FRANCHISING: AN EXPLANATION

The earliest forms of franchising date back to feudal times when English monarchs gave their nobles the rights to levy and collect taxes in return for the nobles providing armies. A portion of the taxes collected stayed with the noble - the balance went to the monarch.

 

The earliest known commercial franchise was developed in the United States shortly after the American Civil War. The Singer Sewing Machine Company licensed independent "peddlers" in horse-drawn wagons to sell machines in specific areas. This early franchise was followed in the first years of the twentieth century by such present-day giants as Coca-Cola, General Motors and Ford. In each case, these companies wished to secure distribution at the local level through businessmen who were well-known in their communities and who had sufficient capital to fund the business.

"The independent businessman

provides his capital, his reputation in

the local community, and his initiative

and diligence."

These larger companies offered the independent businessman a well-known and respected trademark as well as management assistance and know-how.

In return, the independent businessman provided his capital, his reputation in the local community and his initiative and diligence.

This combination of talents served, in great part, to make the soft drink bottling and automobile industries the successful giants they are today.

Present-day Franchising

Today, franchising occurs in a multitude of industries. Franchisors (companies granting rights to their businesses) and franchisees (the independent businessmen) are in partnership together in industries as diverse as retail stores, motels, automotive repair and service centres, restaurants and take-away foods, real estate agencies, boutiques, men's and women's hairdressing salons, computer stores, accounting services and a multitude of other businesses. Franchising has special relevance to service industries. And, with the world-wide growth of disposable income, service industries are increasing. This increase will be accompanied by a a need for integrated operations with personal service. Franchising can help fulfil this need.

What is Franchising?

In today's concept of franchising, a franchisor grants to a franchisee the right to sell the franchisor's product or provide the franchisor's service using

 

the methods and marketing procedures laid down by the franchisor. In essence, the franchisor is selling a proven business package to the franchisee who then duplicates the concept.

Franchising contains benefits for both parties: the franchisor achieves rapid expansion with limited capital outlay; the individual (franchisee) benefits by owning and operating a business which utilises proven methods and procedures; the franchisee's risk is considerably reduced because the franchisor makes his expertise available in a multitude of areas. However, the main ingredient in a franchisee's success is that ethical franchisors will screen him carefully, thus enhancing the chance of success through only selecting suitable franchisees.

By selling a product or providing a service which has already gained market acceptance, the franchisee is usually assured of an immediate market, thus avoiding the pitfalls and growing pains that are inherent in establishing a completely new business.

Why Should a Company Franchise?

Franchising offers substantial benefits to both growing and established companies. Its benefits have been proven over many years. Some of the benefits of franchising are listed below:

 

 

 

          Franchising provides rapid expansion with limited capital. Generally the franchisee provides the bulk of the capital and the franchisor provides the image and know-how.

 

          Franchising is a sophisticated form of capital raising. No other form of capital raising allows a business to expand without giving up equity, paying interest, making lease payments or taking on some other type of contingent financial liability.

 

          Franchising gives the franchisor motivated, involved and committed people at the outlet level - individuals who have their time, their money and their prestige invested in their new venture.

 

          Franchised chains require far less central management than company- owned chains. Franchisees are often well-known in their communities. An operator who knows local conditions - and is known - invariably gets his business off the ground more quickly.

       

Why Become a Franchisee?

Operating a franchise can be a profitable and challenging way of owning your own business with a number of unique advantages (and disadvantages).

 

The Advantages

 

 Business experience is not essential as the franchisor usually provides training.

 

 Investment risk may be lower due to established name, market research and operating controls.

 

 Immediate benefit from goodwill of franchisor's name, product and service.

 

 Facilities are usually designed by franchisor; avoids functionally or aesthetically poor facilities.

 

 Can benefit from the franchisor's volume buying power.

 

 Management and marketing advice is usually available on a continuing basis.

 

 Benefits of regional and national promotion and publicity.

 

 Assistance in obtaining favourable rent and leasing conditions.

The Disadvantages

 

 Operating under controls imposed by franchisor.

 

 Franchisor usually charges a royalty or service fee calculated as a flat fee or as a percentage of franchisee's gross sales.

 

 Usually supplies, with specified minimum quantities, must be purchased from franchisor.

 

 Lack of freedom in meeting local competition as franchisee has difficulty in breaking away from national or regional price structures of franchisor.

 

 Must share burden of franchisor's marketing mistakes regardless of your own efforts.

 

 Aims and objectives of franchisor may not be compatible with those of the franchisee.

 

 Assistance promised by franchisor may not materialise.

 

 Threat of termination by franchisor may be used as a means to make franchisees accept decisions which they see as disadvantageous.

 

 

 

The Basic Ingredients of Franchising

The tie between the company (franchisor) and the independent businessman (franchisee) is usually through a franchise agreement. This is a detailed document subject to Companies and Securities Regulations, which clearly sets out the conditions under which the franchisor agrees to grant a franchise to the franchisee. The agreement also details the obligations of both parties. The franchisee usually pays the franchisor a once-only initial fee (franchise fee) for the right to franchise. This fee is basically a payment for the goodwill of the franchisor's name but it also covers expenses incurred by the franchisor in recruiting and establishing new franchisees.

Many franchise agreements call for the payment of a royalty or management service fee. This is a continuing ongoing payment for the advice and management assistance provided by the franchisor. It is usually assessed as a percentage of sales.

"The franchiser is selling a proven business package."

Often, franchisees are required to contribute to an advertising fund which provides funds to the franchisor to ensure that the franchised produce or service is adequately covered by advertising.

Franchisees receive thorough training in the franchisor's method and procedures. Detailed manuals are usually provided covering all aspects of the business including staff selection, salesmanship, accounting procedures and administrative procedures.

As well, franchisees receive continuing field back-up through regular visits by franchisor field representatives. During these visits, the franchisor is able to supply advice in areas such as marketing, training, new ideas, innovations and methods in the industry and business and personnel management.

 

Expert Advice is Essential

If you decide to buy a franchise, make sure you enlist the help of an independent expert adviser, especially before you sign any documents. Your adviser should be one who is experienced in dealing with franchising arrangements and also fully conversant with the relevant law, particularly trade practices legislation. Although you will have to pay for the advice, it will be well worth the expense.

The Excitement

Whether as a franchisor or franchisee, you can be part of a rapidly growing business world-wide. Franchise opportunities exist all round. Take these examples.

Franchising Private Ex-school Education

By 1990, the Institute of Reading Development, Inc. San Fransisco, anticipates having 300 franchisees sharing in one of the largest private reading schools in the United States. And the concept behind it applies just as validly in Australia. Only 25 percent of students who graduated from U.S. high schools last June could perform as well academically as the average high school graduate of 1964. The classes and family reading programme provide the perfect opportunity for entrepreneurs who would take great satisfaction from running a business that enables parents and children to reverse the tragic decline in reading skills.

American parents spend more than $U35 billion every year on the private education for their children and education services such as the Institute have grown by 850 percent in the past 15 years. This francise has huge potential.

Free Enterprise Post Offices

The US mail service - one of the country's limited nationalised operations - hasn't a very good public image, but one franchising company certainly has.

All over America, shops run by nongovernment employees are providing an alternative by selling stamps and acting as recipients of mail so that people get a better and quicker service.

One company, Mail Boxes Etc, based in San Diego, has more than 400 franchised outlets in 37 American States, making it the "biggest post office outside the Post Office".

Beer and Suds

A Texan has come up with the idea of making laundromats fun places and is offering franchises to his concept of Barwash

Patrons to Barwash enjoy the comfort of a licensed bar/cafe whilst their laundry is washing. They can also watch soap operas or football and have their clean clothing folded free of charge.

Bullet Stop

Another American is working on franchising the Bullet Shop which is already proving to be a great success in Atlanta.

The idea is that customers rent automatic weapons (eg submachine guns) and fire with live ammunition on supervised shooting lanes.

Home Cleaning Services

In 1973 American Leone Ackerly, mother of three, hired herself out as a cleaning lady to earn enough for a new car. She now drives a Jaguar XJ6 and oversees her Georgia-based maid-hire service with 900 employees in 24 States and annual revenue of more than $U9-million.

Fast Food Services

In you thought there was no room left in this area of business, this statistic * may give you food for thought.It is estimated that Australians spent$10 billion a year on meals eaten away from home, about 40 percent of total purchase of food. But, while Americans each eat 12 to 14 meals away from home, the Australian average is only four to five, an indication of potential growth.

 

 

Reprinted with permission: Business Directions Vol.1 I