Francorp - Franchising A Business

Francorp is often asked to describe what franchising means and what is needed for a company to become a franchise company successfully.

Franchising (from the French for honesty or freedom)is a method of doing business wherein a "franchisor" authorizes proven methods of doing business to a "franchisee" for a fee and a percentage of sales or profits. One of the most critical aspects of what Francorp does for it's clients is identify these critical numbers and business issues before putting together legal documents or selling franchises. Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor, and may indeed be required by the franchisor, which generally requires audited books, and may subject the franchisee or the outlet to periodic and surprise spot checks. Failure of such tests typically involve non-renewal or cancellation of franchise rights.


The term "franchising" is used to describe business systems which may or may not fall into the legal definition provided above. For example, a vending machine operator may receive a licensing fee for a particular kind of vending machine, including a trademark and a royalty, but no method of doing business. This is called "product licensing" or "trade name franchising". Francorp will in some cases work with companies looking for expansion through licensing as opposed to Franchising.

A franchise agreement will usually specify the given territory the franchisee retains exclusive control over, as well as the extent to which the franchisee will be supported by the franchisor (e.g. training and marketing campaigns). These also are strategic issues that Francorp identifies when first beginning with a new franchise organization.

The franchisor typically earns royalties on the gross sales of the franchisee. In such cases, franchisees must pay royalties whether or not they are realizing profits from their franchised business. The royalty payments can be set with flat fees per week or month of operation, but in most cases Francorp will recommend a royalty based on gross sales.

Cancellations or terminations of franchise agreements before the completion of the contract have serious consequences for franchisees. Franchise agreement terms typically result in a loss of the sunk costs of the first-owner franchisees who build out the branded physical units and who lease the branded name, marks, and business plan from the franchisors if the franchise is cancelled or terminated for any reason before the expiration of the entire term of the contract.(Item 15 of the Rule of the Federal Trade Commission requires disclosure of terms that cover termination of the franchise agreement and the terms substantiate this statement) Francorp builds into it's agreements and contracts complete protection for the franchisor.

Franchising dates back to at least the 1850s; Isaac Singer, who made improvements to an existing model of a sewing machine, wanted to increase the distribution of his sewing machines. His effort, though unsuccessful in the long run, was among the first franchising efforts in the United States. A later example of franchising was John S. Pemberton's successful franchising of Coca-Cola. Early American examples include the telegraph system, which was operated by various railroad companies but controlled by Western Union, and exclusive agreements between automobile manufacturers and operators of local dealerships. Earlier models of product franchising collected royalties or fees on a product basis and not on the gross sales of the business operations of the franchisees. Francorp used this strategy also with John Deere as the firm converted independant dealerships into franchisees.

Modern franchising came to prominence with the rise of franchise-based food service establishments. This trend started before 1933 with quick service restaurants such as A&W Root Beer. In 1935, Howard Deering Johnson teamed up with Reginald Sprague to establish the first modern restaurant franchise. The idea was to let independent operators use the same name, food, supplies, logo and even building design in exchange for a fee.

The growth in franchises picked up steam in the 1930s when such chains as Howard Johnson's started franchising motels. The 1950s saw a boom of franchise chains in conjunction with the development of the U.S. interstate highway system. Fast food restaurants, diners and motel chains exploded. In regard to contemporary franchise chains, McDonalds is unarguably the most successful worldwide with more restaurant units than any other franchise network.

According to Franchising in the Economy, 1991-1993, a study done by the University of Louisville, franchising helped to lead America out of its economic downturn at the time. Franchising is a unique business model that has encouraged the growth of franchised chain formula units because the franchisors collect royalties on the gross sales of these units and not on the profits. Conversely, when good jobs are lost in the economy, franchising picks up because potential franchisees are looking to buy jobs and to earn profits from the purchase of franchise rights. The manager of the United States Small Business Administration's Franchise Registry concludes that franchising is continuing to grow and that franchising is growing in the national economy.

Franchising is a business model used in more than 70 industries and that generates more than $1 trillion in U.S. sales annually

Businesses for which franchises is said to works best have the following characteristics

Businesses with a good track record of profitability.
Businesses built around a unique or unusual concept.
Businesses with broad geographic appeal.
Businesses which are relatively easy to operate.
Businesses which are relatively inexpensive to operate.
Businesses which are easily duplicated.

For more detailed information on these categories attend a Francorp Franchise Your Business Seminar, it will go into much more detail on what makes a successful franchise company.

Quick start
As practiced in retailing, franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators). A well run franchise would offer a turnkey business: from site selection to lease negotiation, training, mentoring and ongoing support as well as statutory requirements and troubleshooting.


Expansion
After their brand and formula are carefully designed and properly executed, franchisors are able to expand rapidly across countries and continents, and can earn profits commensurate with their contribution to those societies. Additionally, the franchisor may choose to leverage the franchisee to build a distribution network.

Also with the help of the expertise provided by the franchisors the franchisees are able to take their franchise business to that level which they wouldn't have had been able to without the expert guidance of their franchisors.


Training
Franchisors often offer franchisees significant training, which is not available for free to individuals starting their own business. Although training is not free for franchisees, it is supported through the traditional franchise fee that the franchisor collects.


Legal aspects - Francorp is the only development firm in the world to have in-house legal staff, this is a very big reason for Francorp Client's success.

United States
In the United States, franchising falls under the jurisdiction of a number of state and federal laws. Franchisors are required by the Federal Trade Commission to provide a Uniform Franchise Offering Circular (UFOC) to disclose essential information to potential franchisees about their purchase. Francorp has three professional franchise attorneys who work very closely with the FTC to manage this process for clients at a Federal level. States may also require the UFOC to contain specific requirements but the requirements in the State disclosure documents must be in compliance with the Federal Rule that governs federal regulatory policy. There is no private right of action under the FTC Rule for franchisor violation of the rule but fifteen or more of the States have passed statutes that provide a private right of action to franchisees when fraud can be proved under these special statutes.

The franchise agreement is a standard part of franchising. It is the essential contract signed by the franchisee and the franchisor that formalizes and specifies the terms of the business arrangement, as well as many issues discussed in less detail in the UFOC. Unlike the UFOC, the franchise agreement is a fluid document, crafted to meet the specific needs of the franchise, with each having its own set of standards and requirements. But much like a lease, there are elements commonly found in every agreement. "There is a difference between a discrete contract and a relational contract, and franchise contracts are a distinct subset of relational contracts." Franchise contracts form a unique and ongoing relationship berween the parties. "Unlike a traditional contract, franchise contracts establish a relationship where the stronger party can unilaterally alter the fundamental nature of the obligations of the weaker party......." The critical aspect of this is that the legal work that pertains to franchise development is very unique and must be carefully followed, there are very few firms that have the expertise and ability to work with clients through this process like Francorp.

There is no federal registry of franchises or any federal filing requirements for information. States are the primary collectors of data on franchising companies, and enforce laws and regulations regarding their presence and their spread in their jurisdictions. In response to the soaring popularity of franchising, an increasing number of communities are taking steps to limit these chain businesses and reduce displacement of independent businesses through limits on "formula businesses."

The majority of franchisors have inserted mandatory arbitration clauses into their agreements with their franchisees. Since 1980, the U.S. Supreme Court has dealt with cases involving direct franchisor/franchisee conflicts at least four times, and three of those cases involved a franchisee who was resisting the franchisor's motion to compel arbitration. Two of the latter cases involved large, well-known restaurant chains (Burger King in Burger King v. Rudzewicz and Subway in 517 US 681 (1996) Doctor's Associates, Inc. v. Casarotto); the third involved Southland Corporation, the parent company of 7-Eleven in Southland Corp. v. Keating, 465 US 1 (1984).


Russia
In Russia, under ch. 54 of the Civil Code (passed 1996), franchise agreements are invalid unless written and registered, and franchisors cannot set standards or limits on the prices of the franchisee’s goods. Enforcement of laws and resolution of contractual disputes is a problem: Dunkin' Donuts chose to terminate its contract with Russian franchisees that were selling vodka and meat patties contrary to their contracts, rather than pursue legal remedies.


UK
In the United Kingdom, there are no franchise-specific laws; franchises are subject to the same laws that govern other businesses. For example, franchise agreements are produced under regular contract law and do not have to conform to any further legislation or guidelines. There is some self-regulation through the British Franchise Association (BFA). However there are many franchise businesses which do not become members, and many businesses that refer to themselves as franchisors that do not conform to these rules. There are several people and organisations in the industry calling for the creation of a framework to help reduce the number of "cowboy" franchises and help the industry clean up its image.

On 22 May 2007, hearings were held in the UK Parliament concerning citizen initiated petitions for special regulation of franchising by the government of the UK due to losses of citizens who had invested in franchises. The Minister of Industry, Margaret Hodge, conducted hearings but resisted any government regulation of franchising with the advice that government regulation of franchising might lull the public into a false sense of security. The Minister of Industry indicated that if due diligence were performed by the investors and the banks, the current laws governing business contracts in the UK offered sufficient protection for the public and the banks.


Kazakhstan - Francorp has several offices in the Middle East
Until 2002, franchising rules in Kazakhstan were also governed by Chapter 45 of the Kazakh Civil Code (CC). Measures of state support franchising generally been included in the programme of support for business. Measures to promote franchising were provided in paragraph 2.4.1 of the state program for small business development and support for the 1999–2000. Key provisions of Chapter 45, as well as the rules governing the franchise in more detail relations, entered the law "About integrated business license (franchise)", dated 24 June 2002, No. 330 - II. It should be noted that amongst the Commonwealth of Independent States, Kazakhstan is one of the first countries to introduce the legal definition of franchising in a special law.


Social franchises
In recent years, the idea of franchising has been picked up by the social enterprise sector, which hopes to simplify and expedite the process of setting up new businesses. A number of business ideas, such as soap making, wholefood retailing, aquarium maintenance, and hotel operation, have been identified as suitable for adoption by social firms employing disabled and disadvantaged people.

The most successful example is probably the CAP Markets, a steadily growing chain of some 50 neighborhood supermarkets in Germany. Other examples are the St. Mary's Place Hotel in Edinburgh and the Hotel Tritone in Trieste.

Event franchising
Event franchising is the duplication of public events in other geographical areas, while retaining the original brand (logo), mission, concept and format of the event.[21] As in classic franchising, event franchising is built on precisely copying successful events. Good example of event franchising is the World Economic Forum, or just Davos forum which has regional event franchisees in China, Latin America etc.

Visit Francorp's site, www.francorp.com for more insight into the history of franchising and franchising as an expansion tool.