Distributorshipa. Multi unit franchiseb. Polymorphismc. Message passingd.

Which of the following statements is false?4. A franchise is the license or agreement between two legally independent parties.a. A franchise provides franchisees with a certain level of independence where they can operate their b. business.Multi-unit franchises are not an agreement where the franchisor grants a franchisee the rights to open and c. operate more than one unit.Eachsub-classdefinesonlythosefeaturesthatareuniquetoit.d.

Which of the following statement is true?5. ThefranchiseagreementismorespecificthantheUFOCaboutthetermsoftherelationshipbetweenthea. franchisor and franchisee.A good relationship between the franchisee and franchisor is not critical for the success of both parties.b. Polymorphism, a Greek term, means the ability to take more than one formc. .A franchise decreases your chances of business success because you are associating with proven products d. and methods.

A_________ may be subject to many controls by the supplier/producer and begin to resemble a franchise.6. distributor a. franchiseb. traineec. ownerd.

_________ is the franchisor’s identifying marks, brand name and logo that are licensed to the franchisee.7. Trademark a. Objectb. Encapsulationc. Inheritanced.


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A_________ is the license or agreement between two legally independent parties.8. Franchisea. Documentb. UFOCc. Linearityd.

Prospectivefranchiseesarelegallyentitledtohavethefinalfranchiseagreementforatleast_____businessdays9. before they are allowed to sign.

7a. 8b. 5c. 30d.

The franchisee is not completely_________. 10. independent a. dependantb. objectivec. legald.

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Chapter II

Aspects of Franchising

Aim


elucidate to begin different option to begin business•

explain key subjects in franchise agreement•

elucidatefinancialstatement•

Objectives


investigate business options•

describe criteria for selecting franchise•

elucidate franchise•

Learning outcome


understand franchise agreement •

enlist key items in the discloser document(UFOC)•

enlist help options•


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2.1 Options to Begin a BusinessOnce you decide to start your own business, you need to decide whether you want to be an independent business owner or a franchisee.

start a new business

buy a new franchise

buy an existing franchise

Options for beginning a business:

Fig. 2.1 Option for beginning a business

2.1.1 Start a New Business Franchising is a method of product or service distribution that is governed by a contract. It is important for anyone deciding to start a business by becoming a franchisee to remember that in franchising a person is tied into a partnershiparrangementforadefinedperiodoftime.Followingaretheadvantagesanddisadvantagesofstartinga new business.

Advantages

Usually lower start-up cost•Independence and creative •freedomFreedom with location and •proceduresNo inherited problems from an •existing business

Disadvantages

Requires more time and •energyHigh risk of failure•Takes longer to become •profitableFinancing may be more •difficulttoobtain

Fig. 2.2 Advantages and disadvantages of starting a new business

2.1.2 Buy a New FranchiseBuying a franchise is an option that many people looking to manage their own small business should consider, as thereareanumberofadvantagestojoiningthisindustry.Themainbenefitofbecomingafranchiseeisthatyourbusiness will already have in place the knowledge and experience of the franchiser that has enabled it to expand, which provides each franchise with a solid business platform. Following are the advantages and disadvantages of buying a new franchise.

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Advantages

Reduced risk of failure•Proven methods and products•Start-up assistance•On-going training and support •Local, regional and national •advertisingCollective purchasing power•Research and development•Association and synergy with •other franchiseesEasier To obtain Financing•

Disadvantages

Costs more (fees, royalties, •supplies)Smallerprofitmargins•Lack of independence and •freedomDifficult to achieve redress •if franchisor fails to meet obligationsA franchisor’s problem may •become

Fig. 2.3 Advantages and disadvantages a buying a new franchise

2.1.3 Buying an Existing FranchiseThe brand name will be known across the region or country and potential franchisees can also check the success of thefranchiseranditsreputationbeforemakingafirmcommitment.Systemssuchasproductpricing,recruitmentand marketing will be tried and tested, and any early mistakes will likely have already been ironed out. Therefore, this reduces the risk of failure compared to someone starting their own small business on their own. Following are the advantages and disadvantages of buying an existing franchise.

Advantages

The business is already up and •runningRisk and uncertainty may be •reduced The basic infrastructure is in •place:Established location •Exis t ing cus tomers and •reputationEmployees •Vendors •Policies and procedures•Cashflow•Easiertoobtainfinancing•

Disadvantages

Tangible limitations:•Design problems•Location problems•Merchandise problems•Intangible limitations:•Customer or employee ill will •Pricing problems•Inadequate procedures•Lease problems•Potentially higher costs to buy•Legal Liability in inheriting •lawsuits

Fig. 2.4 Advantages and disadvantages of buying an existing franchise


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2.2 The Key Subjects in the Franchise AgreementThefranchiseagreementismorespecificthantheUFOCaboutthetermsoftherelationshipbetweenthefranchiseeand franchisor.

Useoftrademarks:Oneofthemainbenefitsyoureceivewhenpurchasingafranchiseistheuseofwell-known•trademarks. This section lists the trademarks, service marks or logos the franchisee is entitled to use.

Hasthetrademarkbeeninoperationforasignificantamountoftimeandisitwellknown? �Are there any restrictions on its use by the franchisor or franchisee? �

Location of the franchise: This section describes the exclusive area or territory granted to the franchisee.•Do you have exclusive rights in a certain territory? �

Termofthefranchise:Inthissection,thedurationoftheagreementisspecified.•How long does the agreement last? �Can the franchisor purchase the franchise before the agreement expires? �Do you have the right to renew the agreement? �

Franchisee’s fees and other payments: In this section, all the mandatory fees are described:•Initial fee and what the franchisee receives for that fee �Royalty payment, what it is based on and when it is due. �

Obligations and duties of the franchisor: This section describes, in detail, all the services which the franchisor •will provide:

Training �Operations support �Advertising �

Obligations and duties of the franchisee: This section describes the franchisee’s responsibilities:•Requirements for training �Requirements for participation in the business �Requirements for keeping and submitting adequate records �

Restriction on goods and services offered: This section describes any restrictions placed on the goods or services •offered, including:

Required quality standards �Approved suppliers �Approved advertising �Hours of operation and pricing �Renewal, termination and transfer of franchise agreement. �The rights and obligations of a franchisee upon termination �Descriptions about the transfer or renewal of the franchise agreement. �

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2.3 Financial StatementFinancial statements are the track record of the franchise. They are provided the UFOC and contain important informationaboutthefranchisor’sfinancialstatusandstrength.

The two most important financialstatements

Balance sheet Income statement

Fig. 2.5 Financial statement

2.3.1 Balance SheetAbalancesheetisasnapshotsummaryofacompany’sworthonanygivenday.Itreportsthefinancialcondition(solvency) of the franchisor. It includes the following

Assets – what a company owns: current,fixedand intangible assets

Liabilities – what a company owes: current

and long-term debt

Stockholders’ equity

Fig. 2.6 Definition and contents of balance sheet

Definition of Stockholder’s EquityStockholder’s equity is company’s net worth; it is the money the company has taken in from the sale of stock plus anyaccumulatedprofits:

Stockholders’ Equity = Assets – Liabilities = Net Worth

Things on a franchisor’s balance sheetIncreasing assets•Increasing stockholders’ equity•More cash than debt•Amount of current debt < (less than) 1/2 of the total assets•Amount of current debt < 1/3 of the stockholders’ equity•


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2.3.2 Income StatementAnincomestatementreportsacompany’sprofitorloss.Itshowsacompany’sincome,expenseandnetincomealsoknown as the “bottom line” or earnings.

Income statement categories include:Revenues•Income before taxes•Provision for income taxes•Net income (earnings)•Net income (earnings) per share•

Things on a Franchisor’s Income StatementIncreasingprofit•More revenue derived from royalties and system income than from selling franchises•Increasing revenue trends, usually > 15%•Increasing net income trends, usually > 15%•Increasing net income per share trend, usually > 15%•Aprofitablefranchisor.•

Knowledge about Financial StatementsThefinancialstatementsshouldbeauditedfinancialstatements.•Thestatementsshouldcontaintwotothreeyearsoffinancialdate.•

2.4 Business OptionsRegardless of whether you choose to become an independent business owner or become a franchisee, research is the single most important activity in making your decision. Without adequate information, it may end up making the most costly decision.

What is business?

Is there a market?

Can you afford it?

Can you make enough

money to make it

worthwhile?

Fig. 2.7 Steps for beginning a business

2.4.1 Type of BusinessSometimespeoplestartabusinessbecausetheythinkthey’llmakealotofmoney,onlytofindoutthattheydonotenjoy the business. The adage, “know thyself” certainly applies here.

Parameters of which business to select includes, interest and hobbies, experience, special skills and talents,

Industries involved in your interests and use your skills and talents, products or services could be sold in this industry(s).

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2.4.2 Need of MarketAll successful businesses must:

Satisfy a need •Solve a problem•Respond to a trend•

Advantages

How many potential customers are in the area?•Will the product or service sell?•What need does it satisfy?•What problem does it solve?•What trend or fad does it address?•What should the appropriate pricing be?•Who are the competitors?•How many competitors?•What do they offer?•How will the product or service be unique?•What marketing niche can it capture?•

Fig. 2.8 Aspects of conducting a market research

2.4.3 Affordability

Costs to consider

Estimate your start-up •costs:location design and •constructionprofessional fees•equipmentandfixtures•furniture•opening inventory and •suppliesinsurance•pre-opening labour•opening advertising and •promotion

Brainstorm where you might be able come up with money

self•family•friends•savings and investments and •partner

Estimate how much working capital you will need

salaries•insurance•utilities•advertising•rent•interest on a loan•

Fig. 2.9 Parameters of affordability


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2.4.4 ProfitabilityEstimatetheprofitpotentialforthebusiness:

income•expenses•profit(income–expenses)•

Think about the amount of time and energy it will take to make the business successful.

2.5 Criteria for Selecting a FranchiseBefore buying any business, carefully consider many factors that are critical to success:

Costs Expansion plans

Franchisor’s experience

Training and support

Demand and competition

Abilities

Criteria for Selecting a Franchise

Fig. 2.10 Detail criteria for selecting a franchise

2.5.1 Cost

Howmuchmoneywillthisfranchisecostbeforeitbecomesprofitable?•Can the owner afford to buy this franchise?•Can the owner make enough money to make the investment worth time and energy?•

2.5.2 Training and Support

What kind and how much training and support does the franchisor provide?•Doexistingfranchiseesfindthisleveloftrainingandsupportadequate?•

2.5.3 Abilities

Does the owner have the technical skills or experience to manage the franchise?•Does the owner have the business skills to manage the franchise?•

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2.5.4 Franchisor’s Experience

Has the franchisor been in business long enough to have established the type of business strength you are •seeking?

2.5.5 Demand and Competition

Is there enough demand in an area for the franchisor’s products or services?•Is the demand year-long or seasonal?•Will the demand grow in the future?•Does the product or service generate repeat business?•

2.5.6 Expansion Plans

Is the franchisor planning to grow at a rate that is sustainable ?•

2.6 Investigating FranchiseLike starting any business, buying a franchise involves a risk. Studies show that successful franchisees:

Conduct their own marketing research•Usetheirownfinancialandlegaladvisors•Develop thorough marketing and business plans•Have prior work experience•

Prospective franchisees must devote a vast amount of time researching the franchises available and evaluating the strength of the franchisors.

Find out what franchises are available:

Read directories•Read articles and ads in business •publicationsAttend t rade shows and •expositionsConduct research on the •internet

Evaluate the strength of the franchisor:

Investigate the franchisor’s history•Carefully study and obtain professional advice •concerning the franchisor’s UFOC and franchise agreement, paying special attentionVisit and talk with existing franchisees•Visit the franchisor’s headquarters•Go to work in an existing franchise for a couple •of weeks and really get to know themSeek the advice of an attorney and accountant •who specialise in franchises.

Fig. 2.11 Methods to investigate a franchise


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2.7 Key Items in a Discloser Document

Initial investment

Some of these costs are •averages or estimates and may vary in your area.Talk to other franchisees who •have been in the system for a year or more to see:how much money they needed •in the beginning until they becameprofitablehow much they were able to •draw from the business to support themselves

Renewal, termination, transfers and dispute resolution

Take your time to understand •what rights you will have and what rights you are giving up.Pay particular attention to any •non-compete provisions and your obligations when the franchise relationship ends.

Franchisor’s obligations

Be sure you understand the •services you will get before you open: site selection training development assistanceBe sure you know what •services you will receive for your grand opening: marketing advertisingfieldsupportBe sure you know what •services you will receive after you begin operating your business: training advertising operations

Earnings Claims

Only 20 to 25 percent of •al l f ranchisors provide prospective franchisees with information about earnings claims.The next best thing to do is •to talk to existing franchisees about earnings potential.

Financial statements.

Financial statements are the •track record of the franchisor. You should be given copies of the franchisor’s last two or three years financial statements. Take them to an accountant who specialises in franchising to evaluate.The two key f inanc ia l •statements to focus on are the balance sheet and the income statement. Make sure they are audited.

List of franchise outlets.

Examine how many units •the franchisor has taken back and resold. If this number is high, this could indicate churning (when the franchisor takes back failed locations and remarkets them over and over.)Pay attention to the contact •information of the franchisees who have left the system. Thesearepeopleyoudefinitelywant to talk to.

Fig. 2.12 Key items in UFOC

2.8 Help CentresInternational Franchise Association (IFA), www.franchise.org•American Bar Association’s Forum on Franchising, www.abanet.org •IFA’sSupplierForumpublishesalistoffirmsthatspecialiseinfranchisinglaw,www.franchise.org•

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SummaryThere are three options to begin a business, start a new business, buy an existing franchise, and buy a new •franchise.The franchise agreement ismore specific than theUFOCabout the termsof the relationshipbetween the•franchisee and franchisor.Financial statements are the track record of the franchise. They are provided the UFOC and contain important •informationaboutthefranchisor’sfinancialstatusandstrength.Stockholder’s equity is company’s net worth; it is the money the company has taken in from the sale of stock •plusanyaccumulatedprofits.Anincomestatementreportsacompany’sprofitorloss.•Research is the single most important activity in making decision about options in business.•Before buying any business, carefully consider many factors that are critical to success: costs, training and •support, abilities, franchisor’s experience, demand and competition, expansion plans.Prospective franchisees must devote a vast amount of time researching the franchises available and evaluating •the strength of the franchisors.The purpose of the UFOC is to provide prospective franchisees with information about the franchisor, the •franchise system and the agreements they will need to sign so that they can make an informed decision.

ReferencesBeshe, B., • An Introduction Franchising, [pdf] Available at: <http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/Intro%20to%20Franchising%20Student%20Guide.pdf> [Accessed 25 April 2012].Mendelsohn, M., • A guide to Franchising, [pdf] Available at: <http://books.google.co.in/books?id=v_RandLSSDAC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false> [Accessed 25 April 2012].Andrew, O., 2011. • What is the best way to buy a franchise? [Video Online] Available at<http://www.youtube.com/watch?v=SRrvUXLoHGM&feature=related> [Accessed 9 May 2012].2009. • Franchising-Entrepreneurial Opt Q&A, [Video Online] Available at <http://www.youtube.com/watch?v=SCW9nf74Ku0> [Accessed 9 May 2012].Asbil, R. and Goldman, S., 2001. • Fundamentals of International Franchising, American Bar Association.Barkoff, R. M. & Selden, A. C., 2008. • Fundamentals of Franchising, 3rd ed., American Bar Association.

Recommended ReadingJudd, R. J. and Justis, R.T., 2007. • Franchising, 4th ed., Custom Publishing.Keup, E., 2007. • Franchise Bible, 6th ed., Kindle publication.Mathew, J., Debolt, D. & Prevical, D., 2011. • Street Smart Franchising, 2nd ed., Entrepreneur press.


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Self AssessmentOneofthemainbenefitsyoureceivewhenpurchasingafranchiseistheuseofwell-known___________.1.

copyrighta. patentb. trademarkc. single unit agreementd.

________ is the track record of the franchise2. Financial statementa. Discloser statementb. Profitsheetc. Businessd.

Which of the following statement is true?3. Distributorship is a major aspect of franchise.a. All successful businesses must satisfy a need.b. There are no options to begin a business.c. Stockholder’s equity is not company’s net worth.d.

Which of the following statements is false?4. The next best thing to do is to talk to existing franchisees about earnings potential. a. Make sure that all the agreements listed are attached to the UFOC, read every one of them.b. Like starting any business, buying a franchise involves a risk.c. Polymorphism, a Greek term, means the ability to take more than one form.d.

Which of the following statements is true?5. Research is the single most important activity in making decision.a. Anincomestatementdoesnotreportacompany’sprofitorloss.b. Franchising is an easy way of income.c. There are very few aspects to start a franchise.d.

________ is one of the criteria’s for selecting a franchise.6. Costsa. Problemb. Need c. Marketd.

_________________ is the franchisor’s identifying marks, brand name and logo that are licensed to the 7. franchisee.

Trademark a. Objectb. Encapsulationc. Inheritanced.

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________ is a key item in an UFOC8. Franchisea. Earning claimsb. Income statementc. Balance sheetd.

_________publishesalistoffirmsthatspecialiseinfranchisinglaw.9. IFA’s Supplier Foruma. Franchisorb. Newspaperc. Balance sheetd.

Income statement categories include ________.10. Revenuesa. Marketb. Assetc. Equityd.


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Chapter III

Franchise Law

Aim


explainlegaldefinitionoffranchise•

explicate franchise law•

elucidate procedure of franchising law•

Objectives


elucidate relevant requirements•

describe law claims and exemptions•

explain remedies•

Learning outcome


understand the terms and commonly negotiated provisions•

enlist the laws and government agencies•

identify franchise sales law and other laws•

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3.1 Legal Definition of FranchiseIndiadoesnothavefranchisespecificlegislation.However,theterm‘franchise’isdefinedasanagreementbywhichthe franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any processidentifiedwithfranchisor,whetherornotatrademark,servicemark,tradenameorlogooranysuchsymbol,asthecasemaybe,isinvolved.Thisdefinitioniswideenoughtocoverallpossiblefranchiserelationshipsforthepurposes of tax implications.

3.2 Franchise LawA franchisor may set up any of the following entities:

Sole proprietorship: Though it is the simplest form of ownership, sole proprietor risks his or her personal assets •for any liability in connection with the operation of the franchised business.Partnership: In a partnership, the partners are jointly and individually liable for the liabilities of the partnership •and for the actions of the other partners acting within the scope of the partnership; orCompany: The shareholder generally will not be liable for the liabilities of the corporation except to the extent •of the shareholder’s capital contribution. Any individual can set up a sole proprietorship.

Therearenospecificlawsgoverningtheformationofsuchanentity.PartnershipsaregovernedbythePartnershipAct 1932 and registered with the Registrar of Firms. Companies are incorporated under the Companies Act 1956 as private limited companies or public limited companies and registered with the Registrar of Companies (ROC).

The Supreme Court is the apex court in India followed by the high courts. Subordinate to the high courts are the district courts and the session courts. In the event of any dispute between a franchisor and franchisee, the option available to the parties is to initiate litigation or any other method of dispute resolution such as arbitration or conciliation. In case of a cross-border franchise it is advisable to have an international forum as the arbitrator. Domestic arbitration would be covered by the Arbitration and Conciliation Act 1996.

The franchise agreement will be governed by the Indian Contract Act 1872. This statute covers all aspects of the contract: offer, acceptance, validity, breach and termination. The principles set out in this statute govern the rights and obligations of the parties. In case of breach, the rights can be enforced by appropriate legal proceedings and invoking theSpecificReliefAct,1963 for remedies suchas injunctionanddamages.The intellectualpropertyprotection and issues will be governed by the Trade Marks Act 1999, the Patents Act 1970, the Designs Act 2000 the Copyright Act 1957.

The MRTP Act and the Competition Act 2002 regulate competition in business. An action can be taken by a consumer under theConsumerProtectionAct 1986 for deficiency in goods or services.The franchise agreementwouldnormally provide for this liability to be borne by the franchisee. The Income Tax Act 1961 governs all tax aspects of any franchise business in India. FEMA prescribes the guidelines on foreign investments and foreign remittances. Currently, remittance towards franchise fees is freely allowed. However, there are limits on free payments (without approval) towards royalty and technical fees for technology transfers.

3.3 ProcedureFollowing is the procedure of law franchise

CHOICE OF LAW

FORUM SELECTION ARBITRATION

Fig. 3.1 Procedure of law franchise


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3.3.1 Choice of LawAnexplanatoryexampleofchoiceoflawisexplainedhereafter,whichisthefirststepofdefiningfranchiselaw.InMomentum Marketing Sales & Services, Inc. v. Curves International, a Texas federal court ruled that Texas law trumped out-of-state statutory claims asserted by franchisees, even in states whose franchise statutes contained anti-waiver provisions. The initial actions were brought by franchisees asserting claims against Curves and its president in Texas, New Jersey, New York, and Florida federal courts. The franchisees contended that Curves fraudulently induced them to enter franchise agreements to open a Curves franchise in their respective communities, but then over-saturated the market in breach of the franchise agreements.

The district court evaluated the four factors of the Restatement in addressing a choice of law analysis: The place where the injury occurred•The place where the conduct causing the injury occurred•The domicile, residence, nationality, place of incorporation and place of business of the parties•The place where the relationship, if any, between the parties is centered.•

Because the plaintiffs’ claims also involved allegations of fraud and misrepresentation, the court conducted an additional analysis under the Restatement. The court considered

where the Plaintiffs acted in reliance•where the Plaintiffs received the representations•where the Defendants made the representations, the domicile, residence, and nationality of the parties•where the tangible thing was situated•where the Plaintiffs are to render performance.•

3.3.2 Forum SelectionThe court gave great weight to the forum selection clause when evaluating the local interests in adjudicating local disputes.

The law governed the question of whether an action should be transferred based on a forum selection clause. The courtheldthatwhile“theforumselectionclause‘willbeasignificantfactorthatfigurescentrallyinthedistrictcourt’s calculus, the clause should receive neither dispositive consideration nor no consideration. Example stating theimportanceofforumselectionisHullv.PizzaInn,Inc.,afranchiseeanditsguarantorsfiledalawsuitagainstPizza Inn in the Eastern District of Texas.

3.3.3 ArbitrationThe arbitration provision, in addition to other sections of the franchise agreement, was subject to a “survival” clause, which provided that the provision would survive termination “regardless of which party initiated termination or whether termination was wrong.

To establish innovation, Hygiene was required to prove the validity of a previous obligation•an agreement among all parties to accept a new contract •the extinguishment of the previous obligation, and •the validity of the new agreement.•

A court should not deny arbitration unless it can be said with positive assurance that an arbitration clause is not susceptible of an interpretation which would cover the dispute at issue.

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3.4 The Franchise Relationship, Termination, and Non-RenewalFollowing are aspects of franchise relationship, termination, and non-renewal

The franchise relationship, termination, and non-renewal

Statutory update•Dealership termination•Distribution rights•

Fig. 3.2 Aspects of franchise relationship, termination, and non-renewal

The terms under which the franchisee can terminate the franchise agreement will also be as stipulated in the franchise agreement. Under common law parties are under a legal obligation to deal with each other in good faith. The remedies available to an aggrieved party in case of breach of contract by the other party would be to initiate civil proceeding for compensation and damages and criminal proceedings under the Indian Penal Code for cheating, fraud, misrepresentation of facts and criminal breach of trust. A franchisor may refuse to renew the franchise agreement subject to the terms of the franchise agreement. If there is no provision for renewal or the conditions for renewal are not complied with, the franchise agreement can be terminated.

3.5 Relevant Requirements of Franchise LawThe franchise agreement will be governed by the Indian Contract Act,1872. This statute covers all aspects of the contract: offer, acceptance, validity, breach and termination. The principles set out in this statute govern the rights and obligations of the parties. In case of breach, the rights can be enforced by appropriate legal proceedings and invokingtheSpecificReliefAct,1963forremediessuchasinjunctionanddamages.

The intellectual property protection and issues will be governed by the Trade Marks Act 1999, the Patents Act 1970, the Designs Act 2000 the Copyright Act 1957.

The MRTP Act and the Competition Act 2002 regulate competition in business.

AnactioncanbetakenbyaconsumerundertheConsumerProtectionAct1986fordeficiencyingoodsorservices.The franchise agreement would normally provide for this liability to be borne by the franchisee.

The Income Tax Act 1961 governs all tax aspects of any franchise business in India.

FEMA prescribes the guidelines on foreign investments and foreign remittances. Currently, remittance towards franchise fees is freely allowed. However, there are limits on free payments (without approval) towards royalty and technical fees for technology transfers.


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3.6 Common Law ClaimsFollowing are the types of common law claims:

Common Law claims

Contract Issue•Fraud mispresentation•Antitrust•

Fig. 3.3 Types of common law claims

3.6.1 Contract IssueContract issues arise when one or neither party claims ambiguity of the contracts, so the court interprets the contracts as a question of law. An example of contract issue law claim is Blockbuster, Inc. v. C-Span Entertainment; Inc.115 This dispute arose from the franchisee’s purchase of eleven Blockbuster stores. Sunil Dharod attended a two-day informational seminar with Blockbuster and, at the end of the seminar, expressed an interest in purchasing eleven Blockbuster stores in Tyler, Texas. With the representation of legal counsel during the transaction, Dharod purchased the stores for $5.9 million.

The parties executed the asset sale agreement and franchise agreements in connection with the closing. Dharod signed the asset sale agreement in his individual capacity and on behalf of C-Span, a Subchapter S corporation in which Dharod was the sole shareholder, as its president. Dharod signed the franchise agreements in his individual capacity.

When the Blockbuster stores did not perform as anticipated, Dharod and C-Span sued Blockbuster and their attorneys, Akin Gump Strauss Hauer & Feld LLP. In addition to claims for breach of contract, Dharod and C-Span claimed that Blockbuster fraudulently induced Dharod to enter into the asset sale agreement when it provided him with the August1999profitandlossstatement,whichwasmorefavourablethantheprofitandlossstatementincludedinthebid package, but still showed a negative number for cost of goods for the month of July. Blockbuster answered and assertedtheaffirmativedefenseofrelease,amongitsotherdefences.Blockbusteralsocounterclaimedforbreachof contract. Hence claim aroused as a loss of ambiguity in the contract.

3.6.2 Fraud Mispresentation

Fraud mispresentation occurs as a claim in the following circumstances, a threat to do something beyond the •legal right of the party making the threat.An illegal exaction or some fraud or deception occurs.•Arestraintarisesthatis‘imminent’anddestroys‘freeagencywithoutpresentmeansofprotection.•

As mentioned above, there are no disclosure requirements in India. However, the liability for any misrepresentation will depend on the franchise agreement between the franchisor and sub-franchisee. Normally, the franchisor or the sub-franchisorisvicariouslyliableforallactsofitsindividualofficers,directorsandemployees,eitherinthecourseofbusinessoringoodfaith,orboth.Theindividualofficers,directorsandemployeesofthefranchisororthesub-franchisorarenotexposedtoanyliabilityunlesstheliabilityisspecificallyundertaken.

3.6.3 AntitrustSchlotzsky’s, Ltd. v. Sterling Purchasing & National Distribution Co., the Fifth Circuit ruled in favour of the franchisor on the antitrust claim of a supplier on the issue of franchisor-mandated exclusive suppliers, is an claim on antitrust in the law of franchise.

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3.7 ExemptionsSince,therearenospecificlawsregulatingfranchise,therearenoexemptionsandexclusionsfromanyfranchiselaws and regulations.

3.8 RemediesAs mentioned above, there are no disclosure requirements in India. However, the liability for any misrepresentation will depend on the franchise agreement between the franchisor and sub-franchisee. Normally, the franchisor or the sub-franchisorisvicariouslyliableforallactsofitsindividualofficers,directorsandemployees,eitherinthecourseofbusinessoringoodfaith,orboth.Theindividualofficers,directorsandemployeesofthefranchisororthesub-franchisorarenotexposedtoanyliabilityunlesstheliabilityisspecificallyundertaken.

Remedies

compensatory damages

injunctive relief

Fig. 3.4 Types of remedies

Case study for the remedy using compensatory damage, In re Magna Cum Latte, Inc., the bankruptcy court held that acoffeestorefranchiseecouldrecoverlostprofitsagainstitsfranchisorbasedonbreachoftheimpliedcovenantofgood faith and fair dealing and wrongful termination under the California Business Code.

ThecourtstatedthatCalifornialawsupportedtheawardoflostprofitstoafranchiseeforabreachofcontract,butthattheplaintiffhadtoprovetheoccurrenceandextentofthelostprofits.

Case study for injunctive relief, Schlotzsky’s, Ltd. v. Sterling Purchasing & National Distribution Co., discussed above for its Lanham Act and antitrust rulings, and also involved a claim for injunctive relief. The franchisor, Schlotzsky’s, Ltd., was granted an injunction under the Lanham Act prohibiting Sterling, together with its principal andaffiliates,fromrepresentingtomanufacturersthatitwasthe“exclusive”distributorofproductsforSchlotzsky’s,Ltd franchisees, when, in fact, it was not authorised by Schlotzsky’s, Ltd.

To do so.174 “Sterling argued that the injunction was improper because the district court did not make, nor could ithavemade,findingsconcerningirreparableharmorthreatenedfutureconduct.


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3.9 Franchise Sales Laws and Other Laws Affecting International Franchising

Franchise sales lawsUnited States•18 other countries•Other franchise laws•EU block exemption•Franchise relationship laws•Other laws•Trademark laws•Commercial agency laws •(Europe, Mideast, Latin America)Technology transfer laws•Foreign exchange control •lawsTax laws and treaties•Anti-bribery laws•

United States•Federal law•State law•Foreign franchise sales laws•Australia, Belgium, Brazil, •Canada, China,France, Indonesia, Italy, Japan, Malaysia, Mexico, Romania, South Africa, South Korea, Spain, Sweden, Taiwan, Vietnam

Fig. 3.5 Different types of franchise sales law

TheTradeMarksAct1999providesfortheprotectionofmarksofgoodsandservices,collectivemarks,certificationtrademarks and well-known marks in India.

The Trade Marks Act gives the proprietor of the registered trademark an exclusive right to its use and statutory remedy for infringement of this right.

The following courses of action are available against violation of trademarks rights: an action for infringement in case of registered trademark or a passing-off action in case of unregistered trademark, and criminal action. In an action involving infringement or passing off, a court may grant injunctive relief. At the request of the plaintiff, damages oranaccountofprofits,togetherwithanyorderforthedeliveryoftheinfringinglabelsandmarksfordestructionor erasure, can be obtained. Similarly, a civil action can be supplemented by a penal action for violations.

Afranchisor’sknow-howandconfidentialinformationcanbeadequatelyprotectedbyexpressprovisionsinacontract. For the grant of an injunction it would be necessary to prove that the information was important enough to justify an injunction, in the absence of which irreparable damage would be caused to the franchisor.

Where there is no express provision, an implied obligation may be construed depending on the circumstances of the case.

The franchisor’s income in the form of royalties or franchise fees would be treated and taxed as business income under the Income Tax Act 1961, and will be subject to a tax deduction at the applicable rates.

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3.10 Laws and Government Agencies Regulating the Offer and Sale of FranchisesThereisnofranchise-specificlegislation.

The various statutes, which would be relevant are:The Indian Contract Act 1872, governing the contractual relationship between the franchisor and the •franchiseeTheSpecificReliefAct1963forenforcementoftherights•The Trademarks Act 1999•The Designs Act 2000•The Copyright Act 1957•The Patents Act 1970•The Monopolies and Restrictive Trade Practices Act 1969 (MRTP Act)•The Competition Act 2002•The Consumer Protection Act 1986•The Income Tax Act 1961•The Provincial Insolvency Act 1920•The Foreign Exchange Management Act 1999 (FEMA)•The Rules issued by RBI and•Various state statutes and regulations•

In the context of cross-border franchising the Secretariat of Industrial Assistance (SIA), the Ministry of Commerce and the RBI are the main government agencies regulating the foreign investment and remittances abroad.

There is no mandatory requirement for franchise agreements to be in any local language. Generally franchise agreements are in the English language. The franchisor can restrict a franchisee from transferring its franchise ownership by expressly providing for the same in the franchise agreement.

As per the normal trend, the franchisee acquires or owns the real estate. Commercial premises can be acquired either outright or on lease basis by an Indian franchisee. A foreigner would need to obtain approval from the Reserve BankofIndia(RBI)toacquireproperty,exceptforaleasenotexceedingfiveyears.Therearenorestrictionsonadomestic franchisor acquiring property. Suitable provisions need to be incorporated in the franchise agreement and leases for transfer of the property rights (to the franchisor or its nominee) at the franchisor’s option.


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SummaryIndiadoesnothavefranchise-specificlegislation.•Sole proprietorship – though it is the simplest form of ownership, a sole proprietor risk his or her personal assets •for any liability in connection with the operation of the franchised business.The franchise agreement will be governed by the Indian Contract Act 1872. This statute covers all aspects of •the contract: offer, acceptance, validity, breach and termination.The court gave great weight to the forum selection clause when evaluating the local interests in adjudicating •local disputes.The arbitration provision, in addition to other sections of the franchise agreement, was subject to a “survival” •clause, which provided that the provision would survive termination “regardless of which party initiated termination or whether termination was wrong.The Trade Marks Act gives the proprietor of the registered trademark an exclusive right to its use and statutory •remedy for infringement of this right.There is no mandatory requirement for franchise agreements to be in any local language. Generally franchise •agreements are in the English language.The franchisor can restrict a franchisee from transferring its franchise ownership by expressly providing for the •same in the franchise agreement.

ReferencesZeidman, P., • Franchise [pdf] Available at : <http://www.franchise.org/uploadedFiles/Franchise_Industry/International_Development/Resources/India%20laws.pdf> [Accessed 29 April 2012].Coldwell, D. And Williams, A., • Franchise law [pdf]Available at: <http://www.haynesboone.com/files/Publication/9d6259b1-357f-4a92-8823-0391c371fe6b/Presentation/PublicationAttachment/7c00f7e5-8c26-4b11-9ead-1114e670ba9e/Franchise_Law_SMU.pdf> [Accessed 29 April2012].Goldstein, J., 2012. • Franchise law obligations, [Video Online] Available at: <http://www.youtube.com/watch?v=I8FfbDrBNnc> [Accessed 29 April 2012].Gray, D., 2008, • Franchise legal consultants Darwin gray solutions [Video Online] Available at: <http://www.youtube.com/watch?v=8eK7DxfThoE> [Accessed 29 April 2012].Sherman, A. J., 2011. • Franchising & Licensing, 4th ed., AMACOM Div American Mgmt Assnn.Campbell, D. & Netze, A., 2007. • International franchising, Kluwer Law International.

Recommended ReadingLafiura,D.,2011,• Franchise litigation handbook, American bar association.Sherman, A., 2011, • Franchising and Licensing, 4th ed., Amacom publication.Green, S. and Dawn, R., 2009• , Law and order, Benbella books.

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Self AssessmentTheterm‘franchise’isdefinedasanagreementbywhichthe__________isgrantedrepresentationalrightto1. sellormanufacturegoodsortoprovideserviceorundertakeanyprocessidentifiedwithfranchisor.

classa. franchiseeb. namec. single unit agreementd.

Partnerships are governed by the________ Act 1932 and registered with the Registrar of Firms.2. Partnershipa. Income taxb. Franchisec. Consumerd.

The ________is the apex court in India.3. District courta. Supreme courtb. Courtc. Franchised.

Which of the following statements is false?4. Domestic arbitration would be covered by the Arbitration and Conciliation Act 1996.a. The MRTP Act and the Competition Act 2002 regulate competition in business.b. The shareholder generally will not be liable for the liabilities of the corporation except to the extent of the c. shareholder’s capital contribution.Thereisfranchise-specificlegislation.d.

Which of the following statements is true?5. ThefranchiseagreementismorespecificthantheUFOCaboutthetermsoftherelationshipbetweenthea. franchisor and franchisee.A good relationship between the franchisee and franchisor is not critical for the success of both partiesb. Polymorphism, a Greek term, means the ability to take more than one formc. .A franchise decreases your chances of business success because you are associating with proven products d. and methods.

The Trademarks Act ________is one of the regulating bodies of franchising law.6. 1999a. 2000b. 1967c. 1998d.

_____________ issues arise when one or neither party claims ambiguity of the contracts, so the court interprets 7. the contracts as a question of law.

Contracta. Franchiseb. Bondc. Investmentd.


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The Trade Marks Act gives the _______ of the registered trademark an exclusive right to its use and statutory 8. remedy for infringement of this right.

franchisea. proprietorb. franchiserc. ownerd.

The MRTP Act and the Competition Act 2002 regulate _________in business.9. Antitrusta. Harmonyb. Competitionc. Ambiguityd.

The court gave great weight to the ________selection clause when evaluating the local interests in adjudicating 10. local disputes.

forum a. dependantb. franchisec. legald.

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Chapter IV

Franchisee and Operating Franchise

Aim


explain franchisee•

elucidate factors contributing to chose a franchise•

explicate legal issues•

Objectives


describe decision making in franchising•

explain franchisor franchisee relationship•

explicate effective marketing plan•

Learning outcome


understand the operations of franchise•

enlist the steps in capital management•

identify the legal issues in franchisee and its operation•


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4.1 Becoming a FranchiseeMost people buy a franchise because they feel it is less risky than starting a business from scratch. They recognise that their work experience has not prepared them with the knowledge or skills needed to begin and run a business of their own. In addition, many are unwilling to spend time, effort, and money reinventing what is already available.

Franchising is also attractive because, to some extent, a franchise is a cooperative—a community of common interests—from centralised national advertising to common products, operating procedures, and quality control standards. Because of the protective nature of franchising—with its intensive training programs, written standards and procedures, and national name recognition—people who otherwise would not have risked entering the business world have taken the leap and opened their own businesses and done well.

Becoming a franchisee within a solid franchise system removes much of the guesswork of running a business. It also allows avoiding most of the mistakes that independent start-ups make. That’s part of buying a franchise from a mature franchise system.

Finding Good Sources of

Information about Available

Franchises.

Working with a Franchise

Broker.

Deciding Whether to Buy

Old or New.

Evaluating a Franchisor’s

Services.

Market research

Fig. 4.1 Steps involved in becoming a franchisee

4.1.1 Finding Good Sources of Information about Available FranchisesChoosing and buying the right franchise takes time, money, and lots of information. Finding the best way to gather information is to make lists of questions, write down answers, and set up a method for cross-referencing and cross-checking facts as you proceed. Jot down the information they tell you so that you begin building a body of information that eventually gives a clear picture of the business in consideration. In order to get a complete picture ofthefranchises,itissuggestedthatinvestortakesadvantageofeveryresourceyoucanfind.

List of resourses to find information

Print directories•Consumer business publications•Trade shows and expositions•The Internet•

Fig. 4.2 Resources of information

Print directories: • Several different franchise directories list most of the franchise companies currently offering franchises. These guides are one of the best places to begin examination because they give a capsule of information on each company listed. Just because a franchisor is included in one of the directories doesn’t mean that the information is complete or accurate. Many of the directories do not independently verify the information the franchisor provides. Some Print directories are as follows:

Franchise Opportunities Guide � : Published by the International Franchise Association (IFA), this guide lists the trade association’s member companies, franchise lawyers, consultants, and other suppliers, as well asdescriptivesectionsonfranchisestatistics,otherpublications,andeducationalaffiliates.

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Franchise Update Publications � : This magazine publishing group prints a variety of franchise guides, including The Executives’ Guide to Franchise Opportunities, Food Service Guide to Franchise Opportunities, and the Guide to Multiple-Unit Franchise Opportunities. They also publish Franchise UPDATE magazine, a leading trade and management publication targeted to the professionals in the industry.Bond’s Franchise Guide � :Thisguideincludesdetailedprofilesofmorethan1,000franchisorslistedbyname, address, and contact person.The Franchise Handbook � : This guide is a quarterly directory of companies currently franchising, along with key information about them; it also offers articles and success stories.

Consumer business publications: • Several magazines and newspapers regularly publish franchising-related sections that contain articles and advertising on franchising:

Entrepreneur: www.entrepreneur.com �Fortune Small Business: www.money.cnn.com/magazines/fsb �Franchise Times: www.franchisetimes.com �Franchise Update: www.franchise-update.com �Franchising World: www.franchise.org �Inc.: www.inc.com �Nation’s Restaurant News: www.nrn.com �The New York Times: www.nytimes.com �USA Today: www.usatoday.com �The Wall Street Journal: www.wsj.com �

Trade shows and expositions: • Trade shows and expositions give an opportunity to meet face-to-face with representatives of many franchise companies at one time. At trade shows, franchisors usually offer you a senseoftheirbusinessontheexpositionfloor.Tradeshowsareawonderfulsourceforbrochuresonfranchiseopportunities. Most franchisors give their brochures and then follow up later by telephone or in writing. Finally, under no circumstances do you actually buy a franchise at a trade show. Franchisors must follow certain rules regarding the offer and sale of franchises, and one of those rules requires that the franchisor give a copy of its UFOC and time to review the information.Internet:• The Internet provides a showcase for franchise companies and can be a useful avenue of basic information. Most franchisors have their own Web sites and list their Web site addresses in their advertisements and their franchise brochures or, if they are members of the IFA, on the IFA’s Web page, with links to their Web site. Many franchisors also are included in various online franchise directories. The online directories feature basic information, including company history, total investment, and liquid capital needed to invest, areas currently developing, and descriptions of the business. Some directories offer an analysis of particular industries and organise franchisors for easy navigation and comparison and have become the best source of information quickly about any franchise.

4.1.2 Working with a Franchise BrokerFranchisebrokersareindividualsorcompaniesthatoffertohelpyoufindthefranchisethat’sright.Brokersworktodevelopindividualprofilethatreflectsbackground,interests,lifestyle,expectations,andfinancialqualifications.Most brokers do not charge the prospective franchisee a fee; instead, brokers are paid by franchisors to introduce prospects to them. Franchise brokers usually receive 40 to 50 percent of the initial fee you pay the franchisor. Good and competent brokers provide a valuable service to someone looking to invest their life savings into a franchise. It is important to explore franchising independently even if using a broker. The broker works for the franchisor, so makesuretohireownprofessionaladvisorsuchasanaccountant,attorney,orreputablefranchiseconsultingfirmto help in the process.


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4.1.3 Deciding Whether to Buy a New or Old FranchiseSizing up an existing franchise and getting some details before starting from scratch are the two parameters to make the decision of buying a new or an old franchise.

Sizing up an existing franchise• : Buying an existing operation from the company or from a franchisee may offer advantages over starting from scratch. From a franchisor’s perspective, buying an existing location makes sense. They may have made a strategic decision not to operate a company owned store at that location looking for a franchisee to buy it.

Getting a new, enthusiastic franchisee is a good swap. Secondly, franchisors typically require new franchisees to sign the then-current franchise agreement, which allows them to alter the terms of the franchise for that location sooner than they probably would have if the franchisee had stayed and operated under the old contract.Before buying an existing operation, digging for information is a must. Find out why the owner wants to sell. Did the market dry up? Is the location no longer desirable? Did the owner simply want to move on to other things? Is the owner retiring?

4.1.4 Franchisor’s Services Every franchisor is different and the services franchisors provide their franchisees vary widely, based on a company’s philosophy,maturity,andfees.Thefranchiseagreementdefinestheservicesthefranchisorprovides.Theservicesare usually divided into those the franchisor provides pre-opening, such as initial training, and those that continue throughout the lifeof thefranchise,suchasfieldstaffsupport.Modernfranchisingisacomplexbusiness,andfranchisees require continuous updating and retraining to keep them up to speed and at the top of their markets.

4.1.5 Market ResearchConducting some preliminary market research is vital to set up a franchise. Most franchisors have fairly sophisticated support mechanisms that will assist later, but to know some things before making the decision to become a franchisee for a particular company arealwaysanaddedbenefit.

4.2 Franchisee AttributesChoosing the right franchisee is one of the most important aspects of franchising. It involves a lot of interaction between the franchisor and the franchisee followed by a judicious decision by the franchisor. Though there are various ways one can go about choosing a franchisee but a franchisor should try and avoid those franchisees that meetonlyafewcriterionsayforinstancefinancialrequirementsbutfailtomeettheothercriterionthatareequallyimportant. The following are the attributes of a franchisee taken into consideration:

Age•Education•Management skills•Work experience•Financialfitness•Networking abilities•Motivation/family support•Risk taking capacity•Analytical ability•Family business•Technical skills•Profitorientation•

Age:Ageisasignificantfactorthatafranchisorlooksforinhisfranchisee.Thereasonbeingitdeterminesthemindset of a person.

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Education: It is a commonly used selection criterion to assess the likely future chances of success of potential franchisees.Theeducationalbackgroundofthefranchiseesisfurtherclassifiedintothreelevels:

Basic education or +2 level of education•Graduate level of education•Post-graduate level of education•

It may be noted that having the level of education is not just enough; having the right kind of education is more important and more desirable.

Management skills: Franchisors tend to look for franchisees that have developed certain business and management skills. These skills assist in dealing with people, leading a team, communicating with others, managing the operations etc.

Financial fitness:Havingadequatecapitalisnecessarytominimisethefinancialriskassociatedwithstartinganew business.

Networking abilities: The ability to network and to manage customer and business relationships effectively forms an important role of a franchisee. Loyalty and trust are vital features when it comes to managing staff and customers.

Analytical ability:Itisthemeasureoftheconcentrationandspecificityofthefranchisee.Ifapersonisspecifictoevery minute detail then there are less chances of making errors or mistakes.

Family business: Family business can act as an asset while a franchisee embarks on his journey as an entrepreneur.

4.2.1 The Factor AnalysisThe research has shown that there are four broad attributes that are important for becoming a successful franchisee. These factors are the attributes that differentiate one franchisee from the other. These four major factors are then used to identify the underlying variables on which to group the franchisees.

Profile/ qualificationThis includes age, education background and the experience of the individual. The education background is further categorised into basic education, graduation and post graduation level. The experience of the individual is it in the samefieldorinotheralsoformsapartofthisfactor.

SkillsThese are the attributes that can be regarded as the scaffoldings required by the franchisor for running the franchise. Managementskills,motivationandtheemotionalaswellasfinancialsupportoftheindividualthathereceivedfrom family and friends.

Business expertiseThisattributeincludesthefinancialstatusoftheindividual,hisanalyticalskills,andhisrisktakingabilityandhisprofitexpectationfromthebusiness.

Inherent advantagesThis includes the family business and the family support which he receives from time to time.


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4.3 Franchisee ProfilingThere are several ways to project the long-term behaviour of the franchisee by using various questions relating to the psychological behaviour of the Investor. The Model developed analyzes a franchisee on the basis of the most obvious factors like age, education and previous experience of the franchisee.

Y=0.311 x1-0.273 x2+0.01 x3+0.232 x4 +0.084 x5

Where, y is based on the future plans of the franchiseeX1 is the previous occupation of the franchiseeX2 is the relationship that the franchisee has with the franchisorX3 is the years of operation of the business, if the franchisee is an existing oneX4 is the present age of the franchiseeX5istheeducationalqualificationoftheInvestororfranchisee.

Thepreviousoccupationisthemostimportantfactorinafranchisee’sprofilefollowedbythepresentageofthefranchisee. All the variables taken above are considered in an ordinal scale. This formula will help to analyse the riskiness of the franchisee.

Replacing the variables that the franchisee or the prospective franchisee has with the categories and substituting the values in the model provided will give the riskiness score of the franchisee. A franchisee with a higher score is always more desirable.

A survey has shown that there are certain issues relating to franchisee retention. From a franchisor’s perspective a long lasting relationship with the franchisee is the most desirable aspect. It has shown that there are a number of franchisees who are not interested in a long lasting business relationship with the franchisor.The following are the various options present before a franchisee which make their retention by the franchisor a difficulttask:

Franchisee leaving the brand andtaking a new

brandThere is a trend that due •to stagnancy in sales or the brand value going down, franchisees close their previous brand franchisee and set up a new franchisee of some other brand.This decreases the •franchisors’ business and provides apotential risk.

Franchisee starting own business

A franchised outlet •provides the proper e x p e r i e n c e a n d exposure which is needed to establish one’s own business.

Franchisees going into service sector from

franchisingA very rare possibility •is that the franchisee leaves the franchising business altogether a n d g o e s i n t o a salaried job. It occurs very often with these franchisees that have jumped from service sector to franchising

Fig. 4.3 Franchisee options

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4.3.1 ProfilingFranchiseisprofiledasfollows:

Franchisee

Loyal Switcher Leaver

Fig. 4.4 Categories of franchisee

SwitcherThis is a type of franchisee, which will switch from the existing brand to a franchise of some other brand. The following are the characteristics of such a franchisee:

Thisfranchiseeisnotsatisfiedbythegrowthopportunities,thestandardsorthereturnoninvestmentprovided•by the current franchise.They always crave for new ideas, want to set their own rules, keep looking for other opportunities.•The major features of such franchisees are:•Age: The lowest range, the age bracket of 20-30 years.•Educationqualifications:Highlyeducated-ChartedAccountants,IIT,IIMgraduates.•Prior experience: In terms of prior experience they are quite at the lower side.•The franchisor can retain by providing proper incentives, working environment, variety in work and some •amountofflexibility.

LoyalThose franchisees that will not leave a franchise and will continue same brand and take other franchises for the same brand. The following are the characteristics of such a franchisee.

They want a safe business, the one they are already experienced in and believe in.•Theymakethefranchisingformatsuccessfulbyreapingagoodamountofprofitoutofit.•The major features of such franchisees are:•

Age: They are mostly in the late years of their life, around 40-45 years of age. �Educationqualifications:Theseincludelowereducationbracket,thosewhoworkhardandstrivetoprove �their worth.Prior experience: They are operating for a long period in franchising and have gained the tricks to become �successful in this business.

These are the most loyal customers for franchisors and hence good prospective franchisors.

LeaverInclude those franchisees that will leave franchising altogether to start their own business or become an employee of some company. The following are the characteristics of such a franchisee:

They have lost their faith in franchising model or have some dire necessity like extreme losses.•They want to get out of the system and are trying to wrap up their franchises.•The major features of such franchisees are:•

Age: The middle range, the age bracket of 35-45 years. �


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Educationqualifications:TheseincludePostgraduatesandgraduates,whoarequalifiedenoughtotakeup �a salaried job and have earned money and experience to start up their own business.Priorexperience:Theyhaveafairamountofwork-experienceinfranchisingaswellasotherfields. �

A franchisor can’t stop such type of franchisees who have already made up their minds to leave. These are categorised as the most risky franchisees.

4.4 Franchisor- Franchisee RelationshipOpening the doors to a new business is an exciting experience that will, consume the details of its day-today operation. While this will be physically, emotionally, and psychologically draining, begin monitoring relationship with the franchisor immediately. By tracking the assistance and services promised by the franchisor, systematically assess the franchisors performance. Franchisees move through phases of growth, development, maturity and decline. This lifecycle is same for most businesses, however, in franchising, the resources available to a franchise business networktoplananinclusiveofferingisgenerallyabletoensuretheongoingsignificanceofthefranchisebrandand franchise business model, effectively extending the business lifecycle and providing longevity in the market. The franchisor & franchisee relationship is always a matter that requires regular attention from both the ends. To understand and explore a franchisee franchisor relationship and recommend best practices to be adopted by a franchisor,wehavetofirstunderstandthelifecycleofafranchisee,challengesandapprehensionswhichdependon that fact that in which phase of business cycle one is.

4.4.1 Franchisor SupportBefore opening doors, participate in the franchisor’s training program. The training program is the window on thequalityofthefranchisesystemandagoodtimetobeginthemonitoringprocess.Thetrainingprogramisfirstreal opportunity to evaluate the franchisor’s performance. Because the operation of a franchise system involves a partnership between franchisee and the parent company, the franchisor’s performance is an important ingredient. Franchisor’s support to the franchisee makes a big difference to the franchisee’s own life cycle. High levels of support early in the franchise relationship will accelerate a franchisee’s growth and facilitate their early maturation. Franchisorsusuallyfindthatthenatureofsupportprovidedtoafranchiseeduringthecourseoftheirlifecycleinthefranchisebusinesschangesfromhighlytechnicalandoperationallyfocusedatthestart,tomanagement,financialand marketing expertise as the franchisee matures.

Declining phase

Search phase

Maturity phase

Joining phase

Growth phase

Fig. 4.5 Franchisee life cycle

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Search phaseIn this phase the unit is an entrepreneur who needs to go through the necessary introductory stage to ascertain •whether or not this is the correct time, product, and/or service to begin operating a franchised unit.There are various ways in which an entrepreneur looks out for a suitable franchise. A franchisee gets to know •of the franchise through close friends, or close business associates.Around 20% of the franchisees get to know of the opportunity through his brother or family members. Very rarely •they contact the existing franchisees of the brand to know about the franchisor unless they are their relatives having franchisees of the same brand. Generally, this phase lasts from one month to one year.•

Joining phaseIn this phase the franchising deal is signed between the franchisor and the franchisee.•This phase may last from one month to two years depending upon the type of business, the agency helping them •to strike the deal and the franchisee.This phase is completed within a short period of time in a domestic/single-unit franchise and may take longer •in an international/multi-unit/master franchise. This is the most potential stage when the franchisee’s enthusiasm is at its peak. To maintain the level of enthusiasm, •it is advisable to strike the deal in a short span of time.

Growth phaseThegrowthstageoccursfromthetimeofthegrandopeninggenerallythroughthefirstyearortwoofoperations.•At this time, the franchisee works very diligently in order to develop a strong level of business performance for their unit. The initial business volume of the unit may be off and it may require several months of diligent effort to properly •promote and develop. Other organisations may begin very rapidly and are forced to struggle to maintain a high initial business volume. The growth stage often levels off after a period of several months or a few years.•

Initial stage

Joining phase

Growth phase

Maturity phase

closure phase extended

growth phase

Revenue

Time

Fig. 4.6 Franchise revenue vs. time(Source: Indian Franchisee: an outlook)


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Maturity phaseIn the S-curve, this phase appear when the growth stabilises. The growth has come to a point when it is steady •and the scope of growth in the franchise is limited. The franchisee will often meet with the franchisor to discuss different products or services which will enhance •the volume of the business. The franchisee may seek to increase the sales level through the addition of new products or expanded services. It •isthisphasewhentheleveloffranchiseemotivationcouldbesignificantlyaffected;thevolumeofthebusinessremains more or less the same.

Declining phaseDuring the declining stage, the franchisee generally starts to relax their compliance with the rules, regulations, •andstandardswhichhavebeenestablishedbythefranchisor.Franchiseeswhohavebecomedissatisfiedwiththe franchisors often seek to terminate the franchise. Alternately, the franchisor may realise the problem and seek to provide remedies as solutions.The franchisor may improve the communication and may be able to provide greater services and more value •to the franchisee. The franchisor may develop additional promotional, marketing, and advertising programs which enhances the franchisee’s opportunity for success. The franchisor then has the opportunity to turn around the franchise business and to instil within the franchisee, once again, the desire for mutual success and prosperity.

Apart from the above mentioned suggestions which are for an extraordinary performer who need extra attention, there are certain practices which a franchisor can do to enhance and develop the franchisee/ franchisor relationship. Beyond monitoring the basics of relationship with the franchisor, also analyze the methods and avenues available for input into the franchisor’s system. This input, may enhance business as well as the franchisors.

Franchisee - Franchisor Relationship

Sharing the Vision•Active Communication•Passionate marketing •supportTotal Training Program•Developing & sharing an •aggressiveGrowth plan•

Fig. 4.7 Factors contributing to franchisee- franchisor relationship

4.4.2 Relationship FactorsFranchisor should share the personal vision of opportunity and success which the franchise system offers. This vision should include a high desire to receive the rewards of one’s work. This shared vision will become the focal point of the franchisee-franchisor relationship as they build to mutually develop in a harmonious and successful franchise experience.

Active Communication: A regular line of communication from the franchisor acts as a guiding light for the •franchisee.Thiscommunication linewould facilitateabilateralflowof information thereby improving thefranchisor – franchisee relationship.Passionate marketing support: A franchisee requires effective market presence of the brand both on a local and •national basis. A balanced marketing and brand positioning strategy would help franchisee to reap the gains.

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Training Program: Training is the fundamental ingredient of a strong franchisee-franchisor relationship. The •franchisor should provide training and improvement programs which will enhance the abilities and capacities of the franchisee.Developing & sharing an aggressive growth plan: it is important to manage franchisee relations in order to align •their expectations and perceptions. Franchisor should be able to offer a plan for growth so that they can induce the enthusiasm of a vibrant and growing organisation in the franchisee.

4.5 Legal IssuesItwas found thatmanyof thevictimswerefirst-time investorswhoknew littleornothingaboutpurchasingabusiness. Many lost their life savings or retirement income to fast talking salespeople who made false claims. The FTC, after reviewing voluminous complaints against these early, fraudulent franchisors, realised that these deceptive and unfair practices occurred largely due to an informational imbalance between franchisors and franchise buyers. In light of this, regulators concluded that franchise purchasers should be able to get more complete information about the business system they were going to buy. This gave rise to the disclosure laws in effect today. To correct the imbalance, the FTC and a number of state governments borrowed the concept of pre-sale disclosure from the securities industry.

Federal Law: The FTC RuleThe federal franchise regulation is formally titled “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures” and can be found at 16 Code of Federal Regulations Part 436 (the “FTC Rule”). TheFTCRuledefinesa“franchise”asfollows:

Any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:

Thefranchiseewillobtaintherighttooperateabusinessidentifiedorassociatedwiththefranchisor’strademark,•or tooffer, sell,ordistributegoods, services,orcommodities identifiedorassociatedwith the franchisor’strademark;Thefranchisorwillexertorhasauthoritytoexertasignificantdegreeofcontroloverthefranchisee’smethod•ofoperation,orprovidesignificantassistanceinthefranchisee’smethodofoperation;andAs a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment •orcommitstomakearequiredpaymenttothefranchisororitsaffiliate.

Franchising is governed primarily by laws that require franchisors to inform prospective franchisees about the system. This information is contained in the UFOC. Under the federal and state rules, a franchisor cannot offer a franchise until the franchisor has prepared a UFOC.

The laws governing the UFOC mainly deal with disclosure of the terms of the franchise and information about the franchisor. However, a second body of law gives added protection to the franchisee. These are called relationship laws. They give franchisees protection from certain actions of the franchisor, including arbitrary termination of the franchise or nonrenewal of the franchise at the end of its term, as well as the freedom to form franchisee associations.


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Franchise law

Discloser law

Relationship law

Fig. 4.8 Types of franchise laws

4.5.1 Discloser LawIn most instances, the disclosure document sets forth approximately twenty categories of information about the franchise company. This information is vital to purchasing decision.

Although theFTCdoes not require a franchisor to register (file) disclosure documents, some states—the•registration.States--dorequirefranchisorstofiledisclosuredocumentswiththestateSecuritiesAdministratoror the Attorney General. This allows state agencies to regulate franchisors who sell in their states and makes it easy to determine whether a franchisor is complying with the state’s law.The FTC Rule states that disclosure in all states must be at least as strict as the FTC Rule.•As a general rule, if you are thinking of starting a business as a franchisee, don’t sign or enter into the transaction •until the seller is complying with the various franchise disclosure laws.

4.5.2 Relationship LawsIn addition to laws regulating the franchise sales, some states have laws governing a franchisor’s termination of or refusal to renew a franchise known as relationship laws.

They prohibit franchisors from terminating or refusing to renew a franchise without good cause. Franchisees in •certain industries, such as service station dealers and automobile dealerships, also have special state and federal laws guarding against unfair terminations.Without these laws, franchisees would have far less protection and fewer rights.•

4.6 Franchisee MotivationThe franchisee has characteristics and so his motivation level undergoes various ups and downs. The motivation level begins to Increase during the initial phase when the franchisee is on the lookout for a new opportunity. After being in the joining phase for some time, the motivation level begins to decline. This is because it takes time for thebusinesstobreakeven.Aftercrossingthebreakeven,thefranchiseenowbeginstomakeprofits.Thisactsasapropeller and brings him to the zenith of motivation level. But with the passage of time, as the growth of the business reaches the maturity phase, the motivation level begins to decline again. This motivation level curve is applicable for most of the franchisees across all the sectors.

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Mot

ivat

ion

leve

l

Initial phase Joining phase

Motivation curve

Growth phase Maturity phase

Fig. 4.9 Motivation curve for a franchisee (Source: Indian Franchisee: an outlook)

The franchisor should perform the following duties-Manage a line of communication through various means like conference call, mails, personal visits, etc.•Identify the stages where the franchisee needs maximum support which normally happens to be just before the •launch period and after the maturity phase.Share success stories and sales data of other franchisees.•Maintain a healthy relationship with the franchisee through:•

Regular visits to the franchisee unit. �Regular interaction with the management team that takes care of the individual franchisees. �Aconsultingfirmthatwillactsasafacilitatorbetweenfranchisorandfranchisees. �

The royaltyHighroyaltycanseverelyaffecttheprofitsofthefranchisee,especiallyduringitsinitialyears.Anditwillbethebiggest hindering factor during the maturity of a franchisee.

Staff training & attritionStaff attrition or turnover rate is the ratio of the number of employees who left in the year to the average number of employees in the year, multiplied by 100. One of the biggest issues franchisees face is to identify and retain good employees.

ShrinkageA common problem that bothers the franchisees the most is the shrinkages and pilferages. It is the difference in the value of stocks as per books and the value of actual stock at the store on any given date.

CannibalisationManyfranchiseoperationsgenerallyfacetheissueof‘cannibalisation’,thetendencyfornewfranchiseoperationstobecomesuccessful,inpartorinwhole,merelyby‘stealing’businessfromexistingfranchisesinthesamemarket.

Irresponsible franchiseesThere are franchisees that compromise on the quality of products and services in order to reduce costs, harming the brand image as well as other franchisees’ business.


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4.7 Trends, Opportunities and Future ProspectsMore than eighty percent of the respondents interviewed are looking for an expansion of their operation. The survey has shown that a franchisee who owns an outlet would like to expand the business by taking another franchise from the same franchisor, from a different franchisor. Even though majority of the franchisors provided standardised procedures and detailed standard operating procedure, standardisation is not implemented thoroughly across the franchised outlet. There is need to ensure that the operating procedure is standardised irrespective of the type of business the franchise deals with.

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SummaryFranchising is also attractive because, to some extent, a franchise is a cooperative, a community of common •interests, from centralised national advertising to common products, operating procedures, and quality control standards.Every franchisor is different and the services franchisors provide their franchisees vary widely, based on •a company’s philosophy,maturity, and fees.The franchise agreement defines the services the franchisorprovides.Conducting some preliminary market research is vital to set up a franchise.•In growth phase, the unit is an entrepreneur who needs to go through the necessary introductory stage to ascertain •whether or not this is the correct time, product, and/or service to begin operating a franchised unit.Thegrowthstageoccursfromthetimeofthegrandopeninggenerallythroughthefirstyearortwoofoperations.•At this time, the franchisee works very diligently in order to develop a strong level of business performance for their unit. The federal franchise regulation is formally titled “Disclosure Requirements and Prohibitions Concerning •Franchising and Business Opportunity Ventures” and can be found at 16 Code of Federal Regulations Part 436 (the “FTC Rule”).As a general rule, if you are thinking of starting a business as a franchisee, don’t sign or enter into the transaction •until the seller is complying with the various franchise disclosure laws.In addition to laws regulating the franchise sales, some states have laws governing a franchisor’s termination •of or refusal to renew a franchise known as relationship laws.

ReferencesMeany, J• ., 2004, How to buy a franchise, Sphinx publishing.Indian Franchisee: An outlook• , Indian franchise association.Ramco, O., 2011.• Franchise operations management, [Video Online] Available at: <http://www.youtube.com/watch?v=6Oryu5j_kYE > [Accessed 30 April 2012].Gupta, A., 2012.The Indian education council, [Video Online] Available at <http://www.youtube.com/•watch?v=8CemMXmp51E> [Accessed 30 April2012].Franchise buyers guide• , [Online] Available at : <http://www.franchising.com/franchisebuyersguide/> [Accessed 30 April 2012].Franchise know how,• [Online] Available at: <http://www.franchiseknowhow.com/operations/> [Accessed 30 April 2012].

Recommended ReadingSeid, M. & Dave, T., 2006. • Franchising for dummies, 2nd ed., Wiley Publishing.Perkins, E., 2008. • Fundamentals of franchising your business, Perkin law PLLC.Genn, A., 2008, • So you want to Franchise your business? 1st ed., Entrepreneur Press.


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Self Assessment_________isasignificantfactorthatafranchisorlooksforinhisfranchiseeClass1.

Agea. Nameb. Genderc. Casted.

_____________canseverelyaffecttheprofitsofthefranchisee,especiallyduringitsinitialyears2. High royaltya. Shrinkageb. Franchisec. Cannibalisationd.

Buying an existing operation from the company or from a franchisee may offer _______over starting from 3. scratch distributorship.

disadvantagesa. profitableb. advantagesc. Goodd.

Which of the following statements is false?4. Maturity phase lasts from one month to one year.a. In the joining phase the franchising deal is signed between the franchisor and the franchisee.b. During the declining stage, the franchisee generally starts to relax their compliance with the rules, regulations, c. and standards which have been established by the franchisor.The growth stage often levels off after a period of several months or a few years.d.

Which of the following statements is true?5. ThefranchiseagreementismorespecificthantheUFOCaboutthetermsoftherelationshipbetweenthea. franchisor and franchisee.A good relationship between the franchisee and franchisor is not critical for the success of both partiesb. Polymorphism, a Greek term, means the ability to take more than one form.c. A franchise decreases your chances of business success because you are associating with proven products d. and methods.

________ is the fundamental ingredient of a strong franchisee-franchisor relationship distributor.6. Trusta. Franchiseb. Traineec. Trainingd.

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The laws governing the ________ mainly deal with disclosure of the terms of the franchise and information 7. about the franchisor.

Trademark a. UFOCb. FDDc. Royaltyd.

A _________ acts as a facilitator between franchisor and franchisees8. Consultingfirma. Documentb. UFOCc. Supervisord.

Conducting some preliminary________ is vital to set up a franchise.9. Market Researcha. Surveyb. Studyc. Background Checkd.

The franchisee is not completely_________. 10. independent a. dependantb. objectivec. legald.


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Chapter V

Franchise Sales and Broker

Aim


explain franchise sale•

explicate franchise brokers•

elucidate duties of a franchise broker•

Objectives


enlistthebenefitsoffranchisebroker•

explain the questions asked to a franchise broker•

elucidate origin of franchise sales regulations•

Learning outcome


understand the procedure for franchise sales•

describe an effective franchise sales process •

identify the need of a franchise broker•

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5.1 Franchise SalesSelling a franchising concept is similar to selling any other product or service. Franchisors use their own salespeople andbusinessbrokeragefirmstosellfranchisesnationally.Firstencounterwiththefranchisormightbethroughasalesperson or broker. It is important to remember that they are sales people, hired or commissioned by the franchisor. The best franchises sell themselves. Sales people offering the better systems will want to thoroughly investigate the offering and compare it the competition.

Manysalespeoplearewell-versedintheartofflattery,andthatthesoonerstartedthemoremoneywillbeearned.The information provided in these sales presentations is the least important in the entire sales process. It is sales talk. The hard core information upon which it should base is Franchise Salespeople and Brokers is found in the disclosure documents, the professional evaluation from attorney and accountant, and self investigation of the franchisor’s network.

This is the time when it is especially important to remember the self-analysis originally conducted. Remind of strengths and weaknesses and likes and dislikes. They will usually ring truer than the comments of someone else. It is easy to grow too eager, too early, and make the wrong decision. But consider all of the options and take enough time about it.

Thisisnottosaythatallsalespeople,brokers,orbusinessbrokeragefirmsareunprofessionalorwillbemisleading.Just be aware that these are people with much to gain from making a sale. Many are on commission and may receive part of the franchise fee. Once the franchise is sold, they probably will have little to no involvement in the system’s performance. As a result, most salespeople or brokers will have little incentive to make sure that promises are kept. Some may exaggerate and possibly misrepresent information, which is not permitted under the law. For example,thefirstthingyouwanttoknow—andthefirstthingsalespeoplewanttotellyou—ishowmuchyouaregoingtoearnifyoubuyaparticularfranchise.Thisisobviouslysignificantinformationandyoushouldnevertakethe sales person’s word for what you can expect to earn. Insist on proper documentation. Earnings claims must be substantiatedwithdocumentationtakenfromexistingfranchisesorsomeotherreliablefinancialsource.Asalesperson who tells a franchise buyer how much money he or she can expect to earn operating a franchise, without having any reasonable basis and without providing proper substantiating documentation in a disclosure document, is engaging in an outright unlawful practice. This will serve well as to analyze new franchise opportunities.

Finally, any verbal promises made outside of the franchise agreement are generally not enforceable. Any representation, rely upon should be put into writing and included in the franchise agreement.

5.2 Franchise BrokersFranchise Brokers - Often times the idea of franchise sales brokers comes up when working with my clients as to whether or not they should use this as a resource. As a core value, my recommendation is to not use franchise sales brokersastheytendtotakealargechunkoffranchisefee,need,conflictinginterests.However,utilisingbrokersinas a supplement to in-house sales team is something worth considering. Again, when choosing brokers being very careful which company to work with and be quick to pull the plug if there are no results after 6-9 months.

Gettingethicalandprofessionalassistancetohelpyoufindandpurchaseafranchisecanbeaverywisechoice.Usingafranchiseconsultant-broker,ifdoneright,canhelpdefinetypesofopportunitiesavailable.

A franchise broker can help understand the difference between the various types of opportunities so it’s easy to determine which format is right. A competent broker can help focus on businesses that have met certain quality standards and avoid making a potentially big mistake. The key advantage is that brokers have the inside track on both the up and coming as well as the established franchise concepts that will meet the requirements of the new franchise buyer.


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Oneof thebiggestchallengesforfranchisecompanies isfindingentrepreneurswhowillbeagoodfitfor theirparticular business model. Franchisers get thousands of requests for their information packets, but most of these come frompeoplewhoarenotqualifiedormotivatedtoactuallybecomeapartoftheirorganisation.Thesecompaniesgenerally cannot support the amount of staff necessary to do an effective job of bringing in new franchisees. This iswhythevalueofanindependentbroker-referredcandidateissosignificant.

This process saves the franchiser a great deal of time and money, so they pay a fee to the broker if the candidate buys a franchise. The candidate never pays the broker nor will they incur an increase in the cost of the franchise because they used a broker. Thus there is never a cost for the broker’s consulting, research, and recommendations on behalf of the interested buyer. This creates a winning scenario for all parties involved. A franchise broker understands what type of candidates franchises are looking for and is duty bound to provide the best ones. Allowing a broker to introducetofranchisesensuresthatthefranchiseviewisaspre-qualified.

Broker services

Raise visibility

Raise credibility

Fig. 5.1 Services offered by broker to a franchisee

5.2.1 Functions of a Franchise BrokerThe broker’s commitment to be to present top-notch franchises that match needs and have:

Successful track records •Excellent training and support •An opportunity for equity growth, and other important characteristics•

Franchise broker

Takes the time to understand •background, skills, interest and objectivesUnderstand financial limits•and risk toleranceHelp define qualifications •to avoid waste of time and energy

Fig. 5.2 Functions of a broker

Thisispossiblebecausethefranchiseshe/sherepresentshavedisclosedsignificantdetailsabouttheiropportunities,and the broker has the best and most up-to-date details. The broker’s commitment to the franchisers is to present onlythebest,mostqualifiedandinterestedfranchiseecandidates.

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Thefranchisebrokerwilltreatallinformationwiththestrictestconfidenceandwillonlyprovideittofranchisesinwhich an interest has been expressed. Also understand that while the broker should be very knowledgeable on each franchise in his/her portfolio, he/her cannot (due to sheer volume) be an expert on anyone company. The broker’s objective is to eventually put franchisee in touch with franchises. One of the most valuable services a franchise broker can provide is to make aware of opportunities.

The broker should provide one or more concepts that meet original goals, but he/she may also present horizon-expanding opportunities that offer potential success through new and exciting avenues. There are many advantag-es to getting help from a professional who knows the inside workings of an industry or issue. A franchise broker can help identify businesses that are closely aligned with talents, interests and goals.

5.3 Duties of a Franchise BrokerUsing a broker will not change the amount of fees to pay. But it’s important to keep in mind that brokers are paid a commission only when franchisee buys a franchise from one of their clients.

The difference between buying a franchise and buying a home is that there are no multiple listing services for franchisors. Except for the few houses that are not listed because they are being sold privately, the home buyer gets the opportunity to learn about every house in the market. Not so in franchising, since the franchise brokers can only earn money on the franchises offered by the clients they represent.

Therefore, while there may be thousands of franchises available and hundreds that meet ones pocketbook and interest, the broker may only have a very small percentage of the market available to show.

While the number is growing, only a small percentage of franchisors use broker networks and even the largest broker networks only represent a relatively small number of franchise opportunities.

Brokers can provide with important information on franchising and the opportunities available.

Brokers often appear very knowledgeable about franchising to the novice prospective franchisee. This is one of the reasons that they are an appealing source of franchise sales for franchisors.

Inexperienced franchise prospects often take the broker’s recommendation as gospel and do not conduct the type of thorough due diligence on the franchise opportunity that most professionals in franchising recommend.

Include brokers in the network of information on franchise opportunities.

5.4 Benefits of Franchise BrokerWhile using a franchise consultant is a growing trend in amongst prospective franchisees, many individuals do not take advantage of these services; in fact, most people are simply unaware the service is even available. Among those who do, some may feel they’ve already decided what concept is best suited for them. However, one of the primary advantages of a franchise consultant is his or her ability to direct to franchises which might have never been considered.

Many consultants have franchise industry experience or are former franchisees themselves. They have been down the road before and can offer insightful advice to help avoid making the same mistakes they may have previously made as a business owner.

A common mistake made by franchise seekers is to focus on the product or service of the franchise instead of the business model and its characteristics. In simple words, your personal shopping preferences and tastes don’t always guide you to the right franchise system to join.


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Personal likes and dislikes can also be misleading. For example, just because you like kids, it doesn’t mean a child-care franchise is the right choice. A good franchise consultant will look not only for the best or most lucrative opportunity available, but the one that best suits choice and experience.

5.4.1 The Initial Steps

First contact a franchise consultant, forge some type of connection with the person and determine whether to •develop a professional relationship with him or her. Doyouthinkyoucanbenefitfromtheirinsightandadvice?•Willyoubenefitfromtheirstrengthsandexperienceinfranchising?•Also consider that there is a huge amount of information and franchise options to be reviewed. Having a •consultant working during this stage can save you time, money, and aggravation.

5.4.2 Beginning the Franchise Search

Asa franchisee startsworkingwith the franchise consultant, thefirst step is toprovide information about•background and experience. This is often done via an online questionnaire. The franchise consultant needs to haveanunderstandingoffinancestomakesurefranchisesaffordability.Next is the consultation, which is the most important part of the information-gathering phase. An in-depth •discussion will allow the consultant explore areas of interest and past work experience. This is a chance for them to learn more about your goals, and an opportunity for you to learn more about franchising and whether or not bear realistic expectations. After the meeting, the franchise consultant will evaluate the information provided and research franchises •opportunitiesthatbestfitthegoalsandskillset.After checking for market availability, the consultant will typically introduce you to franchise concepts that •make sense for you to consider. While it may be tempting to zero in on a particular franchise, it is important to investigatemorethanone.Thisapproachwillallowyoutoperformacompare-contrastanalysistofindyourbest franchise match.

5.4.3 Narrowing Options

Consultant will then coach through the due diligence phase of the investigation, which typically takes three to •four weeks, if not longer. By introducing only to quality opportunities that match your lifestyle and goals, a consultant can save a great deal of time. Investigating franchises takes a lot of effort; many franchise seekers run out of steam when the demands of life start to take priority over the due diligence required to make an informed decision. Using a consultant increases focus and ultimately decides on the best opportunity. During the due diligence phase, most of important contact will be with the franchisor’s development •representatives, whose purpose is to educate about the details of their franchise opportunity to determine if there is a mutual interest. During this period, consultant will continue to serve as an advisor and coach, making sure franchisee’s learning about the concepts and making decisions that will ultimately lead to the franchise that is the best match. Many,firsttimefranchiseownersthismaybesimilartojumpingoffthehighdiveforthefirsttime.Franchise•consultant that has been with franchisee through the process will provide encouragement to make that life-changing decision.

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5.5 Questions Asked to the BrokersThe franchise industry has experienced a ton of growth in the past 5-6 years, and with it, a plethora of so called franchise“brokers”and“consultants”,whocanmatchyouuptofranchises,andthengetpaidafinder’sfeefromthe franchise companies for making a successful match. The executive re cruiting model is very similar. However, just like not all executive recruiters are created equal, in the franchise brokering business, not all brokers are created equal.

13 Questions

Exactly how long have you been a franchise broker?•What is your franchise experience?•How many articles on franchising have you been quoted in?•How many articles on franchising have you written?•Are you part of a franchise yourself? And if so, do you get paid a fee for •referring folks to your franchise companies headquarters?Can you give me a list of 20 people who are in franchised businesses of •their own, directly as a result of working with you in your current role as a franchise consultant-broker?Can you give me the names of at least 3 franchise attorneys who know you, •and who will vouch for your character?Do you hold face to face meetings in your local•market area, in addition to phone consultations nationwide?•Do you teach small business/franchise classes at local colleges, libraries and •high schools?Is this your only business, or is this an add on to another business of yours?•Did you used to be a franchise salesperson? {If so, franchise sales is a lot •different than franchiseconsulting}Do you have the courage to tell a prospective franchise owner that they need •togofindajob,insteadofinvestinginafranchise,becauseafranchiseisnotright for them?Are you a former franchise owner? Recently sell your business? Now a •franchise consultant-broker because you want something to do?

Fig. 5.3 Broker questions

5.6 Origin of Franchise Sales and RegulationAdvances in technology, orientation towards a service economy, a relative decrease in the importance of product franchising, an expansive interstate road system, “be their own boss,” and women in the work force, have all contributed to the burgeoning rise in business format franchising. Business format franchising accounted for 4.3 times as many business establishments as product franchising, and four times as many jobs, and operated more establishments, met a greater payroll, and generated more output in business services than in any other single line of business. The quick service restaurants hired more people than any other business format segment, and automotive and truck dealers employed more workers and had the greatest payroll of any other product distribution franchise. Jobs and payrolls in franchised businesses were greatest in California, Texas, Florida, and Illinois in 2001.


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One Short Case Study– the Beginnings of McDonald’s: Raymond Albert Kroc (“Kroc”), born in Chicago, became a volunteer ambulance driver in World War I, a dance-band musician, a salesman, a representative for Lily-Tulip paper cups and plates, and, later in his career, a promoter of a milk shake mixing machine. Never completing high school,Krocespousedaconservative,anti-regulatoryphilosophy,andfoughtforamodificationoftheminimumwage law to allow entrepreneurs to employ teenage and student workers.

In 1954, Kroc visited the McDonald brothers’ small San Bernardino, California, hamburger stand, because he was curious why the brothers needed so many of Kroc’s milk shake mixers. What Kroc found was a specialised labour system that produced quality sandwiches at an affordable price. Kroc obtained the exclusive license to market the McDonald name and methods, and founded McDonald’s Corporation. Kroc also opened a drive-in location in Des Plaines,Illinois,todemonstratethebusinessformat’sprofitability.

Along with his associate, Harry Sonnenborn, Kroc purchased the land to build franchise locations, and then rented the real estate to franchisees on long-term leases. This action increased access to capital funds. In 1957, there were 37 McDonald’s locations, by 1959 there were 100 locations, and by 1961, there were 228 locations. McDonald’s meteoric rise continued. In 1977, Kroc assumed the title of Senior Chairman. By 1980, there were 5,000 McDonald’s locations, and by 1987, there were 10,000. At that point, McDonald’s estimated that it had sold 65 billion hamburgers to the eagerly consuming public. It has been estimated that McDonald’s purchases 7.5% of the total potato crop production in the United States.

Franchise consultants make it easier to navigate the thousands of franchised concepts and hundreds of franchise portals available on the market. Until 1970 when California enacted its Franchise selling practices, which were unchecked practically and legally. With the dramatic growth of franchising, came a corresponding growth in complaints over the franchise selling practices the magic of rags to riches stories often sensationalised by the press inducedaneasilyinfluencedrelativelyunsophisticatedaudiencetomakeinvestmentsinfranchiseopportunitiesbased upon a paucity of information.

Franchise sales regulation has reacted to the informational imbalance by taking on the basic attributes of the federal security laws. The regulations require a franchisor to provide a copy of its current of franchise agreement and other ancillary agreements that the franchisee must sign to acquire a franchise and to make detailed disclosure of certain material terms and conditions of those agreements, as well as detailed information about the franchisor, itslitigationandbankruptcyhistory,andfinancialconciliation;identificationofexistingfranchisees;andcopiousadditional disclosures concerning the franchised business. Disclosures must be made a minimum number of days before the franchisor may accept any consideration for the franchise or execute any contract with the franchisee. Several states also impose a registration requirement, conditioning the right to offer or sell franchises in the state upon acceptance by state regulators of a lengthy application containing the franchise disclosure documents and financialstatements.Franchisorsmustannuallyrenewtheirlicensetoofferforsaleandsellfranchisesandamendit there are material changes.

Franchisesales,bylegaldefinition,arecharacterisedbyrepresentationsconcerningmarketingplansandassistance.Even in states that define “businessopportunities”without reference towhether or not promisesofmarketingassistance are made, state administrators sometimes take an aggressive posture, claiming that franchise offers, by theirname,involveimpliedpromisesregardingprofitabilityandincomepotential,andonthatbasisofreasontoextend their business opportunity statutes to traditional franchise relationships

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5.7 Understanding the Procedure of Franchise SalesInitial thinking behind franchise sale:

Make a list of the 10 fastest growing franchises in the country.•Look for existing franchise operations in your target area.•Keep up with franchise news.•Check the minimum amount of capital required to open a franchise. •For example, Taco Bell is one of most expensive franchises to set up.•Researchtherequiredoperationalprocessflow.Forexample,Quiznoshasthreepeopleinvolvedinpreparing•a sandwich, while Subway requires only one person.Research royalty fees charged by the franchise management and the advertis ing and marketing support they •provide.Researchthefinancialrankingsoffranchisors.BanksrankfranchisesfromgradeAtoD.Ahighergrademeans•lower down payment, less paperwork and faster closing under SBA loan programs.

Thereareanumberofareastoevaluateincludingfranchiseeleadflow,qualificationprocess,salesrepresentatives,franchise brokers, review and monitor sales pitches, franchise sales software program, discovery days, proper disclosure, follow-up, and going for the close.

Procedure of Franchise sale

Lead Flow•LeadQualification•Franchise Sales People•Review and Monitor Sales •Pitches Franchise Sales Software•Discovery Days •Proper Disclosure and the •14-day Cooling OffFollow-up •Going for the Close•

Fig. 5.4 Procedure of franchise sales

Leadflow:Tocaptureleadsfollowingstepscanmetaken,exhibitattradeshows,marketingmessageforthe•current franchise sales. It is important to remember that not to go for a total make over all at once since it is most likely change too many variables and be unable to pinpoint what led to the increase in leads and ultimately increasing franchise sales.Leadqualification:Thisisanimportantavenueforyoursalesprocess.Itisimportantinthesalesprocessto•stick to program; otherwise, you end up having discovery days and prospective franchise sales meetings with people that just waste your time.Franchise sales people: The next step is to evaluate the people you have in place running your sales department. •No one can sell with the same passion and charisma that the creator has. Also examine how franchise sales people are being compensated.


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Review and monitor sales pitches: One of the best ways to assist your sales team is to review and monitor the •sales calls. To be sure to comply with any legal requirements prior to listening in to calls or making recordings astherearemanystatesthathavespecificrules.Thisisagreatwaytofindoutwhatpeopleareactuallysayingand more importantly to help them improve. It is as raw as it gets and allows to completely dissecting their presentation and sales skills.Franchise sales software: There are many different kinds of CRM’s and sales software programs that are rather •inexpensive including Salesforce.com, ACT, Access, Goldmine, and many others. Generally it is recommend to work with an “off the shelf” software program as they are less expensive and more people know how to fixthem.Runsomediagnosticsonthecurrentsalesprocesstoensuremaximumutilisation.Itmakesthesalesprocess much easier and helps franchise sales people sell more franchises. Discovery days: conducting discovery days is presenting the best of business to the prospective franchisees. •Re-evaluating discovery days is a must practice. If you are not having any discovery days, make sure that you add them in.Proper Disclosure and the 14-day Cooling Off: Remember to properly disclose your franchisees. Get the •signatures, the sign-offs, and everything else that needs to be taken care of when presenting the Uniform Franchise Disclosure Document to your prospective franchisees. Always make sure to have your UFDD in its most current form and be compliant with your state and federal regulations. Remember to be compliant with the 14 day cooling off period where you cannot accept a deposit, sign a contract, or do anything that could indicate a sale after the initial disclosure document is presented. This is an important aspect of the franchise sales process as your prospects will consult with their lawyers, CPA’s, bankers, friends, family, etc. This is also your opportunity to make sure that this is a prospective buyer that you are interested in bringing into your franchise system.Follow-up:Afterthequalification,phonecalls,anddiscoverydaythehardestpartisnext.Youhavetoremember•to follow-up with your prospects. The follow-up is often times where you are able to hear the truth about what your prospects are thinking. You need to examine how often and what you are saying in your franchise sales follow-up. It is key to institute a quality follow-up procedure to assist your franchise sales long-term.Going for the close: As discussed the franchise sales process is full of detail, hard work, and persistence. •It is a rewarding and exhilarating experience that is full of high emotion for both you and your prospective franchisees.

5.8 Study an Effective Franchise Sales ProcessWhile recruiting franchisees is important to growth, it is also important to note that the offer and sale of franchises is highly regulated. Consulting with franchise attorney as designed the sales process, including, among other things, like handling franchise validation. The key is to understand the legal do’s and don’ts of franchise sales, process enables prospects to gain the information they need, and they gain it in a way that complies with legal requirements.

5.8.1 Map the Sales ProcessAs mentioned in the opening, careful consideration of the franchisee you want to attract is a critical component bothindefiningtherightsalesprocesstoengageprospectsandindeterminingtherightlead-generationtacticstofindthem.

All other steps of the sales process are based upon a actual give-and-take and engagement on both sides in the process; as such, the other sections of the brochure are password-protected and require a salesperson to be part of the prospect expenence.

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The steps may vary for you, depending on your concept’s level of complexity, and it may change over time-as the model changes or as you improve your processes-as ours has. For vital brochure, break the process into the followingfivesteps:

The Opportunity• Competitive Advantages• Training and Support•Validation•Join-the-Team Day•

Another way to consistently improve performance is to evaluate the process monthly.


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SummarySelling a franchising concept is similar to selling any other product or service It is important to remember that •they are sales people, hired or commissioned by the franchisor.The hard core information upon which it should base is Franchise Salespeople and Brokers is found in the •disclosure documents, the professional evaluation from attorney and accountant, and self investigation of the franchisor’s network.A sales person who tells a franchise buyer how much money he or she can expect to earn operating a franchise, •without having any reasonable basis and without providing proper substantiating documentation in a disclosure document, is engaging in an outright unlawful practice.Getting ethical and professional assistance to help youfind and purchase a franchise can be a verywise•choiceA franchise broker can help understand the difference between the various types of opportunities so it’s easy •to determine which format is right.The broker’s commitment to be to present top-notch franchises that match needs and have , successful track •records , excellent training and support, an opportunity for equity growth, and other important characteristics.While the number is growing, only a small percentage of franchisors use broker networks and even the largest •broker networks only represent a relatively small number of franchise opportunities.Asa franchisee startsworkingwith the franchise consultant, thefirst step is toprovide information about•background and experience. This is often done via an online questionnaire. The franchise consultant needs to haveanunderstandingoffinancestomakesurefranchisesaffordability.Consultant will then coach through the due diligence phase of the investigation, which typically takes three to •four weeks, if not longer. By introducing only to quality opportunities that match your lifestyle and goals, a consultant can save a great deal of time.Thereareanumberofareastoevaluateincludingfranchiseeleadflow,qualificationprocess,salesrepresentatives,•franchise brokers, review and monitor sales pitches, franchise sales software program, discovery days, proper disclosure, follow-up, and going for the close.One of the best ways to assist your sales team is to review and monitor the sales calls. To be sure to comply •with any legal requirements prior to listening in to calls or making recordings as there are many states that have specificrules.Conducting discovery days is presenting the best of business to the prospective franchisees. Re-evaluating •discovery days is a must practice. If you are not having any discovery days, make sure that you add them in.Another way to consistently improve performance is to evaluate the process monthly.•

ReferencesSun, S., 2011, • Grow Smart Risk less, Green book press.Barkoff, R. & Seldon, A., 2008,• Fundamentals of franchising, 3rd ed., ABA publishing.King, P., 2011, V• R business brokers franchise Brokerage for Business Sales and Mergers & Acquisitions, [Video Online] Available at : <http://www.youtube.com/watch?v=bwn7NJzNy6s&feature=related> [Accessed 2 May 2012].Allen, G., 2011.• Franchise Broker, [Video Online] Available at <http://www.youtube.com/watch?v=hFqblXZEu-w&feature=related> [Accessed 2 May 2012].Wild, D., • How to Franchise: Franchise sales, [Online] Available at: <http://www.2012businessopportunities.com/component/content/article/1-latest-news/51-how-to-franchise-franchise-sales> [Accessed 2 May 2012].Libava, J., • All about franchising, [Online] Available at: <http://www.biz2credit.com/b2c-ebook-franchise.pdf> [Accessed 2 May 2012].

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Recommended ReadingTomzack, M & Bond, R., 1999. Tips and Traps when buying Franchise, 2nd ed., Source book Publication.•Better business bureau., 2007. Buying a Franchise, Planning shop.•Bennet, J., 2008. Franchise times, Sterling.•


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Self Assessment__________ can provide with important information on franchising and the opportunities available.1.

Brokersa. Franchiseb. Unitc. Ownerd.

What are the functions of a broker?2. Take all decisionsa. Train franchiseeb. Keep all the franchise and franchisee updatesc. Understandfinanciallimitsandrisktoleranced.

A common mistake made by franchise seekers is to focus on the product or service of the franchise instead of 3. the _______and its characteristics.

distributorshipa. multi unit franchiseb. business model c. message passingd.

Which of the following statements is false?4. Personal likes and dislikes can never be misleading.a. A good franchise consultant will look not only for the best or most lucrative opportunity available, but the b. one that best suits choice and experience. Asafranchiseestartsworkingwiththefranchiseconsultant,thefirststepistoprovideinformationaboutc. background and experienceMulti-unit franchises is not an agreement where the franchisor grants a franchisee the rights to open and d. operate more than one unit

Which of the following statements is false?5. After checking for market availability, the consultant will typically introduce you to franchise concepts that a. make sense for you to consider.Franchise consultants make it easier to navigate the thousands of franchised concepts and hundreds of b. franchise portals available on the market.Franchise sales regulation has not reacted to the informational imbalance by taking on the basic attributes c. of the federal security lawsFranchisesales,bylegaldefinition,arecharacterisedbyrepresentationsconcerningmarketingplansandd. assistance.

A_________ may be subject to many controls by the supplier/producer and begin to resemble a franchise.6. distributor a. franchiseb. traineec. ownerd.

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__________ regulations have reacted to the informational imbalance by taking on the basic attributes of the 7. federal security laws.

Trademark a. Franchise salesb. Brokersc. Marketd.

Franchise sales, by legal definition, are characterised by representations concerning ________plans and8. assistance.

franchisea. personalb. marketingc. stock marketd.

_______must be made a minimum number of days before the franchisor may accept any consideration for the 9. franchise or execute any contract with the franchisee.

Disclosuresa. Closersb. Openingc. Launchd.

The broker’s objective is to eventually put franchisee in touch with _________.10. franchisesa. ownersb. marketc. current affairsd.


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Chapter VI

Multiunit Franchising

Aim


explain multiunit franchising•

elucidate single unit franchising versus multiunit franchising•

enlist the characteristics of multiunit franchising•

Objectives


describe methodology of multiunit franchising•

explain multiunit franchising phenomenon•

elucidatebenefitsofmultiunitfranchising•

Learning outcome


understand the meaning of multiunit franchise•

enlist advantages and disadvantages of multiunit franchising•

identify the importance of training in multiunit franchising•

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6.1 Multiunit Franchising Twodistinctformsoffranchisingwithaspecificpurposeareusedbyfranchisors.Franchisingisdistinguishedintotwoforms:productfranchisingandbusinessformatfranchising.Thefirsttypeispresentwhen“amanufacturercreates a contractual channel of distribution for one or more products” Coca-Cola, Goodyear Tires, or John Deere are companies that use this form.

The second form is present when “a retailer licences the right to replicate its business concept in another location”. The salient difference between these two forms is that in the product franchising, the franchisors do not offer an operating system to franchisees while franchisors do in a business format franchising.

6.1.1 Single Unit Franchising versus Multiunit Franchising Within the business format franchising, one can differentiate between two types of franchising. First, a franchisor can use single-unit franchising where the franchisee manages only one unit and is restricted to run this unit. Second, a franchisee can have the possibility to operate many units in a multi-unit franchising. The latter can again be subdivided into two forms: area development and sequential multiunit franchising. These are direct modes of growth for the system because franchisees are allowed to open new outlets under their own ownership resulting in the creation of a number of mini-chains within the franchise system.

In the area development form, the franchisor obliges the franchisee under a contract to open a determined number ofunitsinanassignedterritoryduringaspecifiedperiodoftime.Incontrast,thefranchisorgrantsthefranchiseetheright to open subsequent outlets in the sequential multi-unit franchising. In this case, a separate franchise contract ismadeforeachadditionalunit.Toclarifythestructure,thefollowingfigureoffersanoverviewofthedifferentforms of franchising.

Franchising

business format franchising

single unit franchising

area development form

multiunit franchising

sequential multiunit franchising

product franchising

manufacturing or processing franchising

Fig. 6.1 Forms of franchising (Source:http://arno.unimaas.nl/show.cgi?fid=16765)

Within their systems, many franchisors have a combination of SUFs and MUFs (Weaven and Frazer, 2006). However, multi-unit ownership has become the dominant form of franchising. Over the past two decades, the number of franchisees owning and operating more than one unit has increased and the emergence of franchise owners who have several outlets explained a major part of the recent growth in the franchising industry.

Theimportanceofmulti-unitfranchisingwasinvestigatedandconfirmedinseveralstudies.KaufmannandDant(1996) reported that 88 percent of their surveyed franchisors have at least one multi-unit franchisee within their systems. In addition, in another survey made by Kalnins (2004), 915 out of 1258 new outlets of three fast-food chains were owned by 203 multi-unit franchisees. Finally, across all types of industries, a study conducted by the


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IFA Educational Foundation (2002) found that multi-unit franchisees own more than the half of the surveyed units. The growing prevalence of multi-unit franchising is explained by the effectiveness of this strategy allowing a rapid growth of franchising systems for franchisors (Kaufmann and Dant, 1996). At the same time, several advantages of multi-unitfranchisingforfranchiseesexist:decreasingriskthankstodiversificationwithnewoutlets,economiesof scale or previous experience within the same franchising system.

6.2 Characteristics of Multiunit FranchisingMost franchisors initially experiment with operating multiple companies owned locations, before even beginning franchising. Once a company decides to franchise, rights to operate multiple units often take the form of option agreementsorrightsoffirstrefusalwhichappearasamendmentstosingleunitagreements.

There are 3 principal methods of multi unit expansion prevalent, although there are far more terms used to •describe these relationships. The most traditional form of multi unit expansion occurs between two parties, the franchisor who licenses its •marks and systems, on the one hand, and the multi unit franchisee, which operates the units, on the other. The other methods of multi unit expansion, namely sub franchising and area representation, all involve third •parties, who will be recruited to operate the actual units. Area developer, which is the term most people like to call themselves, is used to describe all of these •relationships.

Multiunit franchisee: A multi unit franchisee is granted an exclusive or nonexclusive right to open a pre �determinednumberofunitsinadefinedorgeographicterritoryonanagreedupondevelopmentschedule.Amulti branded franchisee is a multi unit franchisee who operates units in more than one brand, from related or unrelated franchisors.Subfranchisor:ASubfranchisorlicensestherightstoactasthefranchisorinaspecifiedterritory,andrecruits �franchisees to enter into individual franchise agreements directly with them, and then services and supports them pursuant to those franchise agreement. The sub franchisor must satisfy any regulatory compliance obligations, including any registration requirements. Sub franchising is used in practice less frequently in domestic transactions, except perhaps in the janitorial or other service industries.Area representative: An area representative or development agent as they are sometimes called, pays an initial �fee for the right to recruit prospective franchisees in a particular area pursuant to a development schedule, and is usually responsible for performing certain of the franchisor’s pre-opening and ongoing service and support obligations under the franchise agreement. A multi branded area representative represents multiple non-competing brands, usually through a single entity.

Both a sub franchisor and area representative usually pays an initial fee to the franchisor in exchange for a portion of initial franchise fees and royalties collected from franchisees in the area, but when a franchisor uses an area representative strategy, the franchisee enters into the franchise agreement directly with the franchisor, who collects all fees and is contractually responsible for providing all service and support.

6.3 Benefits of Multiunit FranchisingThemostsignificantrecenttrendinfranchisedevelopmentistheriseofmulti-unitfranchising.

Multi-unit franchising implies the creation of two or more franchise locations either within a given territory, or •through multiple territories.Some investors choose to diversify their portfolio and invest in multiple brands however there are many •advantages to developing a single brand within multiple territories. Multiple units offer both greater returns and opportunities for overall growth of the franchise business.•These expansion techniques are species of multiple unit franchising which share the common goal to open more •units faster, to leverage a franchisee’s money and personnel and to obtain a local presence.Themostcompellingreasontoinvestinmultipleunitsistheincreasedpotentialforincome.Thebenefitsof•reducing your risk are equally persuasive.

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From a franchisor’s perspective, multiple unit franchising provides opportunities for accelerated growth, a vehicle •topenetratenewmarkets,capitaliseoncertainmarketefficiencies,reducethetraining,openingoperationalassistance typically provided to single unit franchisees and a means to attract and reward productive franchisees, as well as a means for liquidity for performing or under performing units.By creating a growth vehicle for multi unit franchisees, there often results a loss of control. Franchisors are forced •to deal with defaults differently, because the franchisor’s interest in enforcing compliance, are tempered by its reliance on the franchisees ongoing royalties and validation. Moreover, depending on the discounts afforded to multi unit operators or the consideration paid to area representatives, these relationships can severely impair a franchisor’scashflow.While multiple unit franchising is the clear trend, it is not appropriate for all opportunities. Sometimes it is a •function of timing, as many new franchisors use various forms of multi unit franchising to grow in early stages, or in other cases the unit economics simply will not support the additional layers of infrastructure to make the investment worthwhile, in other cases multi unit expansion is at odds with corporate philosophy, or the lack of expansion capital in a particular industry or for other reasons.Most prospective multi unit franchisees will tell you that they look for new franchisors with experienced •management, strong unit economics, a successful multi unit history, and appropriate infrastructure (including personnel necessary to support multiunit operations), a strong brand and recognised marks, some level of integrated supply chain management, and a reputation for enforcing system standards.Trainingofstaffcanbeacostlyandcumbersometask.Whenmultiplelocationsexist,savingsandefficiencies•in training are evident and can often be handled by one team.Many multi-unit franchisees encourage competition among the units as a further incentive for their staff.•

6.4 Multiunit Franchising PhenomenonDespite the establishment of the above examined all embracing characteristics, a variety of franchise forms coexists under the same name. However, the traditional perception of franchising is the “mom and pop” franchisee, which brings all of her/his energy and focus to bear on operating one outlet (Caves and Murphy 1976).

In recent years, practitioners’ as well as researchers’ attention has begun to focus on this new development in •franchising, the trend towards multi-unit franchising. In contrast to the historic “mom and pop” franchisee, an ever growing number of franchisees currently owns and operates more than one outlet.Over the past few years, various studies have indicated the persistent importance of multi-unit franchising in the •U.S. Kaufmann and Dant (1996) found that 88% of the surveyed franchisors had multi-unit franchisees, while Kaufmann (1995) found that 83% of the surveyed New Mexican restaurants in 1994 were opened by existing franchisees. Within the McDonald’s franchise system, between 1980 and 1990, 61.5% of all new restaurants were opened by existing franchisees (Kaufmann and Lafontaine 1994). Consequently, Kaufmann and Dant (1996, pp. 346-347) conclude that “the typical location- based franchise system (of which the fast food franchise is the prime and model example) is populated with multi-unit franchisees.” Further, based on various recent studies (example, Kaufmann and Kim 1993, 1995; Robicheaux, Dant, and Kaufmann 1994), it can be concluded that the franchising sector as a whole is not only growing, but that a substantial portion of the industry’s growth can be attributed to the increasing popularity of multi-unit franchising. Hence, Kaufmann and his colleagues (Kaufmann and Dant 1996; Kaufmann and Kim 1993, 1995) identify three •types of multi-unit franchisees, apart from the traditional single-unit franchisee. “Sub franchising”, often also denoted as “master franchising”, and is characterised by the franchisor’s permission to a franchisee to grant franchises on the franchisor’s behalf to third parties. Sub franchising as a distinct form of franchising is widely used in the international expansion efforts of franchisors. •Often, a sub franchisor for one or even several countries is established who then, in turn, sub franchises to local franchisees that are responsible for opening their units.


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The sub franchisor functions as an additional control layer, and largely assumes the tasks of the franchisor in •her/his geographical area for a share of the royalty payments. Sub franchising as well as corporate ownership of outlets by the franchisor have been in the past and are still today among the most frequently observed forms of control in the international expansion process of U.S. franchise systems. Either strategy allows the franchisor a great amount of control over its foreign operations, a paramount objective for franchisors in light of the prevailing communicationandstrategicflexibilityproblemsinglobalfranchisor/franchiseerelationships.Domestically, sub franchising plays a subordinate role compared to “sequential multi-unit” and “area •development” franchising which are described subsequently. Presumably, this inferior representation of sub franchising in the domestic context is grounded in the structure of the arrangement. The additional control layer in a sub franchising arrangement only complicates the functioning of the relationship without yielding an additionalbenefitforeitherparty.Therefore, the following more “direct” relationship constellations between franchisor and franchisee seem to be •preferred domestically. “Area development franchising” as well as “sequential multiunit franchising” denote the types of franchising in which the franchisee her/himself opens additional units under her/his own ownership and management. They are the prevalent types of franchising in the U.S. (Robicheaux, Dant, and Kaufmann 1994), with sequential multi-unit franchising as the most common domestic form (Kaufmann 1992).In area development franchising, the franchisor requires the franchisee her/himself to exercise the contractual •obligation toopenaspecifiednumberofoutletswithinaspecifiedperiodof time. Insequentialmulti-unitfranchising, the franchisor simply grants the franchisee the right to open additional units, with each subsequent outlet being legally governed by a separate franchise agreement.

Both of these types of multi-unit franchising actively encourage the creation of mini-chains, i.e., multiple units owned by the franchisee and operated by employee managers of the franchisee.

6.5 Multi-facets of Multiunit FranchisingFranchising gives young aspiring entrepreneurs the formula to run or own a business successfully. However, many franchisees still consider that a franchisee at a time can only own or run a single outlet. However with advancements in technology, communication and internet, managing more than single outlet is no more a Herculean task for successful franchisees.

For franchisees, who want to own more than single outlet can achieve newer heights through multi-unit •franchising. In simple words, the concept of multi-unit franchising business is the opening of more than one outlet of a •particular brand by a franchisee. The next logical step for franchisees, which have been running a single store successfully,istoexpandtheirbusinesstoearnmoreprofits. Expansion of business with the same brand is considered preferable as both the franchisor and franchisee •may have developed good relations. Moreover, franchisors are keen in offering franchise rights to an old and experienced franchisee who have been successful with the same brand.

Following are the positive aspects of investing in a multiunit franchise:Acceleratesprofits:Bothfranchisorsandfranchiseesexperiencesuddenincreaseinreturnsthroughmulti-unit•franchising. Moreover, for franchisees it gives them the opportunity to expand their businesses and gain more power. Multi-unit franchising decreases per unit expenses as the franchisee can share the expenses with his/her multipleunits.Multi-unitshavemultibenefits.Firstlythefranchiseecanmakemoreprofits.Morethanthistheprofitableoutletscansupportthenewoutletswell.Stronger relations: A multi-unit franchisee is sure to develop better relations with his franchisor as compared •to single unit franchisees. They can also get leverage from franchisors in terms of reducing the franchise fees and regular royalties. Cost- effective in advertising and marketing: Owning multi-units of the same brand save money in terms of •marketing and advertising of the outlets. A franchisee can market all his various outlets through single advertising campaign, as in most cases they are located in one region.

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Rotationofexperiencedstaff:Afranchiseerunningasuccessfuloutletmusthaveefficientandexperiencedstaff.•Therefore, it becomes easier to train and hire new staff for his new outlet as the previous employees can take care of their outlets on their own. Moreover, the staff can be rotated according to the requirement of the outlets. Management of time• : Openingthefirstoutletdemandstimeanddedication.However,whileopeningadditionalunits, less time is spent on each outlet, as with every new outlet, franchisee gains experience and expertise to run the outlet successfully.Developing relation with vendors: A multi-unit franchisee has to buy raw materials or products for all his outlets •simultaneously. Therefore, he can easily save money in buying the supplies in bulk for all his outlets. Vendors also develop relations with their permanent customers and allow high discounts and other services to them.Contribution of whole family: Running multi-units can also engage the members of the franchisee’s family. A •multi-unit franchisee can employ them in different positions at different outlets. This will keep their business in trustworthy hands.Time and efforts is the biggest investment: The franchisee has to put in 100 per cent of his efforts in all his •outletstoreapbenefits.Hehastogiveequaltimeandattentiontohisoutlets.Thus,timeandeffortisthebiggestinvestment in maintaining multi-unit outlets.Hiringefficientmanagers:Itisnotpossibleforafranchiseetobeavailableinallhisoutletssimultaneously,•thereforeeveryoutletrequiresefficientandtrustworthymanagers.Togetdedicatedmanagerisatoughcallfor franchisees.Maintaining high success rate: A franchisee running multi-units has to maintain high standards for all his outlets. •This can add lot of stress and tension to his personal life too.

6.6 Advantages and Disadvantages of Multiunit FranchisingFollowing are the advantages and disadvantages of multiunit franchising:

Advantages

Franchisee has been through this before •and is much more ready for most of the surprises with the new store expansions.Franchisee have a much better feel for •how to market and grow your business.Economies of scale (i.e. marketing and •inventory purchasing) start to work in its favor.Taining of new employees is more honed •in.Franchisee is treated with more respect •from the franchisor (more units, more revenue, more importance)Franchisee have a much greater revenue •(andhopefullyprofit)stream.

Disadvantages

Cashflowcaninitiallybecomemoreof•a critical issue.Franchisee can no longer have the time to •devote to any one unit or store…to really let the control its managers.Personnel issues and risks magnify.•Risk/Reward comes into play more •strongly. Franchisee now have a lot more of your investment into the business and therefore have more money at risk.

Fig. 6.2 Advantages and disadvantages of multiunit franchising

Much confusion still surrounds the concept of franchising despite the fact that it is a long established business arrangement. This arises from the variety of business arrangements that closely resemble franchising, and the common use of the term in everyday language. It is usually assumed explicitly or implicitly that franchising is a distinct and well-definedcategorysomewherebetweencompleteverticalintegrationandautonomousfirms.


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From a marketing standpoint, there are actually a number of alternative organisational forms between the two extremes. Apart from franchising as a contractual vertical marketing system, examples of distribution channel hybrids include administered vertical distribution systems, and strategic alliances. In an international context, licensing represents another popular alternative to franchising. The possible hybrid organisational forms are so numerous that they are best thought of as existing on a continuum. Franchises are not a single point along the continuum, but rather constitute an alternative to each of the organisational types along the continuum.

Four basic features are common to all commercial franchise structures.

Thefirst is that thefranchisoris theownerofaname,anidea,asecretprocess,aproduct,ora•specialized piece of equipment, as well as the goodwill associated with it. Thesecondcharacteristicistheissuingofafranchisespecifiedbycontract,permittingthefranchisee•touse thespecificproduct itself,oreven thecompletebusiness format.Asoutlinedabove, thisdetermines the distinction between “product and trade name” and “business format” franchising. The third characteristic is the inclusion in the franchise contract of regulations and controls relating •to the operation of the business in the conduct of which the franchisee exercises her/his rights.Finally, there is the payment by the franchisee of a royalty, an entry fee, and/or the payments •for supplies purchased from the franchisor in return for rights obtained and franchisor services provided.

Fig. 6.3 Four basic features are common to all commercial franchise structures

6.7 Importance of Training in Multiunit FranchisingA franchising system requires a tremendous amount of preparation and training. New franchisees as well as staff members need to learn about the various positions and occupations in their organisation.

Franchiseesneedtolearnabouthiring,firing,inventorycontrol,marketing,advertising,promotion,bookkeeping,and all other aspects of the franchise business. The knowledge is not enough. It is of equal or more importance that thefranchisorinstilswithinthefranchiseeasenseofself-confidenceandself-worth.

Because of the need to instil both positive attitudes and behavioural skills within the new franchisee, it is very critical to select a competent training director.

The training director will be responsible for all training programs for both the headquarters staff and franchisee staff. This training director must be capable of working with many different individuals and all kinds of different personalities.

The effective training director will realise the duality of his position in providing training for.:Operational skills •Positiveself-confidenceandattitude.•

Thetrainingdirectorwillberesponsibleforexplainingspecificjobduties,policies,procedures,andthehandlingofeachtaskwithinthebusiness.Inaddition,thetrainingdirectormustbeabletoinspireconfidence,afeelingofrapport, and respect for the business operation. The training manager should possess personal expertise and all the practicalaspectsoftheoperation,aswellasbeingabletodevelopasenseofconfidenceforthefranchiseeandtheiremployees.

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The training operation of a franchise system generally involves the following three major components: Developing and implementing a training unit•Creating a training centre or location•Developing the training program including the philosophy, knowledge, experience, and skills which are to be •achieved and the methods used to provide such training.

Franchisee training generally assumes little or no business background. The training is generally divided into three major components:

Pre-opening training•Grand opening training, and •Continuing (post-opening) training.•

6.8 Methodology of Multiunit FranchisingAmajormovementinthefranchisingfieldisthedevelopmentandutilisationofmulti-unitfranchisingprograms.A multi-unit franchisee is an individual who owns and operates more than one franchise. This most often occurs in urban areas or in populations which provide opportunities for multi-unit franchising.

Amulti-unitfranchiseegenerallybeginswithoneunitandoftenutilisestheprofitsfromthatunittoexpandintothesecond, third, and fourth stores. Many larger franchisors limit franchisees to one, two, or three independent units.

6.8.1 Master FranchiseeAnother major method of developing multi-unit franchises is handled through a master franchisee program.

Themasterfranchiseerelationshipisdefinedasarighttosolicitprospectivefranchiseesandtoprovidetraining•and other services to franchisees in exchange for a percentage of the initial fees and royalties paid by the franchisee to the franchisor.In a master franchise relationship the individual has the right to develop, own, and operate franchise facilities •within the territory, as well as to seek other franchisees that may operate individual units.Probably the major use for the master franchisee arrangement is when the franchisor enters foreign countries and •seeks out individuals or corporations to serve as master franchisees for the entire country. For example, Merry Maids has an arrangement with Duskin Corporation of Japan to develop their domestic cleaning franchises in Japan. Master franchising in the United States has disappeared to a great extent because of the emergence of multi-unit franchisees and in some cases, sub franchise programs.

6.8.2 Sub FranchisingAnadditionalmethodoffranchisingisthesubfranchiseroutewhichisdefinedasasubfranchisorthatdevelopsacertainnumberoffacilitieswithinaspecificterritorythroughthedirectsaleoffranchises.

One of the main purposes of any training program is to prepare individuals to perform and handle the functions •for which they are responsible. There are very few positions in any organisation that does not require some form of training. It is indeed a •rare individual who completely understands an organisation and their function in that organisation when they start.

If either the franchisor and/or franchisee fail to provide adequate training, the new franchisee or employee will be forced by trial and error to perform their duties resulting in frequent lost time, poor quality, and lost products.


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SummaryWithin the business format franchising, one can differentiate between two types of franchising. First, a franchisor •can use single-unit franchising where the franchisee manages only one unit and is restricted to run this unit. Second, a franchisee can have the possibility to operate many units in a multi-unit franchising.Theimportanceofmulti-unitfranchisingwasinvestigatedandconfirmedinseveralstudies.Kaufmannand•Dant (1996) reported that 88 percent of their surveyed franchisors have at least one multi-unit franchisee within their systems.There are 3 principal methods of multi unit expansion prevalent, although there are far more terms used to •describe these relationships.Area developer, which is the term most people like to call themselves, is used to describe all of these •relationships.A multi unit franchisee is granted an exclusive or nonexclusive right to open a pre determined number of units •inadefinedorgeographicterritoryonanagreedupondevelopmentschedule.ASubfranchisorlicensestherightstoactasthefranchisorinaspecifiedterritory,andrecruitsfranchiseesto•enter into individual franchise agreements directly with them, and then services and supports them pursuant to those franchise agreement. A multi branded area representative represents multiple non-competing brands, usually through a single •entity.Multiple units offer both greater returns and opportunities for overall growth of the franchise business.•Themostcompellingreasontoinvestinmultipleunitsistheincreasedpotentialforincome.Thebenefitsof•reducing your risk are equally persuasive.Many multi-unit franchisees encourage competition among the units as a further incentive for their staff.•Sub franchising as a distinct form of franchising is widely used in the international expansion efforts of •franchisors.Domestically, sub franchising plays a subordinate role compared to “sequential multi-unit” and “area •development” franchising which are described subsequently.In area development franchising, the franchisor requires the franchisee her/himself to exercise the contractual •obligationtoopenaspecifiednumberofoutletswithinaspecifiedperiodoftime.The concept of multi-unit franchising business is the opening of more than one outlet of a particular brand by •a franchisee. A multi-unit franchisee is sure to develop better relations with his franchisor as compared to single unit •franchisees.Apart from franchising as a contractual vertical marketing system, examples of distribution channel hybrids •include administered vertical distribution systems, and strategic alliances.Amajormovementinthefranchisingfieldisthedevelopmentandutilisationofmulti-unitfranchisingprograms.•A multi-unit franchisee is an individual who owns and operates more than one franchise.Anadditionalmethodoffranchisingisthesubfranchiseroutewhichisdefinedasasubfranchisorthatdevelops•acertainnumberoffacilitieswithinaspecificterritorythroughthedirectsaleoffranchises.

ReferencesMultiunit owners study• , 2002, IFA Publications.Grunhagen, M., 1998• , Multiunit franchising, [pdf] Available at: <http://www.sbaer.uca.edu/research/asbe/2001/06.pdf > [Accessed 3 May 2012].Deering, J., 2011.• Jim Deering on multiunit franchise operators, [Video Online] Available at: <http://www.youtube.com/watch?v=3EZ3074GSUo> [Accessed 3 May 2012].2011. • Multiunit franchise conference, [Video Online] Available at: <http://www.youtube.com/watch?v=5V5jtEC51Cg> [Accessed 3 May 2012].

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Kalinins, A. & Lafontaine, F., • Characteristics of multiunit ownership in Franchising, [Online] Available at: <http://ideas.repec.org/p/nbr/nberwo/5859.html> [Accessed 3 May 2012].Libava, J., • Multiunit Franchising: What you need to know, [Online] Available at: <http://smallbiztrends.com/2009/10/multi-unit-franchising-what-you-need-to-know.html> [Accessed 3 May 2012].

Recommended ReadingKwansa, F. & Parsa, H., 2002. • Quick service restaurants, franchising and multiunit chain management, 4th ed., Routledge.Alon, I., 2012, • Global Franchising: Operations and management, 1st ed., FT press.Windspreger, J., 2004, • Economics and networks of Franchise networks, 1st ed., Physica-verlag HD.


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Self AssessmentFranchising is distinguished into two forms _________ and business format franchising.1.

product franchisinga. single unit franchisingb. multiunit franchisingc. area developmentd.

Which of the following is also known as single unit franchise?2. A franchisor can use single-unit franchising where the franchisee manages only one unit and is restricted a. to run this unit.A franchisee can have the possibility to operate many units.b. A franchise is the license or agreement between two legally independent parties.c. A franchise provides franchisees with a certain level of independence where they can operate their d. business.

_______________ is one of the alternatives to franchise.3. Distributorshipa. Multi unit franchiseb. Polymorphismc. Message passingd.

Which of the following statements is false?4. ASubfranchisorlicensestherightstoactasthefranchisorinaspecifiedterritory,andrecruitsfranchiseestoa. enter into individual franchise agreements directly with them, and then services and supports them pursuant to those franchise agreement.Most franchisors initially experiment with operating multiple companies owned locations, before even b. beginning franchising.Multi-unit franchising implies the creation of two or more franchise locations either within a given territory, c. or through multiple territories.Single units offer both greater returns and opportunities for overall growth of the franchise businessd.

Which of the following statements is true?5. In personal development franchising, the franchisor requires the franchisee her/himself to exercise the a. contractualobligationtoopenaspecifiednumberofoutletswithinaspecifiedperiodoftime.Franchising does not give young aspiring entrepreneurs the formula to run or own a business successfully.b. For franchisees, who want to own more than single outlet can achieve newer heights through multi-unit c. franchising.A single-unit franchisee is sure to develop better relations with his franchisor as compared to single unit d. franchisees.

Both franchisors and franchisees experience sudden increase in returns through ______-unit franchising.6. singlea. multib. area developmentc. subd.

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A franchisee running multi-units has to maintain _______ standards for all his outlets.7. high a. lowb. mediocrec. goodd.

A multi-unit franchisee generally begins with _____ unit Franchise8. multia. singleb. onec. twod.

A major method of developing multi-unit franchises is handled through a _________ program. 9. area developmenta. sub franchiseb. master franchisec. multi franchised.

The ________must be capable of working with many different individuals and all kinds of different 10. personalities.

training directora. franchiseeb. customerc. franchisord.


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Chapter VII

International Franchising

Aim


explain international franchising•

elucidate international expansion•

explicate trademarks in international franchising•

Objectives


explain the advantages of international franchising•

elucidate international franchising market•

explicate regulation of international franchise•

Learning outcome


understand international franchise opportunities•

identify social and international franchising•

describe economic potential of international franchise•

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7.1 International Franchising International franchising is both an offensive and defensive strategy used by large and small companies to diversify intoforeignmarkets-makingthefirmincreasinglylessdependentonhomecountryrevenuesanddemand.

It’s critical to realise international franchise expansion takes more than just a master franchise agreement. Having connections within target country, including people, who know other, high-calibre people, is critical. An international franchise partner can build a brand. But an inappropriate partner can just as easily wreck the brand, usually in a very shorttime.That’swhyourfirmhastakentimeandcareindevelopinginternationalrelationships.

Many businesses begin expanding at a certain region but as time goes by, those that perform well decide to expand through franchising. Some even go to the level of international franchising. The tricky part is deciding if it makes businesssensetogoforinternationalfranchising.Beforeconsideringinternationalfranchises,itisimportanttofirsthaveabudgetthatisrealisticandsetachievablegoalsthatshouldbeinplacewithinthefirstfewyears.

Marketing programs, training and support are necessary for international franchising. There is a need to come up with the practical programs that will make it easier to implement the concept of the franchise in a foreign country. The business model must cope with the market expectations in another country which is likely to have a different culture. If there are strong business systems and support, the process of transferring the concept and the way it is intended to work in another country will be better.

Even though the FDD is a U.S. legal requirement, investors in international franchise transactions insist on one, even though their country may not “technically” require an FDD. So, a company’s FDD must be reviewed with an international focus and include a master franchise agreement. When dealing with international franchising there should be good systems for monitoring a business and setting standards. There are many instances of franchisors who having great systems at home but they fail to enforce similar standards when they operate an international franchise business. Research is also important in determining the number of units that can be established in that country.

7.2 Types of International FranchisingThe most common form of franchisor-franchisee international franchise relationship is the master franchise, also known as sub-franchisor. In such a relationship, the master franchisee is granted a franchise for all or part of a particular country. The master franchisee is granted the right to develop the entire territory or sub-franchise the units to third parties (sub-franchisees).

The master franchisee is trained by the franchisor. Thereafter, in consideration for a portion of the royalties, •the master franchisee recruits, trains, and supports sub-franchisees to operate individual units of the franchise in the territory. In effect, the master franchisee is now the franchisor for that particular country, and normally there is no privacy of contract between the sub-franchisee and the international franchisor located in the United States, or other countries.Another form of international franchisor-franchisee relationships is the Area Development Franchise. Like •the master franchise discussed above, the franchisor grants the Area Developer the right to develop an entire country or part of it. Unlike the master franchise, the Area Developer focuses on running the business, rather than selling franchises.Although less common, some international franchise relationships take the form of single-unit franchises. •A single-unit franchisee is granted the right to open one franchise. Franchisors steer away from this type of arrangement due to the great costs sustained in servicing one unit outside the country.


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7.3 International ExpansionInternationalfranchisingisanexpansionstrategy.Whileconsideringthefirst“international”itmaynotnecessarilyrely solely on domestic resources to assist franchise companies in all countries. It is considered each situation individually and uses the most appropriate talent from around the world, usually in combination with local service providers.

As for the second part, not only does this involve either structuring or restructuring the international transaction, but also due diligence investigations similar to performing mergers and acquisitions investigations apart from franchising.

International franchising and distribution usually differ substantially from domestic programs. Also, it is not uncommon for franchise companies to avoid domestic franchising, relying instead on company-owned outlets domestically. In either case, a new program is typically called for when expanding internationally.

Following is a quick checklist of issues to cover when structuring an international franchise offer:Territory size should correspond to number of units to be opened.•Require that Master open showcase and training units before selling franchises.•Development schedule should be fairly aggressive, to pre-empt competition.•Initial term should coincide with or extend just beyond the development schedule.•Allow Area Rep who completes development schedule on time to renew for one or more additional terms, •but retain the right to require establishment of additional franchises during any renewal term as a condition of renewal; if Area Rep fails to comply or renew, franchisor may take over the area or appoint a new rep to manage the area.Duties of Master/Area Rep may include: contributing to Franchisor’s franchise lead generation activities, •such as advertising on the Web and national publications, preparing DVDs, and printing brochures, generating additionalfranchisesalesleads,qualifyingleads,followingupwithqualifiedleadsuntilreadytosign,fillingin blanks in documents for franchisor and franchisees to sign after the appropriate cooling-off periods, training new franchisees at showcase unit, assisting new franchisees with opening of new units, periodically visiting with franchisees in area, coordinating marketing, testing, and introduction of new products within area, conducting refresher training, training new managers for franchisees when necessary, reporting to franchisor on franchisee compliance and recommending termination, if appropriate, etc.Duties of the Franchisor may include: coordinating Internet and multi-territory marketing for franchise sales •leads, providing lead generation and sales tools, turning over “local” leads to Master/Area Rep, training Master/Area Rep in franchise marketing and sales, training Master/Area Rep in training, assisting, and supervising franchisees, coordinating system-wide product marketing measures, providing Master/Area Rep with new developments to be introduced to the market, conducting annual convention, etc.Typicaltransferandrightoffirstrefusalprovisionsshouldbeincluded.•Typical default provisions should be included.•Typical choice of law and venue provisions should be included.•Typicalconfidentialityandnon-competeprovisionsshouldbeincluded.•

7.4 Trademarks in International FranchisingFollowing are the aspects to be considered while dealing with trademarks in international franchise.7.4.1 Protection of Trade Marks InternationallyOneofthefirstrealisationstypicallymadebyafranchisorattemptingtoexpandhis activities into other countries is that foreign laws are often derived from legal traditions and systems different from his own, frequently resulting in frustrating delays and seemingly incomprehensible restrictions on planned expansion. Certainly the area of trademarks is no exception to this observation, and these differences as they relate to trade marks should be carefully assessed alongwithfinancialandmarketingconsiderations.

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The prudent franchisor will turn his attention to the protection of trademarks internationally• longbeforeafinaldecision is taken to export his franchise system. The issue of protection should certainly be addressed before the franchisor commences discussions with a third party to grant a franchise, master franchise, or development rights for a foreign country. This is• particularly so in view of the fact that what would otherwise constitute piracy of a trade mark in some countries ismerelyviewedas soundbusinesspractice inothers.Thus, thefirst experience in international franchising for many well-known franchisors is that they are forced to acquire the rights to their trademarks previously registered by third parties.

7.4.2 Availability of Trade MarksSearchesarerecommendedbeforeafranchisorproceedstofileforregistrationor commences use of his trademarks internationally. However, the cost of conducting searches will have to be taken into account in assessing the viability of international expansion. It may well be that potential franchisees will require a search opinion concerning a trade mark’s availability as of the date negotiations are undertaken, if no registration has been obtained.

Assuming registration has not been obtained at the time of execution of a franchise• agreement, the franchisor may consider passing onto the franchisee the risks associated with the possible rejection of an application. This can be accomplished by including in the franchise agreement provisions to the effect that no warranty is given against possible infringement of third party marks or that registration of the mark will issue. The agreement should also provide• for the consequences associated with the potential inability of the franchisor to obtain registration of the mark. Furthermore, consideration should be given to matters such as who will pay the cost of changing over the franchisee’s signs, stationery, and other materials bearing the trade mark if need be. It should be noted that in most countries a franchisor’s trade mark need• not be registered before he can license its use and begin to franchise. However, in certain countries such as Taiwan, approval from the appropriate agency for the entering into of an international franchise agreement will not be forthcoming until registration of the trade mark has issued.

7.4.3 Weak versus Strong Trade MarksGenerally speaking, the inherent distinctiveness or “strength” of a trade mark will very much determine whether it is likely to be accepted for registration in a particular foreign country. Inherently distinctive trademarks are the most easily cleared for use and registration. Such marks include “coined” terms created by or for a franchisor, which are words without a dictionary meaning and as such are generally attributed wider protection.

Similarly, trademarks• which have a dictionary meaning unrelated to the goods or services of interest will also be viewed as relatively “strong.” In order to obtain greater promotional impact, many franchisors prefer to select marks which suggest a characteristic or quality of the goods or services to be introduced.In brief,• suggestive marks make registrability and enforceability more problematic. Steps may be taken, however, to strengthen somewhat descriptive marks by adding distinctive matter including a fanciful script or design feature.The weakest trademarks are those which, for example, clearly describe or deceptively mis- describe a •characteristic, quality, or function of the goods or services, or their origin. In some countries, an element which is viewed as clearly descriptive is not registrable as part of the trade mark.Other countries permit registration of the trade mark as a whole, provided the applicant disclaims his right to •the exclusive use of the descriptive word. It should be remembered that “word” trademarks, which possess little inherent distinctiveness may be registrable if they are combined with a distinctive design feature and a disclaimerisentered.Furthermore,ifanunregistrablemarkisusedtoasignificantextentinagivencountry,itmayacquiresufficientdistinctivenesstoultimatelybecomeregistrable.


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7.4.4 International Classification of Goods and ServicesItshouldbeborneinmindthatmostcountriesadheretotheInternationalClassificationof Goods and Services, one which divides all products into thirty-four classes, with eight additional classes reserved for services. An applicant then selects the classes to be included in his applications and often must specify the goods or services of interest in each class.

A• franchisor whose trade mark is to be used in association with a long list of goods or services mayfindthatthey fall within more than one class, thus requiring the payment of additional class fees. Furthermore, if both goods and services are involved, this usually implies the need for filingofseparateapplications.Thus, the cost factor becomes important, and a franchisor may• have to decide what his principal products and services of interest are in order to cut down on the number of classes to be included. On the other hand, it is advisable to claim as wide as possiblearangeofclassesandgoodsandserviceswithineachspecificclass,asinfringement in foreign jurisdictions is often determined only in respect of the classes, or goods or services claimed within a particular class and not similar ones.TherearestillsomecountrieswhichhavetheirownclassificationsystemratherthanadheretotheInternational•Classification,althoughmoreandmorecountriesaremovingtowardtheadoptionofthelatterapproach.

7.4.5 Registration ProceduresThereareanumberofcountrieswhichadhere toa“first to register”asopposed toa“first to use” system for protectingtrademarks.Underafirsttoregisterregime,applicationsmaybe filedandregistrationsobtainedbeforeuse has commenced, thus enabling protection in a timely fashion. While a number of countries do not require use at the time of application or registration, cancellation may be possible if use is not affected within a prescribed period of time following registration.

Registration procedures vary greatly from country to country. In some cases, there is no examination to determine •whether confusingly similar third-party marks might prove to be a barrier to registration. In other countries, there is no proceeding available to third-party trade mark owners to oppose applications for registration. Recourse in such cases typically may only be had through the courts. In Canada and the United States of America for example, a trade mark application is examined prior to being published for purposes of opposition, while in Spain, the substantive examination occurs after the opposition period has passed. Trade mark examiners in the Scandinavian countries have had a practice of citing against pending applications •what are said to be confusingly similar trade marks registered or applied for in respect of what are only remotely related goods. Although it is possible to obtain consent from these third-party owners, it is obviously not a satisfactory situation.It should be remembered that national treatment of unethical practices, including misappropriation of trade marks •as well as counterfeiting, is often less than satisfactory in the absence of a validly registered trade mark.

7.4.6 Other ConsiderationsA franchisor should also consider registration of the transliterated version of his trade mark to prevent third parties from infringing the foreign form by adopting the local equivalent. Among other considerations, numbers and letters are deemed unregistrable subject matter in certain countries. There are exceptions where registration is permitted for a trade mark that has acquired considerable reputation and goodwill through use over the years. Also noteworthy is that registration of a trade mark is not permitted in some European countries on goods considered outside the franchisor’s scope of business activity.

Further, in such countries, a franchisor that proposes to franchise his trade mark but does not maintain a business enterprise concerned with either the production or sale of the products may risk having his trade mark invalidated. Accordingly, trade marks in the name of holding companies are particularly at risk in such countries.

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7.5 Advantages of International FranchisingItisimportantforafranchisortoenterintoadialoguewithhiscounseltoexplorewhatparticulardifficultiesmightbe encountered in each foreign country of interest. A franchisor should consider whether the meaning of his trade mark, when translated, might offend potential foreign customers and whether it is suitable for the same trade mark to be used in all countries.

International Franchising Advantages in a Tough Economy

A big advantage in looking overseas during tough economic times is the •foreign master franchise owners. They are able to bankroll the entire investment themselves. •Masterfranchiseownersinforeigncountriespaysignificant,upfrontfeesof•$100,000 to $1 million or more to acquire a territory or country where they operate as a mini-franchise company, selling franchises, training owners, overseeing those units and collecting royalties. The master franchise owner, a native of the country, is more knowledgeable •about local laws, customs and consumer needs. They are able to thus avoid the pitfalls and problems that international •franchising might bring without their assistance.Even smaller franchise chains can benefit from international franchise•expansion.

Fig. 7.1 Advantages of international franchising

7.6 International Franchise MarketAssessing the economic potential in emerging markets is important for international franchisors because it allows the franchisor to prioritise expansion opportunities. Some of the most commonly used factors in this assessment include,

Commonly used factors in this assessment in international franchise

GDP per capita(Gross Domestic Product •divided by the level of population)Level of population•Growth rate of the target economy•

Fig. 7.2 Assessment of international franchise

GDPpercapitaisoftenusedtoclassifyemergingmarketsbecauseitsignifiesthelevelofincomeandthestate•of the economic and political stability of a country. However, if interpreted incorrectly, it can distort the view of the country’s economic potential. Therefore, it is important to adjust GDP per capita relative to the purchasing power of the population of an emerging market to accurately compare one emerging market with another.


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Level of population is another factor used to measure the economic potential in emerging markets. However, the •franchisor must carefully consider the demographics of the population of an emerging market, and not assume that a large population equates to a large franchise growth potential. Nevertheless, the majority of the population inthesecountriesdoesnotearnsufficientincometoaffordwestern-styleproductsandservices,anddoesnotlive in the major urbanized areas in which international franchisors are often accessible.The economic rate of growth should be analysed in assessing the merits of franchising in an emerging market. •While developed markets exhibit very low, single-digit growth rate, and many emerging markets sustain high levels of growth, both in the GDP and in the GDP per capita.

7.7 Regulating International FranchisingWhile no country imposes as many presale restrictions on franchisors as the United States, many countries do have pre-saleregulations.Currently,thereareatleasttwenty-fourcountrieswhichspecificallyregulatefranchising.

Types of Laws

pre-sale disclosure•requiring franchisors to provide •to a prospective franchiseesprior to sale•a disclosure document setting •forth required information

Fig. 7.3 Regulating laws

Somecountriesalsorequirethatthedisclosuredocumentbefiledwithaspecificgovernmentagency.Inadditiontopre-sale disclosure regulation, international franchising is affected by a wide range of laws, including those which relate to trademark, antitrust, contract, tax, and technology transfer issues, currency control, foreign investment, import and export restrictions, and dispute resolution. A prospective franchisee should seek assistance in such laws which include U.S. federal and state statutes and regulations, laws of the foreign nations where the franchise will be located, and even any bilateral or multilateral treaties which may apply.

Inaddition,fifteenstatesintheUnitedStateshavefranchisesaleslawsthatalsorequireafranchisortoprovidecertain disclosures to a prospective franchisee at the time a franchise is offered or sold. These state franchise laws may also apply to an international franchise transaction.

However, unlike disputes which arise when franchisor and franchisee are in the same country, a dispute involving two differentlegalsystemscanbecomeadifficultandcostlyproblemforallconcerned.Issuessuchaswhichcountry’slaw governs the franchisor-master franchisee agreement, and where a dispute is to be resolved, are important factors to be considered by a prospective international franchisee. A prospective international franchisee should consider whetherthelawswhichgovernincludeanyspecificfranchiseregulationatall.

7.8 International Franchising OpportunitiesInternationally, the general trend toward globalisation has also played a role in fuelling overseas franchise growth in both directions. With the ever-increasing reach of the Internet during the past 15 years, and the upsurge in international travel for several decades.

However, despite the opportunities, operating a franchise overseas also comes with a unique set of obstacles. These include not only different laws, languages, and cultural differences in how business is conducted, but also different tastes, dietary restrictions, and quality and supply chain problems.

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The most successful approach has been to partner with a local business owner with a strong track record, preferably in the same industry as the brand. The most common form of agreement is to license the country or a large city to such a partner in the form of a master or sub-franchisor agreement, with the franchisor delegating the signing, training, and most other responsibilities to the overseas partner.

Once an international •market is identified, oneeffective way to target prospective franchising partners within that market is the trade missionAn option for franchisors •interested in international expansion is the use of brokers.

Identifying Partners

many legal issues must •be consideredthe franchisor also •needs to select and hire competent legal counsel in the relevant country.

Implementing franchise agreement

Once an international •market is identified, oneeffective way to target prospective franchising partners within that market is the trade missionAn option for •franchisors interested in international expansion is the use of brokers.

Structuring relationship

Fig. 7.4 Important steps in international franchising

7.8.1 Expanding Emerging Markets: IndiaIndia is a large market with a thriving class of more than 500 million potential consumers.

Indiahasnospecificlegislationregulatingfranchisearrangements,butthereareanumberofareasofthelaw•that affect the franchisor-franchisee relationship. Intellectual property, taxation, labour, competition, property, andexchangecontrolregulationsallinfluencefranchising.The government of India permits foreign franchisors to charge royalties up to one percent for domestic sales •and two percent on exports for use of the foreign franchisor’s brand name or trade mark, without a transfer of technology. In effect, this means that by lending just their brand name or trademark to an Indian company, foreign companies •can receive royalties. However, a foreign company must approach the Reserve Bank of India—India’s banking regulatory authority •(which is also responsible for exchange control regulations)—if royalties exceeding prescribed limits are sought.ThegovernmentofIndiahasalsospecifiedaformulaforcalculationofroyaltiesthatmustbeadheredtobefore•the foreign company can remit funds out of India. Ifthefranchiseagreementproposesroyaltiesorlumpsumfeesbeyondthespecifiedlimits,theapprovalofthe•Foreign Investment Promotion Board is required.


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7.9 Precautions in International FranchisingInternational franchisors face a number of risks that should be taken into account before entering a target •market. The goodwill associated with the franchise in the U.S. may be non-existent in another country, and consumers •may be biased against foreign brands for certain products and services.The franchisor’s net revenues from international franchising are often lower than domestic net revenues due to •increased expenses and sharing of revenues with master franchisees. Revenuesfrominternationalfranchisingmayalsobeaffectedbyinternationaltaxtreatiesandfluctuationsin•currency exchange rates. International franchising may require more management resources than the franchisor can spare. •Inaddition,supportingandsupplyinginternationalfranchiseescanbemoredifficultandexpensive.•

7.10 Social and International FranchisingTo enter a foreign market, several options are possible. In the simplest case, the franchisor gives the franchisee the right to operate one single-unit franchise or a multiple-unit franchise.

However,U.S.franchiseshavetypicallyexpandedinternationallythroughtheuseof‘masterfranchisecontracts,’of which there are four types. These contracts grant the right to investors to become a franchisee or local franchisor inaspecificgeographiclocale.Territoriesrangefromsmallcountriestoregionaldivisionsoflargercountries.Thefour types of master franchise contacts are as follows:

Types of Interntional franchise

The Traditional Master •LicenseThe Area Developer•The Joint Venture•The Public-Private Hybrid•

Fig. 7.5 Types of international franchise

The traditional master license: • The franchisor grants a master license to an individual or group of franchise investorsinaparticulargeographicarea.Apilotorflagshipstoreisoftenlaunchedfortrainingpurposesandtoguaranteeaqualityassurance‘yardstick’existsinthecountry.Thisisthepreferredmodelforthefranchisorbecauseitminimisesfinancialrisks,allowsforsomemeasureofoversightandensuresthataminimumnumberof units will be developed in a given region.The area developer: • Thefranchisorempowersamiddleman,or‘areadeveloper’,tosellfranchiseunitsinaclearlyspecifiedregion.Thisisanuncommonmodelforinternationalfranchisingbecausethefranchisorhaslittle control over who owns and operates its businesses. It is, however, the quickest way to open markets and generates revenue.The joint venture: • The parent franchise company invests in their own franchise business overseas, effectively becoming a passive investor in its own expansion. While not common, this is sometimes done when no investor can be found with enough capital to invest into the master license.The public-private hybrid: • The franchisor issues a license to a government in a state-controlled economy. This model is rarely used, though there are examples of socialist and communist regimes using franchises to generate revenue for the government.

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7.10.1 International Social FranchisingIngeneral,socialfranchisingcanbedefinedasusing“thestructureofacommercialfranchisetoachievesocialgoals.

Anon-profit ownedbusiness,whichutilises franchising to further theirmission. In thismodel, the non-profitfranchiseefunnelstheirprofitstowardtheirmissionactivities,orusesthebusinessitselftoservetheirbeneficiaries(i.e.throughjobtraining)inadditiontogeneratingincome.Thesedefinitionshighlightthetwodifferentobjectivesof international social franchising,

Achievingsocialbenefitsandgeneratingrevenue•In various relationships and frameworks.•

While these goals do not have to be mutually exclusive, the varying models indicate there is little consensus on whethertoprioritiseearningrevenuetofundasocialmission,servinganonprofitsclientele,oramixtureofboth.

7.11 Economic Potential of International FranchisingInternationalfranchisinghasgrownsignificantlysincethe1960sbecauseofbothpushandpullfactors.Domesticsaturation, increased competition and diminishing profits at home have pushed franchisors to examine theiropportunities abroad, while favourable macroeconomic, demographic and political conditions abroad pulled them intospecificmarkets.TheinitialexpansionofU.S.-basedfranchisorswastoculturally-similar,politicallystable,and economically rich countries such as Canada and Western Europe. In recent years, however, opportunities have diminished in these countries as well, and international franchisors have begun to seek development opportunities in emerging markets.

Fortheeffectiveandefficientinternationalfranchising,onethingwhichshouldbefollowedbymostofthefranchisecompanies is to bend and change to the cultural experiences of each individual country. Each country’s culture rules with their own commonalities and thus in order to succeed- the franchises must adjust for the sales volume and personalisation of the retail items.

The economic rate of growth is a variable that needs to be emphasised in analysing the market potential of developing markets. While developed markets exhibit very low single-digit growth rate, many emerging markets sustain high levels of growth both in the GDP and in the GDP per capita. Such statistics should be viewed favourably by international franchisors because they parallel the development of pent-up demand for western-style goods, lessen the political risk and social discontent of the citizenry, and point at an emergent middle class.

According to the World Outlook on Franchising report, Europe and the Middle East followed by Asia have the highest worldwide market potential for franchising. By continent, the countries that have the greatest market potential for franchising are South Africa, China, Germany, Brazil, Australia and the U.S. Our interviewees by and large echoed these sentiments, and all of the countries above were singled out in conversation. Bill Edwards (Edwards Global Services) thought that Mexico and Vietnam would be included on the list, while David Messenger (Service Master International) mentioned that his company had just expanded their business to Turkey.

The IFA estimates that “well over 500 companies are franchising internationally, and an additional 100 companies are looking to begin their international expansion every year.

In terms of industries that are ripe for expansion, service, training, education, healthcare, technology, food service and retail were all singled out as growth areas by the various interviewees, though the cost of the master franchise contract in certain industries can be onerous.


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SummaryIngeneral,socialfranchisingcanbedefinedasusing“thestructureofacommercialfranchisetoachievesocial•goals. Anon-profitownedbusiness,whichutilisesfranchisingtofurthertheirmission.Inthismodel,thenon-profit•franchiseefunnelstheirprofitstowardtheirmissionactivities,orusesthebusinessitselftoservetheirbeneficiaries(i.e. through job training) in addition to generating income.International franchising is both an offensive and defensive strategy used by large and small companies to diversify •intoforeignmarkets-makingthefirmincreasinglylessdependentonhomecountryrevenuesanddemand.Marketing programs, training and support are necessary for international franchising. There is a need to come •up with the practical programs that will make it easier to implement the concept of the franchise in a foreign country.The most common form of franchisor-franchisee international franchise relationship is the master franchise, •also known as sub-franchisor.Another form of international franchisor-franchisee relationships is the Area Development Franchise. Like •the master franchise discussed above, the franchisor grants the Area Developer the right to develop an entire country or part of it.It should be noted that in most countries a franchisor’s trade mark need• not be registered before he can license its use and begin to franchise. The agreement should also provide for the consequences associated with the potential inability of the franchisor to obtain registration of the mark.Registration procedures vary greatly from country to country.•Assessing the economic potential in emerging markets is important for international franchisors because it •allows the franchisor to prioritise expansion opportunities.GDPpercapitaisoftenusedtoclassifyemergingmarketsbecauseitsignifiesthelevelofincomeandthestate•of the economic and political stability of a country. Level of population is another factor used to measure the economic potential in emerging markets. The economic rate of growth should be analyzed in assessing the merits of franchising in an emerging market.The government of India permits foreign franchisors to charge royalties up to one percent for domestic sales •and two percent on exports for use of the foreign franchisor’s brand name or trade mark, without a transfer of technology. The economic rate of growth is a variable that needs to be emphasised in analyzing the market potential of •developing markets. While developed markets exhibit very low single-digit growth rate, many emerging markets sustain high levels of growth both in the GDP and in the GDP per capita.According to the World Outlook on Franchising report, Europe and the Middle East followed by Asia have the •highest worldwide market potential for franchising.

ReferencesWright, R. & Relf, S., • International Franchising, [pdf] Available at: <http://www.michbar.org/journal/pdf/pdf4article945.pdf> [Accessed 8 May 2012].Bleyer, S., 2009• , International social Franchising, Community wealth ventures Inc.Maddok, T., 2011, • Tony Maddock - 9th International Franchise and Retail Show 2011, [Video Online] Available at: <http://www.youtube.com/watch?v=Zcwq_IFYU6c> [Accessed 8 May 2012].Hussain, S., 2012, • Franchise India, 9th International Franchise & Retail Show 2011: Part I, [Video Online] Available at: <http://www.youtube.com/watch?v=nxJcyOMo0W8> [Accessed 8 May 2012].Vevstad, V., • International Expansion [Online] Available at: <http://www.internationalexpansion.org/international-franchising/international-franchising/> [Accessed 8 May 2012].Murphy, K. B., 2006. • The Franchise Handbook: A Complete Guide to All Aspects of Buying, Selling Or Investing in a Franchise, Atlantic Publishing Company.

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Recommended ReadingHero, M., 2010, • International Franchising, Globe Law and Business.Konigsberg, A., 1991, • International Franchising, Juris Pub Inc.Diane, H. & Alon, I., 2005• , International Franchising in Industrialized markets, CCH Inc.


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Self AssessmentThe most common form of franchisor-franchisee international franchise relationship is the __________.1.

master franchisea. social franchiseb. registrationc. sub- franchisord.

What is also known as international franchising?2. Social franchisea. Master franchiseb. Regional franchisec. Foreign franchised.

A big advantage in looking overseas during tough economic times is the foreign__________ owners. 3. franchisea. trademarkb. master franchisec. marketd.

Which of the following statements is false?4. A franchisor should also consider registration of the transliterated version of his trade mark to prevent third a. parties from infringing the foreign form by adopting the local equivalent.Registration procedures do not vary greatly from country to country.b. Afranchisorwhosetrademarkistobeusedinassociationwithalonglistofgoodsorservicesmayfindthatc. they fall within more than one class, thus requiring the payment of additional class fees.International franchising and distribution usually differ substantially from domestic programs.d.

Which of the following statement is true?5. Growthpercapitaisoftenusedtoclassifyemergingmarketsbecauseitsignifiesthelevelofincomeanda. the state of the economic and political stability of a country.Level of pollution is another factor used to measure the economic potential in emerging markets.b. The economic rate of stability should be analyzed in assessing the merits of franchising in an emerging c. market.Assessing the economic potential in emerging markets is important for international franchisors because it d. allows the franchisor to prioritise expansion opportunities.

The master franchise________, a native of the country, is more knowledgeable about local laws, customs and 6. consumer needs.

buyera. ownerb. franchisorc. productd.

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_________ is the franchisor’s identifying marks, brand name and logo that are licensed to the franchisee.7. Trademark a. Objectb. Encapsulationc. Inheritanced.

Somecountriesalsorequirethatthe___________befiledwithaspecificgovernmentagency.8. discloser documenta. registration formsb. pre-sale discloserc. legal documentsd.

The most successful approach has been to partner with a_________ business owner with a strong track record, 9. preferably in the same industry as the brand

generala. patentb. internationalc. locald.

The __________ franchisee is trained by the franchisor.10. generala. master b. marketc. trademarkd.


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Chapter VIII

Social Franchising

Aim


explain social franchising•

elucidatesignificanceofsocialfranchising•

explicate social franchise formats•

Objectives


explain the key elements of social franchising•

elucidate the differences between social and commerce franchising•

discuss considerations of social franchise•

Learning outcome


understand the meaning of social franchise•

enlist the future of social franchise•

identifythebenefitsanddifficultiesofsocialfranchising•

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8.1 Social FranchisingWhen social businesses want to expand and grow there are a number of options to think about in terms of replication, expansion or franchising of the business. Planning the growth of social business requires analysis. Many of the important decisions will depend on the vision for business. Some may be purely money-orientated and lead to a commercialmodelthatmaximisesprofittosupportsocialaims.

Social Franchising involves the purchase of a business model (a franchise) which operates using a successful, established brand and proven operating system for an upfront charge. The franchisee can use these under license in adefinedgeographicalarea.Continuingsupportandmanagementservicesprovidedbythefranchisorforanongoingfee.Wherethisdiffersfromtraditionalfranchisingisthataclearsocialorenvironmentalbenefitisdefinedbytheobjectivesofthebusiness,orbyhowanyprofitsaredistributed.Followingaretheadvantagesanddisadvantagesof social franchising.

Advantages

Revenue stream from the •franchiseeFranchisee purchases •a proven, successful business modelCapital from sales of •franchisesPotential for fast growth•

Disadvantages

Franchisor loses total •control over the businessFranchisee expected •to follow the business processes and brand maintenance of the franchise, which can be restrictive.Profitssharedbetween•the franchisor and the franchisee

Fig. 8.1 Advantages and disadvantages of social franchising

8.2 Significance of Social FranchisingSocial franchising means using and developing the franchising method to achieve social goals. It is about spreading experience from successful social enterprises so that more people become employed. And that these companies apply democracy in such a way that the potential of all employees is developed. Social franchising also builds a community by stimulating contacts among employees in different companies and efforts toward common goals.

8.2.1 Community In social franchising, there is a founder, just like in any franchise. The starting point for the franchisor is to spread its ideas, share its experiences, and build a community. The social goals are fundamental, and often include contributing to the creation of more jobs. In this form of franchising, exchange and learning through contacts with those who started earlier are important for the entrepreneurs.

8.2.2 Various FormsThe founder builds up a franchise system and becomes a franchisor. The forms vary among different systems. They can be cooperatives when this is appropriate, but the franchisor always enters into an agreement with the franchisee that regulates rights and obligations. Through involvement, knowledge, and fees, the franchisee contributes to the development of the business concept.


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8.2.3 Knowledge Transfer Bydefiningthekeystosuccessanddocumentingtheminmanuals,andbydevelopingtrainingcoursesbasedonthem, a group of entrepreneurs can gain access to knowledge and experience.

In social franchising, an important aspect is training as a source of support for entrepreneurs. Training, forms of management and routines are designed so they empower the employees. As a part of every company’s founding, everyone is involved in the design of the organisation.

8.2.4 Handles the Competition Better By cooperating in a franchise organisation, competitiveness is improved. Joint development and quality efforts offer better prospects. Even the social enterprise must survive the ever-faster change in its environment.

8.3 Establishing a Social Franchising SystemThe path to social franchising as a rule consists of the following steps:

One has operated one’s business with success for several years.•An analysis of the company that includes its market, the products, the strength of the brand, administrative •routines,and(notleast)afinancialanalysis.Thatonedefinesone’skeystosuccessandreflectsabouthowthesecanbestbedisseminated.•A handbook is written that described how sales, the design of services or products, and the organisation and •administration should take place, and the requirements placed upon them. Abusinessplanandestablishmentplanforthefranchisor,withfinancesthatmakeitpossibletosupportthe•local companies and develop the concept further.An agreement between the franchisor and franchisee is drafted.•Aprofileofcriteriaforthefranchiseeplushowtherecruitingandstaffselectionshouldtakeplace.•Contact the Companion and/or a franchising consultant to see if your venture can be spread and in this way •create a larger network.

8.4 Social Franchising Formats

Marketing and image

Business concept & brand name

Catalogue of servicesprice

productservice

CUSTOMERFRANCHISEE

System Loyalty

FRANCHISOR

Directives and control

System Development

Information and Fees

System Compliance

Fig. 8.2 Relationship between franchise, franchisor and customerSource:(http://www.stiftungen.org/fileadmin/bvds/de/Projekte/Projekttransfer/Social_Franchise_Manual_

Englisch.pdf)

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Generally,socialfranchisingcanbedefinedasthe“adaptedusageoftechniquesfromcommercialfranchisingforprojects,whichbenefitthesocialaimsofthenon-profitsector.Morespecifically,socialfranchisingcanbeunderstoodas contract-based cooperation of decentralised entrepreneurial units with a central support unit, uniform quality standards and supported by a common philosophy.

Apilot project that is developedby the franchisor is replicatedby anumberof franchisees subject todefinedguidelines. These are usually laid down in the form of a manual and communicated to the franchisees through training offered by the franchisor.

Social marketing indicates the systematic effort of a group (the change agent) to encourage others (the target group) to embrace, amend or give up certain conceptions, attitudes, habits or behaviour, through using commercial marketing tools. The idea is that challenges, such as in health-care, relating, for instance, to family planning and so on, can be solvedmoreefficientlybyusingmarketinginstruments.

Potential social franchise formats range fromcommercial franchiseswith intended social effects to non-profitreplication systems with franchising elements.

Threeformatscanbeidentifiedinprinciple:Acommerciallyorganisedfranchisesystemforachievingsocialbenefits.Thesoledifferencefromcommercialfranchisingisthefocusofthesystemasawholeonsocialbenefitsandtheabsenceoftheprimarygoalofgeneratingaprofitforprivateindividuals.

A subsidised franchise system to make services available at lower cost than commercial solutions. This may include profit-makingentrepreneursatthefranchiseelevel.

Anon-profitreplicationsystemwhichincludescoreelementsoffranchising,butwithouttheclassicalfeeandprofitelements. In the following sections, we will concentrate on this format.

Firstly, so-called network franchising entails multiplying or replicating complete solution networks, instead of individual outlets. A solution network means that each member of the network is part of a solution, each takes over a particular element of the work that amounts to one product or service. With network franchising, it is not a simpleproductorservicethatisfranchised,butthemanagementmethodasawholeandconfigurationofanetwork.Insuchcases,thefranchiseecoordinatesthisverticalnetwork.Sincenon-profitprojectsoftenentailanumberofcomplex elements in order to achieve the desired outcome, this form of franchising lends itself very well to the social sector.

Furthermore, master franchising is a potentially viable concept for the social sector. The franchise system is supplemented by an additional level. In addition to the franchisor, there is the master franchisee, which is responsible forcoordinatingthefranchiseesinaspecificarea.Especiallyinternationalprojectsthatareimplementedindiverseorlargegeographicregions,canbenefitfromthistypeoffranchising.

8.5 Key Elements of Social FranchisingAbusinessmodel,withassociatedsystemsandprocesses,whichhasbeencodifiedintoanoperationsmanual.

A legally-binding franchise agreement • A common brand (usually trademarked); often a centralised marketing budget •Training and support provided from the centre (at start-up and ongoing) •Demand (or need) for the model to be replicated elsewhere, from potential franchisees, investors or end-users •Quality assurance system (including monitoring performance) •Clear franchise fee structure (initial and ongoing) •Learning culture (openness to feedback, innovation, new practice)•


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Social franchising is the use of a commercial franchising approach to replicate and share proven organisational models for greater social impact.

Socialfranchisingispartofaspectrumofreplicationstrategies,whichrangefromtheveryflexibleandlooselycontrolled (dissemination, giving away for free, and open source) to the more restrictive and tightly controlled (wholly-owned by central organisation). Social franchising sits between these two extremes, but does demand a larger degree of involvement and control from the parent organisation than partnerships or licensing.

Theinitialdefinitionabovedoesrequireustounderstandwhatwemeanbycommercialfranchising.Themostusualform of commercial franchising is business format franchising.

Growth and replication strategies

DISSEMINATION PARTNERSHIP LICENSING SOCIAL JOINT WHOLLY-OWNED FRANCHISING VENTURES

Flexibility Control

Fig. 8.3 Social franchising strategies (Source:http://www.socialenterprise.org.uk/uploads/files/2011/11/social_franchising_manual.pdf)

Licensing: Licensing usually involves being granted a license to provide a service or sell a product, rather than an entire business format or system. The relationship between a licensing organisation and licensee is also looser than its franchising equivalent. This usually means a much smaller package of training and support (and not ongoing), and often no ongoing fees payable after the initial license purchase. Moreover, licensees will usually not receive exclusive territorial rights, and the granted rights are usually more limited.

This is not to say that franchising is preferable to licensing; it may be that the lower upfront development costs and lower ongoing costs (of fees) are preferable to the licensee. Similarly, the licensing company’s reduced level of involvement and support provision may be preferable for models that require less control or for an organisation with less capacity.

Joint venture: A contractual agreement joining together two or more parties for the purpose of executing a particular businessundertaking,oftenforafiniteperiod.Thepartiessharecontrolovertheenterprise,andagreetoshareinthe revenues, costs and assets.

Partnership:Anagreementorarrangementinwhichtwoormorepartiesagreetoworktogetherformutualbenefitor to advance their interests. Partnership can vary in complexity or involvement, and it is helpful to also think about a partnership continuum.

8.6 Difference between Social Franchising and Commerce FranchisingThe primary difference between social franchising and commercial franchising is very similar to the difference betweensocialenterpriseandcommercialenterprise:thattheaimsarenotpurelyfinancial(tomakeprofits),butalso social (and/or environmental). Indeed, the social impact and mission of the organisation will often be primary, withprofitsreinvestedtofurtherthesocialmission.

This raises interesting questions where franchising is concerned, as commercial franchising is powered by •financialincentives.Thefranchiseetakesupthebusinessforthemselvestoearnaliving,andthemoreprofittheymake,thebetter•off they will be personally; and

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Thefranchisorreceivesfeesfromthefranchiseewhichareusuallydirectlyrelatedtothefinancialsuccessof•thatfranchise(e.g.,percentageofturnover);thefranchisoristhereforealsofinanciallyincentivisedtoprovideexcellent training and ongoing support to those starting up and running the business.

Inshort,theinterestsofbothpartiesarealignedaroundthefinancialbottomline:growthbenefitsall.Thisbecomesmore complicated in social franchising, which involves a double or triple bottom line, and raises some key questions or challenges for those considering the social franchising approach, such as:

Can the interests of both parties be aligned around two or three different areas? •Canincentivesbedevelopedwhichmarrythefinancialandthesocialobjectives?•Canonlysocialenterpriseswithabusinessmodelthatmakesanevidentprofit(orsurplus)adoptafranchising•approach to replication?

Developing incentives which drive good behaviours from franchisees (and franchisors) in relation to both social andfinancialobjectivesisacriticalissue:aretheincentivesrelatedtofinancialgrowth,qualityofperformance,socialimpactmeasures,oracombination?Forexample,afranchisormaychoosetolinkservingmorebeneficiaries(growthofsocialimpact)toareductioninfranchisefees(lowerfinancialcost).

8.6.1 Franchisee Selection There are also some differences in relation to franchisee selection between the commercial and the social. For example:

Commercial franchisees can quite often be an individual, rather than an organisation; this is less likely in social •franchising, given the type of products and services being replicated As discussed above, in social franchising, the franchisees must share all of the objectives of the franchisor, •includingnotonlythefinancialones,butalsothesocialobjectivesthatflowfromtheorganisation’smission;this will often form a key part of the selection criteria for franchisees in social franchising Social franchisors may be more likely to place an emphasis on the values and culture that underpin their approach, •and make this a key part of the selection criteria and training Social franchisors may decide, as part of the above mission alignment, to only select franchisees which have a •similar(non-profit)legalstructure.

8.6.2 Social Impact Measurement Aswithsocialenterprises,itisnotonlymeasuringthefinancialbottomlinethatisimportantinsocialfranchising,but also measuring the social impact. This would obviously not be a part of a traditional commercial franchise.

Social franchises should ensure their evaluation framework for measuring social impact is established before replication, as it will form part of the systems that are being utilised by franchisees. Social franchisors may collect such data centrally as part of their quality assurance procedures, and offer overall evaluation work (collation and analysis of data) as an additional central service to franchisees. This emphasis on shared evaluation also helps ensure that:

The focus remains on achieving social impact (the original reason for replication); •The focus remains on the experience of the end user / customer / client; and •There is a system for continuous improvement. •

8.6.3 Finance and Funding Commercial franchising is often viewed by mainstream banks as less risky and a safer option for investment, because the business model is proven and there will often be other franchisees as direct evidence of that fact. Social franchisingisinitsinfancy,andtherearecurrentlytoofewexamplesformainstreamfinanciersandinvestorstotakemuch notice. Similarly, social investors have been slow to identify the opportunities, or have made the judgement that there are not enough proven and credible models to justify investment.


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8.7 Considerations for Social FranchisingThe following points highlight pre-conditions for implementing franchising:

Is there an existing under-employed private sector?•Isitsufficientlywidespreadthatitjustifiesthecostofbuildinganumbrellafranchiseorganisation?•Are clients willing and able to pay for the services/products being franchised? Most curative services offered •in urban areas will meet this criterion, but it has been well established that people rarely pay for preventative services or cures requiring long-term treatment regimes.Afranchisecanonlybedevelopedwherethereexistssufficient localcapacitytobuildandmanagea large•organisation,workinginaneffectivelyfor-profitmanner.

In order to answer these questions, there needs to be an understanding of:Market structure;•Comparative advantage of different parties to take on different roles in the franchise system.•

8.7.1 Market StructureItisappropriateforthegovernmenttoconsidermarketstructurebecauseitshouldaimtofindgapsinthemarketwhere the new, franchised services can improve upon existing services or product quality, prices, or geographic coverage. It would be a waste of resources for the government to use public money to enter a market where customer’s needs are already well met; this is especially the case if the franchised products and/or services are subsidised. This could lead to exit of private sector (none franchised) operators from the market, and in the long term, could decrease competition2 and availability to consumers.

The issues that need to be understood include:Whatpercentageofdifferenttypesofhealthcare(especiallyRH)isprovidedandfinancedbythestateandwhat•percentagebytheprivatesector(non-profit,commercial,‘traditional’practitioners)?How does each compare, in a particular region, in terms of service or product quality, price, product range, •geographic coverage, market segment strategy? What gaps exist in the market?Are thereasufficientnumberofsuppliers (example,healthcarepersonnelwith the rightspecialisation) for•a new service to be offered? Or would the new service end up poaching existing healthcare personnel from competitors?If new RH services or products are offered, do these complement or substitute for existing RH care services?•

8.7.2 Comparative Advantage: Roles and ResponsibilitiesThemostcommonmodelinsocialfranchisingisforanon-profitorganisationtoactasfranchisor,

withfor-profitentities(smallclinics/pharmacies/outlets)asfranchisees.4Indiahasbeenanexception,•when it comes to social marketing; the government has been involved in managing social marketing•Programmes for many years, and it may continue this kind of involvement in franchising as well.•

8.8 Regulations and Social LicensingIn return for the advantages the franchisee obtains from being part of the network, the franchisee has a contractual obligation to abide by certain rules and standards. These may include any of the following:

Meeting sales quotas•Maintaining service quality, including a high service orientation (counselling and health information) and •compulsory good dispensing practicePaying franchise fees•Adhering to a standardised retail outlet design and colour and a uniform system of display and retail •management

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Offering a standard range or price of services and goods•Providing transparency to the patient: services/products with price lists clearly displayed•Gathering public health statistics to provide to the franchisor•Participating in health information and promotion campaigns•Abiding by standardised stock management, sales reporting, and patient monitoring systems.•

8.8.1 Quality MonitoringItisimportantforthefranchisortomonitorservicequalitysinceitisdifficultforpatientstoaccuratelyassessthequality of the healthcare received. The Planned Parenthood Federation of America conducts extensive evaluations andre-certificationsofitslocalaffiliateseveryfouryearsinordertoassurethattheirservicequality;pricingandfinancialmanagementfitswiththePlannedParenthoodbrand.

Thenatureofservicesofferedinmedicalcaremakesstandardisationdifficult,qualityevaluationimpreciseandmonitoringcostly.Quasi-franchiseslikethePlannedParenthoodaffiliateprogrammechoosetodealwiththisbymonitoringandcontrollingonlyafractionoftheservicesofferedbytheaffiliates–thoseservicesthatareunderthe brand umbrella.

Inhealthservicefranchising,onlythoseaspectsofservicequalitythatareobservableandverifiablearetypicallymeasuredandmonitored.Routine‘qualitychecklist’visitsandperiodicmysteryclientsurveysareoftentheverifyingmechanism.Itemsverifiedmightinclude:

Record keeping•Compliance with standardised procedures, such as: sterilisation of equipment, cleanliness of consulting and •operating rooms, and proper disposal of single-use needlesAvailability of medicines and other materials •Knowledge of potential side effects associated with the franchised services/products and compliance with •treatment protocols.Quality control of service provision typically will not extend beyond this limited range of standardised procedures. •Themoreadvancedtheserviceis,themoredifficultisqualitymonitoringandstandardisation,andthemoredifficultitistoofferitaspartofafranchisedsystem.

8.8.2 Implications of Commercial Franchising for Social FranchisorsThe most obvious way a franchise network differs from other forms of business association is in the use of a common name or brand. The brand provides its customers with the reassurance that they will receive a consistent product wherever they purchase it. It provides new franchisees with a pre-existing pool of customers prepared to purchase their product and services on the basis of their previous experience of the brand. Because of this mutual dependence on a common brand, the operation of a franchise network necessitates a high degree of control and regulation, which are underpinned by legal agreements.

Standing this situation on its head, we might concur that social enterprises wishing to franchise could obviate •the need for legal agreements with their franchisees simply by dispensing with a common brand. After all, it couldbearguedthatinmanycasestheircustomers–thebeneficiariesoftheirsocialservices–donotconsumetheir products in different locations and therefore have no need of brands and the reassurance they provide.This may be true, but any organisation on the scale of a social franchise will have other stakeholders for whom •a recognised brand is important – donors, grant-makers, sponsors and investors, as well as volunteers, partners, suppliers, assessors and public bodies – will all draw comfort from knowing a social enterprise is a member of a wider, better-known network. All members of such a network would be at constant risk without any controls to govern the performance and behaviour of individual franchisees.Franchisees pay to join a franchise network. They do so in the expectation that the franchise business will repay •theirinvestmentthroughfutureprofits.Themoreprofitablethefranchisor’sbusinessmodel,themorefranchiseesvalue it and are prepared to pay for it.


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8.9 Future of Social FranchisingSocial Pioneers is an advocate of, and leading expert in, Social Franchising as a preferred approach to growing and reproducing high performance public services. By developing new social franchises in areas such as environment, criminal justice and Local Authority services, we help our clients and communities resolve the dilemma of being true to localism whilst achieving economies of scale in provision.

SocialFranchisinghasfivekeyfeatures:Proven successful format delivering social and commercial value•Easily duplicated•Simple skill transfer•Incomeand‘profit’forbothparties•Culture of mutual support•

Core components of social franchising

Social (value):Building social capital delivering public •services expanding community enterpriseBusiness (sustainability):Commercial disciplines •sustainable income generation best value and valuesFranchising (replication):Trading in successful business •formulas delivering social improvements capturing what works with sound ethics

Fig. 8.4 Core components of social franchising

8.9.1 Potential Difficulties of Social FranchisingDespite the many advantages that social franchising offers as a replication model, various problems may nonetheless prevail.

Risk of changing initial missionInitiativesareoftensetupwithaspecificgeographicfocusinmind.•Adapting it to local peculiarities might alter the original mission. In the worst case, this might alienate the •organisation’s core stakeholders.Additionally, the franchisees’ goals might differ from those pursued by the franchisor, as well as those of other •franchisees. Franchisees do not have to provide start-up-capital, because the initial investments are usually provided by the franchisor or a donor. Consequently, because franchisees fear less capital loss, they might behave opportunistically and the motivation to adhere to the system might be lower.

Risk of negative reputationOperating under the same name, the various units in a social franchise system are perceived as one organisation. •Consequently,thereputationofoneaffiliatehasanimpactontheorganisationasawhole.Franchisees might present themselves in a way which is inconsistent with the central unit. Therefore, the franchisor •has to ensure an appropriate level of control over the franchisees. Since the independence of franchisees is such animportantelementofsocialfranchising,thisisadifficultbalancingact.

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Difficulties of monitoring and evaluationMonitoring and evaluating franchisee performance is important, because of the risk of negative reputation. •However,thisisdifficulttoachieveinpracticebecauseabstractachievementscannoteasilybequantified,as•in the case of units sold in conventional commercial franchising. Consequently, the question arises of how to measure the achievements of the system.•

Difficulties in standardisationStandardisation is a core element of a social franchise system.•However,becausetheessentialknowledgeandskillsareoftentacit,thestandardisationofnon-profitprojects•canbedifficult.Also,thesuccessofaninitiativeisoftendependentonspecificgeographicorculturalpeculiarities.Excessive•standardisationmightthereforeleadtoinflexibility,makingitmoredifficulttoadapttheprojectatotherlocations.Itisthusimportanttofindtherightbalancebetweenstandardisationandflexibility.

Competition over fundraisingWe have learned that, on the one hand, a social franchise system can tap the full potential of national and local •donors.However, devolution of fundraising activities to the local franchisees might lead to inefficiency and •ineffectiveness. Assuming that each of the franchisees serves the same basic purpose and individually solicits contributions from •more or less the same donor pool, the effort of one franchisee may entail a reduction in fundraising productivity and thus an increase in the costs of fundraising for the other franchisees.

8.9.2 Rights of Social FranchisorsIn return for the right to use the turnkey concept, social franchisors have the right to monitor franchisees and to take anyactiontoensuresystemcompliancethateffortsaremadeandthatfranchiseeshavesufficientlyhighqualitystandards. This might for example include the request for regular and extensive information from franchisees in order to continuously improve the system and project concept. In case of non-compliance, the franchisor can discipline the franchisee and even terminate the contract. While commercial franchisors additionally have the right to collect franchise fees, social franchisors will not always have this option.

8.9.3 Duties of Social FranchisorsThe franchisor has three main duties with the aim of contributing to the success of local sites and the system:

Duties of social franchisor

The franchisor must ensure performance and thefulfilmentofthe social mission of the

system

The franchisor must ensure an exchange of know-how within the

network

The franchisor must provide central services

Fig. 8.5 Duties of social franchisor


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Thefranchisormustensureperformanceandthefulfilmentofthesocialmissionofthesystem:Heisrequiredtopreciselydefinethesocialmissionaswellasmediumandlong-termobjectives.•He needs to provide a successful turnkey project concept, usually in form of a manual.•He coordinates the players of the system: franchisor, franchisees, donor and recipients.•He is responsible for the quality management of the system.•Hemustensuretheeconomicefficiencyofthesystem.•

The franchisor must ensure an exchange of know-how within the network:He needs to offer guidelines and standards for franchisees.•He must provide initial and advanced training, support and consulting.•He is responsible for system development.•He is responsible for research and development of the services.•He must provide franchisees with project know-how, for example, in the form of a manual.•He has to offer a framework that encourages communication among franchisees.•The franchisor must provide central services:•He must analyse the market and environment and inform franchisees about relevant developments.•He is responsible for coordinating national and regional marketing.•Hemustcoordinatethelogistics,finance,anddistribution,etc.ofthesystem.•

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SummarySocial Franchising involves the purchase of a business model (a franchise) which operates using a successful, •established brand and proven operating system for an upfront charge.Social franchising means using and developing the franchising method to achieve social goals. It is about •spreading experience from successful social enterprises so that more people become employed.In social franchising, an important aspect is training as a source of support for entrepreneurs. Training, forms •of management and routines are designed so they empower the employees.Socialfranchisingcanbedefinedasthe“adaptedusageoftechniquesfromcommercialfranchisingforprojects•whichbenefitthesocialaimsofthenon-profitsector.Licensing usually involves being granted a license to provide a service or sell a product, rather than an entire •business format or system. The relationship between a licensing organisation and licensee is also looser than its franchising equivalent.The primary difference between social franchising and commercial franchising is very similar to the difference •betweensocialenterpriseandcommercialenterprise:thattheaimsarenotpurelyfinancial(tomakeprofits),but also social (and/or environmental).Commercial franchising is often viewed by mainstream banks as less risky and a safer option for investment, •because the business model is proven and there will often be other franchisees as direct evidence of that fact.The most obvious way a franchise network differs from other forms of business association is in the use of a •common name or brand.The core components of social franchising are: Social (value): Building social capital delivering public services •expanding community enterprise, Business (sustainability): Commercial disciplines sustainable income generation best value and values, franchising (replication): Trading in successful business formulas delivering social improvements capturing what works with sound ethics.In return for the right to use the turnkey concept, social franchisors have the right to monitor franchisees and to •takeanyactiontoensuresystemcompliancethateffortsaremadeandthatfranchiseeshavesufficientlyhighquality standards.Followingarethedutiesofsocialfranchisor:Thefranchisormustensureperformanceandthefulfilmentofthe•social mission of the system, The franchisor must ensure an exchange of know-how within the network, The franchisor must provide central services.

ReferencesProf. Dr. Ahlert, D. & Dr. Ahlert, M., 2008, • Social Franchising, Bundesverband Deutscher Stiftungen.Volery, T. & Hackl, V., • A promise of social Franchising as a model to achieve social goals, University of St. Gallen.Firestone, R. & Charman, N., 2011. • Video: Social Franchising and Health, [Video Online] Available at: <http://www.youtube.com/watch?v=9mZAjjB0mdY > [Accessed 10 May 2012].Sir Feachem, R., 2012.First Global Conference on Social Franchising Video, [Video Online] Available at <http://•www.youtube.com/watch?v=UjRDgIzgcpc> [Accessed 10 May 2012].Social Franchising• , [Online] Available at: <http://www.socialpioneers.com/what-we-do/social-franchising/> [Accessed 10 May 2012].Temple, N., 2011, • The Social Franchising Manual, [Online] Available at: <http://www.socialenterprise.org.uk/uploads/files/2011/11/social_franchising_manual.pdf>[Accessed10May2012].

Recommended ReadingKickul, J. & Lyons, T., 2012, • Understanding Social Entrepreneurship, 1st ed., Routledge.Cross, R. & Thomas, R., 2009, • Social Networks, 1st ed., Jossey-Bass.Birkeland, P., 2004• , Franchising dreams, 1st ed., University of Chicago Press.


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Self AssessmentSocial franchising means using and developing the franchising method to achieve _______ goals.1.

universala. personalb. socialc. publicd.

Whatofthefollowingisdefinedaslicensing?2. It usually involves being granted a license to provide a service or sell a product, rather than an entire business a. format or system.Discloser statementb. A contractual agreement joining together two or more parties for the purpose of executing a particular c. businessundertaking,oftenforafiniteperiod.Anagreementorarrangementinwhichtwoormorepartiesagreetoworktogetherformutualbenefitortod. advance their interests.

Themostcommonmodelinsocialfranchisingisforanon-profitorganisationtoactas________.3. distributora. franchisorb. franchiseec. social workerd.

Which of the following statements is false?4. Initiativesareoftensetupwithaspecificgeographicfocusinmind.a. Operating under different names, the various units in a social franchise system are perceived as one b. organisation.Monitoring and evaluating franchisee performance is important, because of the risk of negative c. reputation. Standardisation is a core element of a social franchise system.d.

Which of the following statement is true?5. The franchise is required to precisely define the social mission as well as medium and long-term a. objectives. The franchise is responsible for coordinating national and regional marketing.b. Commerce franchisors have the right to monitor franchisees and to take any action to ensure system c. compliancethateffortsaremadeandthatfranchiseeshavesufficientlyhighqualitystandards.Afranchisecanonlybedevelopedwherethereexistssufficientlocalcapacitytobuildandmanagealarged. organisation,workinginaneffectivelyfor-profitmanner.

_________ franchising can be understood as contract-based cooperation of decentralised entrepreneurial units 6. with a central support unit, uniform quality standards and supported by a common philosophy

Sociala. Commerceb. Internationalc. Masterd.

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Thefranchisorreceivesfeesfromthe_________whichareusuallydirectlyrelatedtothefinancialsuccessof7. that franchise

franchiseea. objectb. franchisec. ownerd.

Social franchisors may be more likely to place an emphasis on the _____ and _____that underpin their approach, 8. and make this a key part of the selection criteria and training.

franchise and franchisora. profitandlossb. value and culturec. owner and consumerd.

Itisimportantforthe________tomonitorservicequalitysinceitisdifficultforpatientstoaccuratelyassess9. the quality of the healthcare received.

franchisora. ownerb. customerc. social workerd.

_______________is a core element of a social franchise system.10. Standardisation a. Licensingb. Monitoringc. Evaluatingd.


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Case study I

McDonald’s Restaurants WhentheMcDonaldbrothers,DickandMacopenedtheirfirstrestaurantin1940inSanBernardino,California,they could never have imagined the phenomenal growth that their company would enjoy. From extremely modest beginnings, they hit on a winning formula selling a high quality product cheaply and quickly. However, it was notuntilRayKroc,aChicagobasedsalesmanwithaflairformarketing,becameinvolvedthatthebusinessreallystarted to grow. He realised that the same successful McDonald’s formula could be exploited throughout the United States and beyond.

This case study examines the success of franchising and investigates the special three way relationship that exists between the franchisee, the franchisor and the suppliers.

McDonald’s views the relationship between franchisor, franchisee and supplier to be of paramount importance to the success of the business. Ray Kroc recognised the need very early on for franchisees that would dedicate themselves to their restaurants. He wanted people who had to give up another job to take on the franchise venture, relying on their franchise as their sole source of income and would therefore be highly motivated and dedicated. Consequently, McDonald’s will not offer franchises to partnerships, consortia or absentee investors. The initial capital has to come from the franchisee as a guarantee of their commitment. The selection process is rigorous to ensure that McDonald’s only recruits the right people.

FranchisingMcDonald’s is an example of brand franchising. McDonald’s, the franchisor, grants the right to sell McDonald’s branded goods to someone wishing to set up their own business, the franchisee. The licence agreement allows McDonald’s to insist on manufacturing or operating methods and the quality of the product. This is an arrangement that can suit both parties very well.

Under a McDonald’s franchise, McDonald’s owns or leases the site and the restaurant building. The franchisee buys thefittings,theequipmentandtherighttooperatethefranchisefortwentyyears.Toensureuniformitythroughoutthe world, all franchisees must use standardised McDonald’s branding, menus, design layouts and administration systems.

Selling a well established, high quality productIn this case, the product is recognised all over the world. A large proportion of new businesses and new products fail, often due to costs of the research and development needed. The McDonald’s formula, however, has been successfully tried and tested. Ray Kroc’s insistence that all McDonald’s outlets sold the same products and achieved the same quality has led to a standardisation of the process and great attention to detail. The cooking processes in McDonald’srestaurantsarebrokendownintosmall,repetitivetasks,enablingthestafftobecomehighlyefficientand adept in all tasks.

This division of labour and the high volume turn over of a limited menu allows for considerable economies of scale. For the franchisee, this can considerably reduce the risk of setting up own business. There is no need to develop the product or do expensive market research. Nor will they have sleepless nights wondering if the product will appeal to the consumer. McDonald’s carries out regular market research.

Intensive initial trainingEvery franchisee has to complete a full-time training programme, lasting about nine months, which they have to fund themselves. This training is absolutely essential. It begins with working in a restaurant, wearing the staff uniform and learning everything from cooking and preparing food to serving customers and cleaning.

Further training at regional training centres focuses on areas such as business management, leadership skills, team building and handling customer enquiries. The franchisee will have to recruit, train and motivate their own workforce, sotheymustlearnalltheskillsofhumanresourcemanagement.Duringthefinalperiod,thetraineelearnsabout

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stockcontrolandordering,profitandlossaccountsandthelegalsideofhiringandemployingstaff.Consequently,no McDonald’s franchisee would have to ask a member of his or her staff to do something that they couldn’t do themselves. Knowing this, can also be a powerful motivator for the staff.

Continuous supportMcDonald’s commitment to its franchisees does not end with the training. It recognises that the success and profitability ofMcDonald’s is inextricably linked to the success of the franchises.Ahighly qualified teamofprofessional consultants offer continuous support on everything from human resources to accounting and computers. Thefieldconsultantcanbecomeavaluedbusinesspartnerandasoundingboardforideas.

Benefit from national marketing carried out by McDonald’sThe phenomenal growth of McDonald’s is largely attributed to the creation of its strong brand identity. McDonald’s trademark, the Golden Arches, and its brand name has become amongst the most instantly recognised symbol in the world.

In the UK, McDonald’s recognised the need for a co-ordinated marketing policy. In order to be successful, an organisationmustfindoutwhatthecustomerswant,developproductstosatisfythem,chargethemtherightpriceandmake the existence of the products known through promotion. Cinema and television advertising have played a major part in McDonald’s marketing mix. McDonald’s is now the biggest single brand advertiser on British television.

Radioandpressadvertisementsareusedtogetspecificmessagesacrossemphasisingthequalityofproductingredients.Promotional activities, especially within the restaurant, have a tactical role to play in getting people to return to the restaurantsregularly.Allfranchiseesbenefitfromanynationalmarketingandcontributetoitscost,currentlyafeeof 4.5 percent of sales.

ForecastingAnother major problem for a new business is predicting how much business it might enjoy, running the risk of eithercashflowproblemsorthedifficultiesassociatedwithovertrading.Theturnoverandprofitfromanyoutletwillvary, depending on a wide range of internal and external variables. Each franchisee is expected to take a positive approach to building up sales, although an average rate of return of over 20 percent is generally expected over the lifetime of the franchise.

The advantages for the franchisorMcDonald’srecognisesthebenefitsofafranchisedoperation.Franchisesbringentrepreneurs,fullofdeterminationand ideas, into the organisation. Franchising enables McDonald’s to enjoy considerably faster growth and the creation ofatrulyglobalbrandidentity.Themorerestaurantsthereare,themoreMcDonald’scanbenefitfromeconomiesof scale.

Onthefinancialside,McDonald’sreceivesamonthlyrent,whichiscalculatedonaslidingscalebasedontherestaurant’s sales, i.e. the higher the sales, the higher the percentage and visa versa. There is also a service fee of 5 percent of sales in addition to the contribution to marketing. The purchase price of a restaurant is based on cash flowandisgenerallyabout£150,000upwards.Thenewfranchiseeisexpectedtofundaminimumof25percentofthis from their own unencumbered funds.

Dynamic innovationWhilst the franchisees have to agree to operate their restaurants in the McDonald’s way, there still remains some scope for innovation. Many ideas for new items on the menu come from the franchisees responding to customer demand. Developing new products is crucial to any business, even one which has successfully relied on a limited menu for many years. Consumer tastes change over time and a company needs to respond to these changes. Innovation injects dynamismandallowsthefirmtoexploitmarketspreviouslyoverlookedorignored.


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The three-legged stool - the suppliersA third group of stakeholders, critical to the success of the franchise operation, is the suppliers. As McDonald’s considers the quality of its products to be of absolute importance, it sets standards for suppliers that are amongst the highest in the food industry. The supplier’s work closely with McDonald’s to develop and improve products and production techniques. This close interdependency is described as a three-legged stool principle, and involves McDonald’s, the franchisees and the suppliers. Suppliers that are able to meet the quality standards set down by McDonald’s have been able to share in the growth and success of McDonald’s.

(Source: The route to fast food franchising: case study [Online] Available at<http://businesscasestudies.co.uk/mcdonalds-restaurants/the-route-to-fast-food-franchising/conclusion.html> [Accessed 14 May 2012]).

QuestionsEnlist the advantages in buying a Mc Donald’s franchise.1. AnswerMcDonald’s, the franchisor, grants the right to sell McDonald’s branded goods to someone wishing to set up their own business, the franchisee. Following are the advantages of buying a franchise named Mc. Donald’s.Being theirownbossSellingawellestablished,highqualityproductIntensiveinitialtrainingContinuoussupportBenefitfrom national marketing carried out by McDonald’s.

The phenomenal growth of McDonald’s is largely attributed to the creation of its strong brand identity. 2. Justify.AnswerIn this case, the product is recognised all over the world. A large proportion of new businesses and new products fail, often due to costs of the research and development needed. The McDonald’s formula, however, has been successfully tried and tested. A brand is a name, term, sign, symbol or design, (or a combination of these) whichidentifiesoneorganisation’sproductsfromthoseofitscompetitors.McDonald’sisanexampleofbrandfranchising. They’ve got massive international exposure, a relatively safe business, only moderate leverage, extremely shareholder friendly management, and a good dividend yield.

How is the future business estimated in Mc Donald’s?3. AnswerThebusinessisforecastedbyrunningtheriskofeithercashflowproblemsorthedifficultiesassociatedwithovertrading.Theturnoverandprofitfromanyoutletwillvary,dependingonawiderangeofinternalandexternalvariables. Each franchisee is expected to take a positive approach to building up sales, although an average rate of return of over 20 percent is generally expected over the lifetime of the franchise.

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Case study II

Barka- Social development, Integration and Entrepreneurship

At the time of writing, there are just fewer than 60 social franchises in Europe employing over 13,000 people. This is one of a number of case studies produced by ESFN to demonstrate the impact social franchises are having acrossEurope,sharelearningandraisetheprofileofthisimportantapproachtogrowinganddevelopingsocialcooperatives/enterprises.

BarkaThe Barka Foundation is a non-governmental organisation; its purpose is social development of marginalised groups, giving them a chance to rebuild their lives by creating a program of mutual assistance, education, entrepreneurship and development of civil society. Barka has focused its efforts on the new accession countries and the countries which have been regaining independence.

The Foundations aim is to create support systems for integration of socially marginalised groups, which consists of programs covering around 5 000 people per year (this number is constantly growing). The main purpose of the Barka Foundation development program is to create a pro-active social system in Poland. But the demand for their knowledge and business models had increased in the last years and now Barka is expanding in Europe.

Spreading the business to other countriesSince 2007 when Barka started in London, they have been approached several times by different actors in large European cities. Today Barka is in the process of starting centres in Stockholm, The Hague and Utrecht, Berlin and Bremen.

Barkafirstadoptedafranchisemodelin1989–2008withinPolandbyestablishing20associationsand20socialcooperatives which have been assembled into a network.

Nowadays Barka has been working in 40 sub-regions of Poland on a franchising basis creating partnerships with councils, entrepreneurs as well as organisations in the government projects.

Key success factors of the business ideaThe Barka organisation is today growing to become an important player within the area of”social work” in Europe. There are a lot of successes factors, key success factors are among others:

Methodology, in theory and practice, has been developed under a long time by professionals.•Knowledge about vulnerable and excluded people is profound within the Barka organisation.•Working models and business models has been developed and proven since the start•1989.•Top management, including the Sadowska family, is very dedicated and professional.•

The services provided by Barka UK are as follows:Voluntary returnBarka Leaders/Assistants make contact with Eastern European migrants who have become homeless to offer them the opportunity to return home. They support the individuals in their journey from exclusion to inclusion through an organised program of reconnection.

”During outreach on the streets, Barka Leaders & Assistants invite Eastern European rough sleepers to day centres for the homeless. Here they share stories of their path from exclusion to integration.

Through building relationships based on trust, they encourage and prepare clients for reconnection. Barka also helps people to obtain passports and transportation. When appropriate, Barka support the individuals to reconnect with their communities and families with the help of the local organisations.


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Social economy centreThe goal with this programme is to guide people out on the working market and help them gain and maintain employment in the host country. This programme targets people who are haven’t yet hit the bottom of human existence and do not have to return home for rehabilitation. Few of the people that Barka staff meets within the Social Economy Centre are ready to undertake employment at once. The majority however, needs an on-going work with therapists, job advisor, enterprise development worker and psychologist as well as accessing support groups such as Alcoholics Anonymous to prepare for employment. The Barka team at the Social Economy Centre are in the process of establishing the model for employment support centres for migrants/refugees.

Education services & study visitsDuring the last years Barka has drawn a lot of interest on the working models and frameworks used in the integrated programmes within Barka. More than 200 study groups has visited Barka programmes in Poland to learn more about the success criteria’s when working with people guiding them back to a life within the society and back to the labour market.

Within the Barka concept, professionals can now receive a-few-week- formation-training in”Barka models” of social work.

Services provided by the franchisorBarka Foundation cooperates with Barka UK and its other franchisees in every step of the business development. Sincestartingnewbranchoffices/franchiseesisanewconceptforBarka,thebusinessmodelisnotfullydeveloped,but Sadowska, the chief executive at Barka UK is very aware that establishing a new franchisee in a new place and in a "new” country is very time consuming and takes a lot of work. Today Barka has a lot of professional and skilled people within the organisation, people who can transfer the working models to a franchisee.

Usually there is a request/invitation from a local civil social organisation – like the City Mission in Hamburg - and a local authority, which can provide local resources/people at start up. Barka can provide the working models and a management with work experience from the work done in Poland and the UK. Barka also provides training and the network of local Barka schools, centres, enterprises, cooperatives in Poland, UK, Lithuania and the Czech Republic, The Ukraine and Romania.

(Source: Barka- Social development, Integration and Entrepreneurship, [pdf] Available at: <http://www.socialfranchising.coop/uploaded/Barka_ESFN_Case_Study_6.pdf>[Accessed 21 May 2012]).

QuestionsDefinesocialfranchisingusingtheabovecasestudy.1. Social attributes should be considered while establishing a franchise in multiple countries. Justify.2. Laws and regulations in social franchising vary in different countries.Justify3.

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Case Study III

The International Franchising

This client was a small, family run business that was a victim of its own success and made a classic franchising mistake. Fortunately we were able to put things right and guide them to great success.

Customers of the business can make personalised jewellery inspired by their children. It is a charming and highly popular product which instantly hit the mark with the public. It was inevitable that at some point someone from overseas would see the concept and ask if they could franchise the business in their country.

Many businesses get into international franchising via such ad hoc approaches and they often end in disaster because ofinsufficientpreparation.Aswithanyformoffranchising,internationalfranchisingshouldbebasedonasoundfinancialandoperatingmodelthatcanberolledoutinmultipleterritories.

The owners were so excited that someone on the other side of the world wanted to bring the concept in to their country that they had a master license agreement hastily put together and dived headlong into international franchising. At the time the company contacted us, things were going wrong but they were getting more enquiries to franchise into other countries.

We worked with the client to develop a properly structured international offering, restructured the existing international operation and helped them roll out an international franchise programme based on the new model. The client has since achieved good international growth based on sound, sustainable franchising principles and even achieved recognition in the category “Best International Franchise”, coming second only to McDonalds. The lesson was that theclientwouldhaveachievedsuccessandtheassociatedfinancialrewardssoonerandavoidedtheinitialcostlymistakes if they had invested the necessary time and money in getting their international franchising package right inthefirstplace.Internationalfranchisingisveryexcitingandtheideaofspreadingyourbrandaroundtheworldis very attractive. Whilst we help our clients achieve this, we also have a great deal of experience in international expansion and bring an outside view and different perspective to the project.

This particular client in the domiciliary care market was seduced by the prospect of international growth. As requested, we worked with them to develop an international offering and operating structure. The client went on to recruit their firstinternationalfranchiseeandallwentwell.However,duringtheprocessitbecamecleartousthattheystillhadhuge potential for growth within the UK. After bringing this to their attention and helping them review their overall business growth strategy, they decided to concentrate on domestic growth in the short term.

There was no pressing strategic reason for the company to achieve international growth and the “Low hanging fruit” wascertainlytheUKmarketwhichofferedthemostobviousroutetoquick,profitablegrowth.However,theywerenow in the nice position of knowing that when the next good enquiry from an international market came, they had the structure and documentation in place to proceed in the right way with a now tried and tested system.

Our long experience of working with businesses of all sizes means we have more to offer our clients than just producing documentation. We become part of the strategic planning process, offer new ideas and contribute in many ways to helping our clients achieve their overall goals.

(Source: The International Franchising [Online] Available at: <http://www.theinternationalfranchisingcentre.com/international_franchising/Case_Studies.php> [Accessed 21 May 2012]).

QuestionsInternational franchising is a task that needs to work with best interest. Explain.1. Is branding a problem in international franchising?2. Above example can be converted into international social franchising, mention the aspects.3.


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References 2009. Franchising-Entrepreneurial Opt Q&A, [Video Online] Available at <http://www.youtube.com/•watch?v=SCW9nf74Ku0> [Accessed 9 May 2012].2011. • Multiunit franchise conference, [Video Online] Available at: <http://www.youtube.com/watch?v=5V5jtEC51Cg> [Accessed 3 May 2012].Allen, G., 2011.• Franchise Broker, [Video Online] Available at <http://www.youtube.com/watch?v=hFqblXZEu-w&feature=related> [Accessed 2 May 2012].Andrew, O., 2011. What is the best way to buy a franchise? [Video Online] Available at: <http://www.youtube.•com/watch?v=SRrvUXLoHGM&feature=related> [Accessed 9 May 2012].Archar, D., 2011. • Free Franchise Seminars sponsored by Lloyds TSB, [Video Online] Available at: <http://www.youtube.com/watch?v=7fplEaFutZs> [Accessed 24 April 2012].Asbil, R. and Goldman, S., 2001. • Fundamentals of International Franchising, American Bar Association.Barkoff, R. M. & Selden, A. C., 2008. • Fundamentals of Franchising, 3rd ed., American Bar Association.Beshe, B., • An Introduction Franchising, [pdf] Available at: <http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/Intro%20to%20Franchising%20Student%20Guide.pdf> [Accessed 24 April 2012].Beshe, B., • An Introduction Franchising, [pdf] Available at: <http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/Intro%20to%20Franchising%20Student%20Guide.pdf> [Accessed 25April 2012].Bleyer, S., 2009• , International social Franchising, Community wealth ventures Inc.Campbell, D. & Netze, A., 2007. • International franchising, Kluwer Law International.Coldwell, D. And Williams, A., • Franchise law [pdf]Available at: <http://www.haynesboone.com/files/Publication/9d6259b1-357f-4a92-8823-0391c371fe6b/Presentation/PublicationAttachment/7c00f7e5-8c26-4b11-9ead-1114e670ba9e/Franchise_Law_SMU.pdf> [Accessed 29 April2012].Deering, J., 2011.• Jim Deering on multiunit franchise operators, [Video Online] Available at: <http://www.youtube.com/watch?v=3EZ3074GSUo> [Accessed 3 May 2012].Dr Michael, S. C., 2011.• The Ins and Outs of Franchising, [Video Online] Available at <http://www.youtube.com/watch?v=EPI6ef29CDE> [Accessed 24 April2012].Firestone, R. & Charman, N., 2011. • Video: Social Franchising and Health, [Video Online] Available at: <http://www.youtube.com/watch?v=9mZAjjB0mdY > [Accessed 10 May 2012].Franchise buyers guide• , [Online] Available at : <http://www.franchising.com/franchisebuyersguide/> [Accessed 30 April 2012].Franchise know how• , [Online] Available at: <http://www.franchiseknowhow.com/operations/> [Accessed 30 April 2012].Goldstein, J., 2012. • Franchise law obligations, [Video Online] Available at: <http://www.youtube.com/watch?v=I8FfbDrBNnc> [Accessed 29 April 2012].Gray, D., 2008, • Franchise legal consultants Darwin gray solutions [Video Online] Available at: <http://www.youtube.com/watch?v=8eK7DxfThoE> [Accessed 29 April 2012].Grunhagen, M., 1998• , Multiunit franchising, [pdf] Available at: <http://www.sbaer.uca.edu/research/asbe/2001/06.pdf > [Accessed 3 May 2012].Gupta, A., 2012.The Indian education council, [Video Online] Available at <http://www.youtube.com/•watch?v=8CemMXmp51E> [Accessed 30 April2012].Hussain, S., 2012,• Franchise India, 9th International Franchise & Retail Show 2011: Part I, [Video Online] Available at: <http://www.youtube.com/watch?v=nxJcyOMo0W8> [Accessed 8 May 2012].Indian Franchisee: An outlook, Indian franchise association.•

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Kalinins, A. & Lafontaine, F., • Characteristics of multiunit ownership in Franchising, [Online] Available at: <http://ideas.repec.org/p/nbr/nberwo/5859.html> [Accessed 3 May 2012].King, P., 2011, • VR business brokers franchise Brokerage for Business Sales and Mergers & Acquisitions, [Video Online] Available at : <http://www.youtube.com/watch?v=bwn7NJzNy6s&feature=related> [Accessed 2 May 2012].Libava, J., • All about franchising, [Online] Available at: <http://www.biz2credit.com/b2c-ebook-franchise.pdf> [Accessed 2 May 2012].Libava, J., • Multiunit Franchising: What you need to know, [Online] Available at: <http://smallbiztrends.com/2009/10/multi-unit-franchising-what-you-need-to-know.html> [Accessed 3 May 2012].Maddok, T., 2011, • Tony Maddock - 9th International Franchise and Retail Show 2011, [Video Online] Available at: <http://www.youtube.com/watch?v=Zcwq_IFYU6c> [Accessed 8 May 2012].Meany, J., 2004, • How to buy a franchise, Sphinx publishing.Mendelsohn, M., • A guide to Franchising, [pdf] Available at: <http://books.google.co.in/books?id=v_RandLSSDAC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false> [Accessed 25 April2012].Mendelsohn, M., A guide to Franchising, [pdf] Available at: <http://books.google.co.in/books?id=v_RandL•SSDAC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false> [Accessed 25 April2012].Multiunit owners study• , 2002, IFA Publications.Murphy, K. B., 2006. • The Franchise Handbook: A Complete Guide to All Aspects of Buying, Selling Or Investing in a Franchise, Atlantic Publishing Company.Prof. Dr. Ahlert, D. & Dr. Ahlert, M., 2008, • Social Franchising, Bundesverband Deutscher Stiftungen.Ramco, O., 2011. • Franchise operations management, [Video Online] Available at: <http://www.youtube.com/watch?v=6Oryu5j_kYE > [Accessed 30 April 2012].Sherman, A. J., 2011. • Franchising & Licensing, 4th ed., AMACOM Div American Mgmt Assnn.Sir Feachem, R., 2012.• First Global Conference on Social Franchising Video, [Video Online] Available at <http://www.youtube.com/watch?v=UjRDgIzgcpc> [Accessed 10 May 2012].Social Franchising, [Online] Available at: <http://www.socialpioneers.com/what-we-do/social-franchising/> •[Accessed 10 May 2012].Sun, S., 2011, • Grow Smart Risk less, Green book press.Temple, N., 2011, • The Social Franchising Manual, [Online] Available at: <http://www.socialenterprise.org.uk/uploads/files/2011/11/social_franchising_manual.pdf>[Accessed10May2012].Vevstad, V., • International Expansion [Online] Available at: <http://www.internationalexpansion.org/international-franchising/international-franchising/> [Accessed 8 May 2012].Volery, T. & Hackl, V., • A promise of social Franchising as a model to achieve social goals, University of St. Gallen.Wild, D• ., How to Franchise: Franchise sales, [Online] Available at: <http://www.2012businessopportunities.com/component/content/article/1-latest-news/51-how-to-franchise-franchise-sales> [Accessed 2 May 2012].Wright, R. & Relf, S., • International Franchising, [pdf] Available at: <http://www.michbar.org/journal/pdf/pdf4article945.pdf> [Accessed 8 May 2012].Zeidman, P., • Franchise [pdf] Available at : <http://www.franchise.org/uploadedFiles/Franchise_Industry/International_Development/Resources/India%20laws.pdf> [Accessed 29 April 2012].


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Recommended ReadingAlon, I., 2012, • Global Franchising: Operations and management, 1st ed., FT press.Bennet, J., 2008,• Franchise times, Sterling.Better business bureau, 2007, • Buying a Franchise, Planning shop.Birkeland, P., 2004, • Franchising dreams, 1st ed., University of Chicago Press.Charles. M., • Business Franchise Secrets, Kindle publication.Cross, R. & Thomas, R., 2009. • Social Networks, 1st ed., Jossey-Bass.Diane, H. & Alon, I., 2005• , International franchising in Industrialized markets, CCH Inc.Genn, A., 2008, • So you want to Franchise your business? 1st ed., Entrepreneur Press.Green, S. and Dawn, R., 2009• , Law and order, Benbella books.Hero, M., 2010, • International Franchising, Globe Law and Business.Judd, R. J. and Justis, R.T., 2007. • Franchising, 4th ed., Custom Publishing.Judd, R. J. and Justis, R.T., 2007. • Franchising, 4th ed., Custom Publishing.Kestenbaum. H., 2008, • Franchise Your Business, 1st ed., Entrepreneur Press.Keup, E., 2007. • Franchise Bible, 6th ed., Kindle publication.Kickul, J. & Lyons, T., 2012, • Understanding Social Entrepreneurship, 1st ed., Routledge.Konigsberg, A., 1991, • International Franchising, Juris Pub Inc.Kwansa, F. & Parsa, H., 2002. • Quick service restaurants, franchising and multiunit chain management, 4th ed., Routledge.Lafiura,D.,2011,• Franchise litigation handbook, American bar association.Mathew, J., Debolt, D. & Prevical, D., 2011. • Street Smart Franchising, 2nd ed., Entrepreneur pressPerkins, E., 2008. • Fundamentals of franchising your business, Perkin law PLLC.Seid, M. & Dave, T., 2006. • Franchising for dummies, 2nd ed., Wiley Publishing.Sherman, A., 2011, • Franchising and Licensing, 4th ed., Amacom publication.Tomzack, M & Bond, R., 1999, • Tips and Traps when buying Franchise, 2nd ed., Source book Publication.Windspreger, J., 2004, • Economics and networks of Franchise networks, 1st ed., Physica-verlag HD.

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Self Assessment Answers

Chapter Id1. b2. a3. c4. a5. a6. a7. a8. c9. a10.

Chapter II c1. a2. b3. d4. a5. a6. a7. b8. a9. a10.

Chapter IIIb1. a2. b3. d4. a5. a6. c7. b8. c9. a10.

Chapter IVa1. a2. c3. a4. a5. d6. b7. a8. a9. a10.


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Chapter Va1. d2. c3. a4. c5. a6. b7. c8. a9. a10.

Chapter VIa1. a2. a3. d4. c5. b6. a7. b8. c9. a10.

Chapter VIIa1. b2. c3. b4. d5. b6. a7. a8. d9. b10.

Chapter VIIIc1. a2. b3. b4. d5. a6. a7. c8. a9. a10.

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Franchise Management and Operationsjnujprdistance.com/assets/lms/LMS JNU/MBA/MBA... · Franchise Management and Operations 2/JNU OLE 1.1 What is a Franchise? A franchise is the license