13.5: Reading- Franchising
Franchising is the practice of licensing another firm’s business model as an operator.
KEY Points
- Essentially, and in terms of distribution, the franchiser is a supplier who allows an operator, or a franchisee, to use the supplier’s trademark and distribute the supplier’s goods. In return, the operator pays the supplier a fee.
- Thirty three countries, including the United States, China, and Australia, have laws that explicitly regulate franchising, with the majority of all other countries having laws which have a direct or indirect impact on franchising.
- Franchise agreements carry no guarantees or warranties, and the franchisee has little or no recourse to legal intervention in the event of a dispute.
Terms
- Franchisee : A holder of a franchise; a person who is granted a franchise.
- Franchising : The establishment, granting, or use of a franchise.
- Franchise: The authorization granted by a company to sell or distribute its goods or services in a certain area.
- Franchiser: A franchisor, a company which or person who grants franchises.
Franchising is the practice of using another firm’s successful business model. For the franchiser, the franchise is an alternative to building “chain stores” to distribute goods that avoids the investments and liability of a chain. The franchiser’s success depends on the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business. Essentially, and in terms of distribution, the franchiser is a supplier who allows an operator, or a franchisee, to use the supplier’s trademark and distribute the supplier’s goods. In return, the operator pays the supplier a fee.
In short, in terms of distribution, the franchiser is a supplier who allows an operator, or a franchisee, to use the supplier’s trademark and distribute the supplier’s goods. In return, the operator pays the supplier a fee.
Each party to a franchise has several interests to protect. The franchiser is involved in securing protection for the trademark, controlling the business concept, and securing know how. The franchisee is obligated to carry out the services for which the trademark has been made prominent or famous. There is a great deal of standardization required. The place of service has to bear the franchiser’s signs, logos, and trademark in a prominent place. The uniforms worn by the staff of the franchisee have to be of a particular design and color. The service has to be in accordance with the pattern followed by the franchiser in the successful franchiseoperations. Thus, franchisees are not in full control of the business, as they would be in retailing.
A service can be successful if equipment and supplies are purchased at a fair pricefrom the franchiser or sources recommended by the franchiser. A coffee brew, for example, can be readily identified by the trademark if its raw materials come from a particular supplier. If the franchiser requires purchase from his stores, it may come under anti-trust legislation or equivalent laws of other countries. So too the purchase of uniforms of personnel, signs, etc., as well as the franchise sites, if they are owned or controlled by the franchiser.
Franchise agreements carry no guarantees or warranties, and the franchisee has little or no recourse to legal intervention in the event of a dispute. Franchise contracts tend to be unilateral contracts in favor of the franchiser, who is generally protected from lawsuits from their franchisees because of the non-negotiable contracts that require franchisees to acknowledge, in effect, that they are buying the franchise knowing that there is risk, and that they have not been promised success or profits by the franchiser. Contracts are renewable at the sole option of the franchiser. Most franchisers require franchisees to sign agreements that mandate where and under what law any dispute would be litigated.
GLOSSARY
Interest The price paid for obtaining, or price received for providing, money or goods in a credit transaction, calculated as a fraction of the amount or value of what was borrowed. A great attention and concern from someone or something; intellectual curiosity.
Licensing A business arrangement in which one company gives another company permission to manufacture its product for a specified payment.
Trademark A word, symbol, or phrase used to identify a particular company’s product and differentiate it from other companies’ products. A trademark, trade mark, or trade-mark is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify for consumers that the products or services on or with which the trademark appears originate from a unique source, designated for a specific market. It also distinguishes its products or services from those of other entities. A word, symbol, or phrase used to identify a particular company’s product and to differentiate it from other companies’ products.
Business model The particular way in which a business organization ensures that it generates income, one that includes the choice of offerings, strategies, infrastructure, organizational structures, trading practices, and operational processes and policies.
Controlling The management function of checking progress against plans to exercise influence over, to suggest or dictate the behavior of, oversee.
Design To plan and carry out (a picture, work of art, construction etc. ).
Distribution The process by which goods get to final consumers over a geographical market, including storing, selling, shipping, and advertising. The set of relative likelihoods that a variable will have a value in a given interval. A probability distribution; the set of relative likelihoods that a variable will have a value in a given interval.
Franchise agreement A legal, binding contract that authorizes a company to sell or distribute another’s goods and services in a certain area.
Good An object produced for market.
Incentive Something that motivates, rouses, or encourages. It is used to motivate employees for better performance by providing financial rewards. An anticipated reward or aversive event available in the environment. Something that motivates an individual to perform an action.
Investment A placement of capital in expectation of deriving income or profit from its use. The expenditure of capital in expectation of deriving income or profit from its use.
Liabilities Probable future sacrifices of economic benefits arising from present obligations to transfer assets or providing services as a result of past transactions or events. An amount of money in a company that is owed to someone and has to be paid in the future, such as tax, debt, interest, and mortgage payments. an obligation of an entity arising from past transactions or events, including any type of borrowing.
Operation The method or practice by which actions are done. A procedure for generating a value from one or more other values.
Price The price is the amount a customer pays for the product. The quantity of payment or compensation given by one party to another in return for goods or services. The cost required to gain possession of something.
Profits Collective form of profit.
Raw materials A raw material or feedstock is the basic material from which a good product is manufactured or made, frequently used with an extended meaning. For example, the term is used to denote material that came from nature and is in an unprocessed or minimally processed state; e.g., raw latex, iron ore, logs, crude oil or seawater. A raw material is the basic material from which a product is manufactured or made. Materials and components scheduled for use in making a product. A raw material is the basic material from which a good product is manufactured or made, frequently used with an extended meaning.
Risk The potential (conventionally negative) impact of an event, determined by combining the likelihood of the event occurring with the impact, should it occur. The potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable outcome). To incur risk [of something].
Services That which is produced, then traded, bought or sold, then finally consumed and consists of an action or work.
Standardization The process of setting certain norms or standards for a product with regard to shape, size, color, quantity, quality, weight etc
Supplier One who supplies; a provider.
Supply provisions The amount of some product that producers are willing and able to sell at a given price, all other factors being held constant.
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