December News


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 to do commerce for instance, in a context in which this right was reserved to the higher authority. Similarly, it meant the granting of an immunity from an obligation. To be granted a franchise was to be granted a liberty, and exemption from something.
Since then, in English, it has taken on, depending on the context, various but similar meanings, and has become a term used very commonly, but not always with total clarity.

In the context of modern commerce, franchising is a mode of distributing goods or services based on network of independent partners, whose distinct but combined efforts have proved that franchising can increase the power and efficiency of this distribution.

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 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 own 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 includes an entrance fee and/or a fixed percentage of annual turnover for the period of the contract.

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.

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:

 agency agreements,
 selective or exclusive distribution agreements,
 "business partnerships" taken in a very loose sense
 co-operatives.

Quote from the Chairman of the European Franchise Federation,
Pierre Jeanmart, experienced franchisor:

"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".

Link to "The European Code of Ethics"