What is meant by “franchising”?
The term “franchising” is a term that dates back to the post-Middle Ages/”Modern Times” and in that context referred to the granting, generally by a king or higher authority, of a right for instance to do commerce in a context in which this right was usually reserved to the higher authority, or to develop/colonise a territory which belonged to the State.
In a similar spirit which had its foundations in the privileged-founded regimes of those times in Europe, it meant the granting of an immunity from an obligation. To be granted a franchise was to be granted a liberty, meaning oftentimes an exemption from a restraint.
Since then and depending on the context, the term “franchise” in English has been used variedly but with very close meaning, although not always with great clarity. One hears of “business franchise” as one hears of “territorial franchise” such as in the film Star Wars.
As franchising has grown internationally, the term “franchise” has been adopted to indicate a business system composed of a brand name, a "system" or format implying the distribution of a product and/or service through a network. This system replicates itself with every new business partner (franchisee) that invests and becomes another member of the network. Interestingly, as cultures, market and social conditions differ, many aspects of business format franchising differ too. The term "franchising" in business evokes: brand name, replication of a system, expansion and network. In fact, it is a lot more complex.
In the context of modern commerce, franchising is a business model aimed at the distribution of goods and/or services based on the licensing of a brand, a set of intellectual property rights (the brand names, trademarks or trade names associated with the brand), a business format – bundled and sold as an asset. This business “kit” is sold by the franchisor – the founder of the system – to independent partners who each invest in this offer in order to operate the business opportunity for themselves and in respect of the prescriptions of the format.
The independent partners, the franchisees, together with the franchisor, form the franchise network.
The promotional slogan for such a business partnership is expressed by some as “being in business for yourself but not by yourself”.
“Business-format franchising” is a common term used for this form of commercial distribution.
Franchising has proven itself to be a powerful and efficient means of growing a business and of creating employment and wealth both at local and international level.
This comes from the distinct but combined roles of the franchisor and of the franchisees whose efforts together leverage the potential of the business concept.
In greater detail:
Franchising operates on the basis of a contractual agreement between two independent business parties, the franchisor and the franchisee, in which the franchisor grants the franchisee, for the term of the contract, the right to buy and operate the franchisor’s branded and formatted business system for a fee and according to the prescribed rules and procedures developed for the system by the franchisor.
Hence the term most commonly used to refer to this type of commercial relationship: “business format franchising”.
The franchisor’s “business format franchise” necessarily comprises the following 5 essential* elements:
1. A brand name (registered as a brand name and/or a trademark, etc.) which serves as the umbrella sign for network, and a rallying sign for the consumer and public),
2. a licence to the use the brand, granted to the franchisee by the franchisor,
3. a business system – a business concept formatted into a duplicable value “package” founded on the franchisor’s tested Know How and his continued assistance during the term of the agreement),
4. payment by the franchisee of a financial consideration, either in a direct form, such as an entrance fee and/or continuing fee (“royalty”), and/or an indirect form such as a mark-up on supplied goods,
5. the investment in, and ownership of, the assets of the franchised business by the franchisee
(* source: Martin Mendelsohn, “Franchising Law”, Kluwer, 2004)
A mother company may choose to operate its network entirely as a franchise, or combine franchising with company-owned outlets.
Franchisor and franchisee each have a distinct but complementary role to play in the optimisation of the efficiency and results of the franchise business.
A franchisor seeks to duplicate, as many times as possible, a tested and successful business system with a network of independent partners, the franchisees. As stated above, each franchisee is the owner of his franchised business, and is legally and financially independent of the franchisor and of the other franchisees in the network.
During the term of the franchise contract, the franchisor imparts his know-how and assistance to the franchisees with the purpose of increasing their opportunity for running their franchised business efficiently and profitably.
A franchisee’s principal motive in joining a franchise network is to be in business “for yourself, but not by yourself” and thus improve his chances of success as an independent entrepreneur by having the back-up of a tested system. This increases survivability in the first years of setting up the franchised business, as well as greater chances of rapid expansion since the franchisee concentrates principally on his specific role within the franchise.
The franchisee’s benefits over an isolated independent non-franchised entrepreneur are the following. He
buys into a brand-name,
has immediate access to a market via the right to utilise the parent company’s brand name or trademark,
and benefits from both the transfer of know-how (management, marketing, merchandising) and on-going assistance.
In return for which the franchisee pays the franchisor a fee or royalty, or a combination of fees, which often but not always, includes an entrance fee and/or a fixed percentage of annual turnover for the period of the contract.
Other financial models are possible.
The role of the franchisor is to concentrate on:
developing and constantly improving the franchise business’s concept so as to ensure the credibility, quality and notoriety of the brand on the market,
constantly improving the “franchise package” offered to the franchisee which includes:
- seeking and guaranteeing better purchasing prices for goods and services,
- optimising management and sales skills through on-going training,
organising national or international advertising campaigns,
steering the business’s overall development strategy.
The role of the franchisee is to concentrate on:
guaranteeing the customer the best possible service,
optimising his sales force and results,
respecting the principles and manner of operating of the franchise business as defined in the franchise contract, which includes respecting the common identity and reputation of the franchise network, and the confidentiality of the business know-how transferred.
Franchising in the life-cycle of a business
To start with, the EFF defends the idea that it is absolutely essential for a franchise system ready to launch itself to have first tested the concept for a period of time allowing for an honest and realistic assessment of its survivability through at least two company-owned pilot outlets on the target market or on a market with a similar economic environment.
A distribution business may set itself up as a franchise from the start, in other words, the business model and its future development is founded entirely on establishing a network made up of the of head company (the franchisor) and a number of independent investors/operators (the franchisees).
Alternatively, the business may from the start combine the "franchise" model with a parallel network of company-owned outlets ("mixed" franchise and company-owned).
Alternatively, a non-franchised business may in the course of its development switch to a franchise business model. Many analysts call this switch "conversion franchising" whereby a non-franchised business converts to the franchise model.
Then again, a business may adopt the various modalities described above at different moments of its development. It may for instance start as a fully franchised concept, gradually evolve into a "mixed" model, and eventually be bought back by the franchisor and turned into a fully company-owned business.
In the course of these developments, the initial concept may change too, and this change factor is an essential factor for the survivability of any business in the fast-evolving world we live in.
For each business, many configurations are possible in the course of time, each motivated by very specific reasons and conditions proper to each system.
Business Format Franchising and other forms of networks of independent entrepreneurs:
The European Franchise Federation upholds the idea that what it qualifies as “franchising” is “Business format franchising” founded on all of the elements described above, and operated in the framework of the principles of ethics defined in the EFF’s Code of Ethics for franchising.
Other forms of business offers exist on the market which may combine certain of the elements of franchising. Some businesses combine all of the above and yet do not call themselves franchises. Others combine only some of the elements above and yet qualify themselves as franchises.
Hence the role of the franchise associations to educate as to what authentic and ethical franchising is.
Offers which may share some aspects of franchising, but which must not be confused with franchising are:
selective or exclusive distribution agreements,
“business partnerships” taken in a very loose sense
Quote from the Past Chairman of the European Franchise Federation, Pierre Jeanmart, experienced franchisor from Belgium:
“Of the many forms of business relationships between independent business-partners organised in a network, franchising is the most sophisticated both in its business concept construct as in the scope and quality of the franchisor-franchisee relationship without which a franchise system cannot succeed in the long-term. When all of these elements are combined together, we can speak of “authentic and ethical franchising”.