Franchising as a Business Strategy Today !

     A franchise is an advance form of licensing that a party (franchisee) acquires to allow them to have access to a business’s (franchisor) proprietary knowledge, processes, know-how, and trademarks in order to allow the party to sell a product or provide a service under the business’s name.

     In exchange for gaining the franchise, the franchisee usually pays the franchisor an initial start-up and annual royalties fees.

     Franchises are a very popular method for people to start a business, especially for those who wish to operate in a highly competitive industry like the fast-food industry. One of the biggest advantages of purchasing a franchise is that you have access to an established company’s brand name, meaning that you do not need to spend further resources to get your name and product out to customers.

     An explicit contract defines the terms of the relationship. The Franchise Disclosure Document (FDD) is a legal disclosure document that must be given to individuals interested in buying a U.S. franchise as part of the pre-sale due diligence process. It contains information essential to potential franchisees about to make a significant investment. In the next installment I will give you more details about the FDD.

     Franchises generate the biggest volume of sales in advanced economies such as the United States, Europe, and Japan. However, a large number of franchises are found in countries that are less economically developed in Asia. Many of these are micro franchises, operated by one or two people. Franchising is a major job creator in developing economies in Asia and Latin America, helping to raise living standards. A large proportion of franchises in Africa and less-developed Asia are international.

     Most firms undertake business format franchising (sometimes called system franchising). The franchisor transfers to the franchisee a total business method, including production and marketing methods, sales systems, procedures, and management know-how, as well as the use of its name and usage rights for products, patents, and trademarks. The franchisor also provides the franchisee with training, ongoing support, incentive programs, and the right to participate in cooperative marketing programs.

     In return, the franchisee pays some type of compensation to the franchisor, usually a royalty representing a percentage of the franchisee’s revenues. The franchisee may be required to purchase certain equipment and supplies from the franchisor to ensure standardized products and consistent quality. Burger King and Subway require franchisees to buy food preparation equipment from specified suppliers.

     Franchising parties normally establish an ongoing relationship that may last many years, in a general sense about ten (10) years. This results in a more stable long-term business strategy.

     Franchising is more comprehensive than licensing because the franchisor prescribes virtually all the business activities of the franchisee. The franchisor tightly controls the business system to ensure consistent standards. International franchisors employ globally-recognized trademarks and attempt to guarantee the customer a uniform retail experience and consistent product quality.

     Completely standardized business activities, however, are difficult to replicate across diverse markets. Differences in local tastes, available ingredients, and physical space may necessitate changes to the franchise formula. McDonald’s offers teriyaki burgers in Japan, wine in France, and a McPork sandwich in Spain. In China, KFC offers shredded carrots, fungus, and bamboo shoots instead of the coleslaw it sells in Western countries.

     In this master franchise arrangement, an independent company is licensed to establish, develop, and manage the entire franchising network in its market. The master franchisee has the right to sub-franchise to other independent businesses and thus assume the role of the local franchisor.

      Master franchisees prefer this arrangement because it provides them with an exclusive, large, predefined territory (often an entire state) and substantial scale economies from operating numerous sales outlets simultaneously. They gain access to a proven retailing and marketing concept and partnership with a corporate headquarters and master franchisees in other territories, which typically provide support, know-how, and the latest innovations in the field.

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