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
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.
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.