WHAT IS FRANCHISING?

Franchising is derived from the Old French word franc which means right or privilege. It refers
to the method of practicing and using anothers perfected business concept. This duplication of
a successful business involves two legally independent parties the franchisor and the
franchisee.
In a franchise relationship the franchisee is granted the right to mar!et a product or a service
under a mar!eting plan or a system that uses the trademar! name logo and advertising owned
by the franchisor.
"s a contractual agreement for the franchisee to use the franchisors business operating and
mar!eting strategies franchising establishes a relationship with a successful business allowing
entrepreneurs to use and capitali#e on its proven system and name.
Franchising There is no legal definition of franchising but a franchise is a contractual
relationship where the franchisor$%
allows a franchisee to use its trade name mar!s and brands
e&ercises continuing control over a franchisee
is obliged to provide training and assistance to a franchisee
re'uires a franchisee to ma!e an initial and continuing payments to the franchisor
" form of business organi#ation in which a firm which already has a
successful product or service (the franchisor) enters into a continuing contractual relationship
with other businesses (franchisees) operating under the franchisor*s trade name and usually
with the franchisor*s guidance in e&change for a fee. +ome of the most popular franchises in
the ,nited +tates include +ubway -c.onalds and /%0leven.
"rrangement where one party (the franchiser) grants another party (the franchisee) the right to
use its trademar! or trade%name as well as certain business systems and processes
to produce and mar!et a good or service according to certain specifications. The franchisee
usually pays a one%time franchise fee plus a percentage of sales revenue as royalty and gains
(1) immediate name recognition (2) tried and tested products (3) standard building design and
d4cor (5) detailed techni'ues in running and promoting the business (6) training of employees
and (7) ongoing help in promoting and upgrading of the products. The franchiser gains rapid
e&pansion of business and earnings at minimum capital outlay.
Earliest Franchising
-any believe that "lbert +inger founder of the +inger sewing machine was the initiator of
franchising. 8e was actually the earliest person recogni#ed by most as being associated with
franchising. 8owever the concept of franchising really began long before.
The term *franchising* derived from ancient French is defined as holding a particular privilege or
right.
9ac! in the middles ages local leaders would designate privileges to citi#ens. +ome of these
rights included conducting fairs running mar!ets and operating ferries. The franchising idea
then carried forward to the practice of :ings yielding rights to conduct activities such as beer
brewing and road building. In addition the e&pansion of the church is !nown as a form of
franchising.
The Evolution of Franchising
.uring the 1;5<*s several =erman ale brewers granted rights to particular taverns to mar!et
their ale. This was the beginning of the type of franchising that became familiar to most of us in
the twentieth century.
Franchising then traveled from 0uropean brewers into the ,nited +tates. 9efore franchising
there was not much in the way of chain operations which would eventually form the basis of
franchising in the ,.+.
>eddlers in early "merican history selling items from town to town were also considered a form
of franchising. ?icenses were provided to general stores at military outposts as well. These
e&clusive territorial rights are described in written literature however specific names are not.
"lbert +inger came on the scene in 1;61 with the +inger +ewing -achine @ompany. +inger
made use of franchising to distribute his machines over a widespread geographic area. 8e is
the first actual name recogni#ed as an early franchisor. "dditionally +inger was the first to
prepare franchise contracts. These documents then became the basis for the modern version of
franchise agreements.
In the late 1;<<*s and early 1A<<*s many other forms of franchising too! place. +ome e&amples
included monopoli#ed franchises for several utilities as well as street car companies. Then as oil
refineries and auto manufacturers found that they could sell their products over a larger
geographical area they began to franchise.
Transportation and increasingly mobile "mericans were the basis for the establishment of retail
and restaurant chainsBfranchises. "s time went on a large number of establishments began to
franchise. +ome of the well%!nown franchises include :entuc!y Fried @hic!en in 1A3< .un!in
.onuts in 1A6< 9urger :ing in 1A65 and -c.onald*s in 1A66.
The word Franchise comes from the Old French meaning freedom or privilege. In the middle
ages of 0urope the local lord would grant rights to hold mar!ets or fairs. In essence the
monarch gave someone the right for a certain type of activity. They were the first Franchisors
and did not !now it.
In 1;61 Isaac +inger accepted fees from independent salesmen to ac'uire territorial rights to
sell his recently invented sewing -achine. The +inger @ompany began granting distribution
franchises and was the first @ompany to write franchise contracts. In the late 1;;<Cs @ities
began giving franchises to newly established electricity companies. "round the turn of the
@entury oil companies and automobile manufacturer began to grant rights to sell their new
inventions. Dhite @astle was the first fast food hamburger franchise chain in "merica opening
1A21 and sold since then over 12 billion hamburgers. "ED started franchising their root beer
stands in 1A21.
9usiness format franchising which is the dominant mode of franchising today started after the
+econd Dorld Dar. In the 1A6<Cs all !ind of services and products started to franchise in the
,+". In 1A66 a certain Fay :roc came to the idea of franchising a then little !nown fast food
place named -c.onalds and in the meantime they sold more than a 1<< billion of
hamburgers worldwideG -any well%!nown restaurant franchises started during this time. @olonel
8arlan +anders initiated his first :F@ franchise so did .airy Hueen and .un!in .onuts.
Franchising has powerfully transformed the entire perception of business culture and practice.
In the ,+" over a trillion I in revenues is generated by more than 6<<< Franchisors and their
Franchisee yearly. The "merican .ream is becoming a dynamic reality for hundreds of
thousands of additional entrepreneur around the world. In the >hilippines where 9usiness
Format Franchising started in the 1A/<Cs (e&cept "ED who was earlier here) one of the first
was again was -c.o who opened its first outlet in 1A;1. To that time a small chain of ice
cream Joints began selling burgers Kollibee which is today our number one Franchise
@ompany in the @ountry. The success of Kollibee is a mystery to the top guys of -c.onalds in
@hicago since they are the number one in fast food in every @ountry they operate e&cept the
>hilippines.
Today more than A6< Franchisors maJority local operate in the @ountry and the number !eeps
growing to the advantage for the consumer more competition more choice more bargains.
"lmost all of them in the food business offer some !ind of value meal combinations. +ome of
them are e&porting their Franchise +ystem to other @ountries. "s e&ample 26 of the more than
37< Franchisor clients of F: Franchise @onsultancy are already franchising in foreign @ountries
throughout "sia the -iddle 0ast 0urope and "merica.
Modern Franchising
The modern leading form of franchising !nown as business format franchising became popular
post Dorld Dar II. "t that time those serving in the war returned home and had huge desires for
many products and services. +ubse'uently the baby boomers became the leaders of the
economy and are e&pected to continue as the driving force for 'uite some time.
"s franchising e&panded rapidly in the 1A7<*s and 1A/<*s also came a large amount of
oppressive activity to contend with. There were several companies that were under%funded and
poorly managed therefore going ban!rupt leaving many franchisees in a lurch. -ore upsetting
were the fraudulent companies who literally too! peoples* money for nothing.
These unfortunate events led to the formation of the International Franchise "ssociation (IF") in
order to regulate the franchising industry. The IF" continuously wor!s in conJunction with the ,+
@ongress and Federal Trade @ommission (FT@) on improving the industry*s relations with
franchisees. In 1A/; the FT@ created the ,niform Offering @ircular (,FO@) re'uiring franchise
companies to provided detailed information to potential franchisees. This document was
updated in 2<</ and renamed the Franchise .isclosure .ocument (F..).
Franchising continues to be a highly regulated industry in an effort to promote the healthy
growth of the economy.
FRANCHISING IN THE HI!IINES
Franchising in the >hilippines began in the 1A;<s with the sector predominated mostly by
foreign franchise companies. From around 2< foreign and local franchises the sector rapidly
grew with the figure reaching around 1<<< by 2<<;.
The growth of franchises has been helped by the various programs underta!en by the >hilippine
Franchise "ssociation (>F") which is a voluntary self%regulating governing body for franchising
in the country. 0stablished in 1AA6 the >F" now has 1;< franchisors and allied members
nationwide and is currently the countrys biggest franchise association.
>F" members are bound by the Fair Franchising +tandards (FF+) a @ode of 0thics which the
"ssociation developed ensuring that they commit themselves to respect and to apply fair set of
provisions in the conduct of the sale of their franchises protecting both franchisors and
franchisees.
Dith over A<L success rate franchising has evolved as a business model primarily identified
with minimal ris!. This in turn ma!es franchising a most preferred strategy that guarantees
countless opportunities for all entrepreneurs.
Through this boo!let >F" aims to help increase the level of awareness in the -+-0 sector
even the aspiring entrepreneurs on franchising as the best strategy to achieve rapid business
e&pansion while maintaining high survival and sustainability rates. Fecogni#ing the significant
roles that -+-0s play in national development >F" continuously lin!s the franchise advantage
to the -+-0 sector in the hope of retaining greater economic activity.
FF"M@8I+IM= has become an easy and convenient way to deliver goods and services to
consumers. "side from usual food and beverage establishments other services such as salons
hotels and many others are now also open for franchising.
@learly consumers are not the only ones benefiting from the welcome convenience offered by
'uic! services or from the wider range of products and services made available to them.
Franchisers in turn also reap the benefits through profit.
It would be interesting to !now what is behind franchising and how it e&ploded in the mar!et.
Origins
Franchising has had a long history but the concept is widely believed to have started from
sewing manufacturer "lbert +inger.
The idea came about to address one common problem in business$ funding.
In the 1;6<s the +inger @ompany produced sewing machines but could not pay its salesmen
their salaries. "s an alternative the company created a networ! of dealers who paid +inger a
fee to sell the machines. These first franchise owners made money for each sewing machine
they bought from +inger and eventually resold within their particular territories.
Other prominent e&amples abound in history. @oca%@ola for e&ample was originally created as
a fountain drin! until 9enJamin Thomas and Koseph Dhitehead obtained permission in 1;AA to
bottle the soda. ,pon reali#ing that they alone could not afford to create a bottling company the
two created a franchise company that sold the right to bottle the cola to individual plants.
In the >hilippines franchising also traces its roots to the +inger +ewing -achine. In that period
franchising was limited only to foreign businesses and public utilities services until the >hilippine
Franchising "ssociation was created in 1AA6. .uring that time there were only 111 franchise
concepts which eventually grew to A7/ concepts in 2<</.
?ucrative business
Over the years franchising has become a lucrative enterprise.
In the >hilippines the number of franchise concepts has grown by 1A.;L in a span of 12 years
to 2<</.
In the same year of the total number of franchise concepts 53L are in the food sector 2;L
and 21L involve retail and services respectively and 3L are engaged in speciali#ed services
such as hotel services and memorial services.
"ccording to >hilippine @hamber of @ommerce and Industry >resident +amie ?im franchising is
a promising venture given the countrys growing consumer mar!et and rising per capita incomes
and rate of urbani#ation.
The emergence of the business%process outsourcing industry also gives opportunities for
establishments to e&tend their operating hours to cater to different wor!ers throughout the day
especially to those wor!ing in graveyard shifts.
"ccording to >hilippine Franchise "ssociation (>F") >resident Fobert F. Trota franchising
remains a good business option amid the economic slowdown.
The continued inflow of OFD remittances also provides ade'uate support from both the supply
and demand side. Femittances enable some households or persons to venture into franchisingN
at the same time remittances also boost the consumption of goods and the patronage of
various services that franchised establishments offer.
The overall effects on the economy have been substantial. In the latest >F" study presented by
the chairman emeritus +amie ?im income from franchising represents some five percent of the
countrys gross domestic product from 2<<6 to 2<</ which translates to appro&imately >1<7./6
billion for the economy. It is also an important means to create enterprise and generate
employment creating an estimated 2<<<<< franchise outlets and employing almost a million of
Filipinos nationwide.
.epartment of Trade and Industry ,ndersecretary Oenaida -aglaya has noted that franchising
is a sure and secure way to a successful business due to the availability of technology formula
and the process giving the entrepreneur an advantage since he or she will not necessarily start
from scratch.
>rospects
In addition to the emergence of the business process outsourcing units the franchising industry
also sees tourism as a road to mar!et e&pansion for local businesses.
"ccording to Franchising in the >hilippines in 2<<;$ @ountry Feport tourist inflows afford
franchisers an opportunity to ac'uire concepts from the country where these foreigners come
from to cater their needs and preferences.
In addition the franchising industry can capture more investment in the forward and bac!ward
lin!ages in the tourism industryN in this case they can venture into travel and transport services
hotel and other accommodation services food and beverage and others.
The franchising industry also boasts a competitive stance in franchising operations abroad. In
fact the >hilippines ran!ed 5th in the world when it comes to franchising concepts (and 1st
among "+0"M nations). Dith its success in the local mar!et some brands such as Kolibee
9ench -a&s Festaurant etc. have penetrated and established their grounds in the foreign
mar!et.
Indeed the franchising industry has proven to be a successful business in the country surviving
even in tough economic times. Further this business has indeed provided starting
entrepreneurs a good head start in the world of business given the readily available technology
and process of running the franchise. Dith its growth in the local mar!et and penetration in the
international mar!et this venture is indeed a good business prospect.
"# $ears of franchising in the hili%%ines
(+ource$ The >hilippine +tar Mews Online % </B2AB12)
-anila >hilippines % +ome 2< years bac! the then infant franchising industry in the >hilippines
only had less than 6< players with ;< percent of them foreign brands.

Mow under the stewardship of the founders of the >hilippine Franchise "ssociation (>F")
franchising in the country e&ploded into an I11 billion industry that consists of over 13<<
franchise concepts more than 125<<< franchisees and employee base of 1.1 million.

In the past 2< years the >hilippine franchising industry is li!ened to an hourglass wherein
entrepreneurs and retail concepts s'uee#e through the small Pring of purification to become a
franchise which can now go forth and multiply and create thousands of +-0s and millions of
Jobs +amie ?im the ac!nowledged father of >hilippine franchising emphasi#ed.

The success story of the industry dates bac! to the early A<s when ?im toured the ,nited
+tates and 0urope as head of the Federation of "sian retailers. In the conferences that he
attended ?im learned that franchising is the fastest growing industry.

+o in 1AA3 reali#ing the potential of franchising as a maJor economic growth catalyst for the
>hilippines ?im and industry pioneers such as Kose T. >ardo and Qicente T. >aterno Joined
hands and held the countrys first franchise e&po. The event grew bigger the following year
giving the then industry bigwigs the reason to create an industry association.

That time the Top 1< franchisers in the country were only meeting among themselves regularly
where they tal! about best practices. This small group was convinced by ?im >ardo and
>aterno to spearhead the establishment of the >hilippine Franchise "ssociation in 1AA6. ?im
although he was not a franchiser then served as the founding father which is a testament to the
efforts he put in to bring together the industry players.

>F" then approached the ,+"I. through the >rivate Investment and Trade Opportunities
headed by +ergio Orti#%?uis and obtained a I1<<<<%funding support for the creation of an
industry master plan using the "merican e&ample.

The gist of that study is we identified the 1< different sectors that are best suited for franchising
and we focused on them. Dith that came the development of local and foreign franchises li!e
Kolibee ?im e&plained.

Dith homegrown business concepts sprouting >F" included an incubation pavilion at the
annual franchise e&po to support the high potential business ideas. Those who got the nod of
the >F" screening committee got free booths thus giving them free e&posure to prospective
buyers investors and partners.

The >F" also tal!ed to the colleges and universities li!e the ,niversity of "sia E the >acific and
"teneo +chool -anagement to dedicate areas for food stalls that were conceptuali#ed by
students. "nd through the >hilippine @hamber of @ommerce and Industry (>@@I) >F" also
launched the 9usiness Ideas .evelopment "ward (9I."). It awarded the best business ideas
that were sent by students and gave them free space again at the e&po.

Then came the ne&t big thing financing. Out of 1<< who come forward to say they want to
franchise only five are really 'ualified because the rest do not have enough money. +o we
brought in the ban!s and now we have 9>I Family +avings 9an! 9anco de Oro >hilippine
Mational >lanters 9an! +9 @orp. .evelopment 9an! of the >hilippines and >+ 9an! as the
top lenders to the industry ?im said. Dith funding no longer a problem ?im said franchisers
and franchisees are now also able to ac'uire multi%brands.

"nd now the >hilippines is being used as staging point of foreign franchises that are
establishing presence in "sia. "nd more importantly Filipino brands such as -a&s Kolibee and
>otato @orner are now doing good in the international arena.

The strong growth of the industry was mainly private sector%led as in contrast to the other
countries that provide numerous support schemes to their franchisers the >F" toiled on its own
and even turned it into an advantage. +ince we are basically private sector%led we are more
consistent unli!e the others where policies change when there is a change of government ?im
further e&plained.

The >hilippines also benefited a lot from >F"s membership in the Dorld Franchise @ongress as
the country is able to get e&perts that give valuable pointers to the industry players during the
annual Franchise conference.

"s of this year we have the largest franchise e&hibit in the world R the Franchise "sia
>hilippines (F">) 2<12. De are able to do this because we are consistently growing. Dith last
years Dorld Franchise @onference hosted by the >hilippines the word is now out that if you
want to go to "sia you should go to the >hilippines.

De are building from last year and I hope we can sustain that ?im stressed. This years
International Franchise 0&po which is one of the four maJor components of F"> 2<12 will have
about 6<< firms e&hibiting at the 1<<<<% s'uare meter +-S @onvention @enter e&hibition halls
with over 6<<<< visitors e&pected. Qisitors and e&hibitors are e&pected from ,+ @anada
=uam "frica >a!istan 9angladesh -iddle 0ast Thailand -alaysia Taiwan @hina Kapan
and :orea.

?im said he is now see!ing to harness the programs of Tesda director general Koel Qillanueva to
further boost the potential of >hilippine franchising.

?im noted he agrees with Qillanueva that Filipinos should change their notion that college
diploma is important to be able to land a good Job. ?im hopes to partner with Qillanueva in
launching nationwide several short courses that will serve the employment re'uirements of the
franchising industry. These include short courses for baristas waitering and even basic
house!eeping.

Dith Tesdas help we can improve the competitiveness of >hilippine franchise concepts
because we will have wor!ers that have standardi#ed !nowledge and s!ills. That is what
franchising is all about having professionali#ed and standardi#ed operations ?im added.
FA HIST&R'
The >hilippine Franchise "ssociation (>F") a non%stoc! non%profit organi#ation is the
voluntary self%regulating governing body for franchising in the country. It was formed in 1AA6 to
organi#e the growing number of franchise industry players both homegrown and foreign.
The creation of >F" can be traced bac! to the success of the 1AA3 and 1AA5 Franchise
@onferences and 0&pos pioneered by the >hilippine Fetailers "ssociation (>F") with the
support of the >rivate Investment and Trade Opportunities % >hilippines (>ITO%>).
In 1AA3 the first International -aster Franchise @onference (I-F@) was held with the following
obJectives$ to introduce and e&plain the concept of franchising to as many people as possible in
order to spread the benefits that many "mericans who have become entrepreneurs and
businessmen in their own right have achieved through franchisingN and secondly to introduce
new "merican franchises in the local mar!et.
"fter the successful staging of I-F@ >F" again hosted the same event in 1AA5 this time with
an added feature % the >hilippine Franchise 0&po (>F0). The twin activity % the Franchise
@onference and Franchise 0&po % provided first%hand !nowledge and e&perience on franchising
to conference participants and e&po visitors. The 0&po in particular was envisioned to be a one%
stop shop wherein franchisors franchisees and potential investors can meet and negotiate
possible franchise partnerships.
The tremendous success of the >hilippine franchises and conferences and e&hibits as well as
the high level of participation and interest they generated showed that franchising given the
right impulse could flourish in the >hilippines. This inspired the >F" to organi#e the growing
number of players in the industry into a formal association. Thus on February / 1AA6 the
>hilippine Franchise "ssociation (>F") was formed.
+ince then the >F" has been actively involved in the promotion of the >hilippine franchise both
here and abroad. Its annual >hilippine Franchise @onference and 0&po have become an
institution for the development and growth of franchising by encouraging the creation of more
local franchise businesses and inviting foreign master franchisors to come to the >hilippines and
get >hilippine franchisees. The 0&hibit has also been an important mar!etplace for the
countryside e&pansion of both local and foreign franchises already operating in the >hilippines.
>F" members are bound by the Fair Franchising +tandards (FF+). 9y adhering to this @ode of
0thics the >F" members commit themselves to respect and to apply fair set of provisions in the
conduct of the sale of their franchises. Internationally the >F" is recogni#ed by the Dorld
Franchise @ouncil (DF@) the "sia >acific Franchise @onfederation (">F@) and the
International Franchise "ssociation (IF").
MI!EST&NES
"s the premier and the biggest franchise association in the country >F" pioneered and
undertoo! numerous programs which saw the phenomenal growth of franchising in the country
resulting to$
The growth of the sector from only 6< franchises in the early *A<s to almost 1<<< in
2<<;.
The creation of thousands of enterprises and generation of hundreds of thousands of
Jobs ma!ing franchising an important tool in the country*s economic growth.
The entry into the international mar!et of Filipino brands and concepts
The fostering of an environment of e&cellence through the Franchise 0&cellence "wards
(F0") which helped e'uipped franchises to be more globally competitive.
The development of the Fair Franchising +tandards which ensures Just and mutually
beneficial business dealings between franchisor and franchisee.
The growth of the >hilippines as the Tfranchise hub of "siaT when it comes to the
development of franchise concepts.
These and other achievements have made franchising the preferred business method for more
and more entrepreneurs % both aspiring and established. These also made >F" the preferred
and most trusted franchise association in the country.
FA (ision
For the >hilippines to be the TFranchise 8ub of "siaT by providing the gateway to the entry and
e&port of world%class 'uality brands products and services from "sia to the rest of the world and
vice versa.
FA )ill continue to
9e the voice of the >hilippine Franchise +ector
9e a dynamic world%class organi#ation
9e a relevant member of the international franchise community
FA Mission
To promote top franchises in the international mar!et
To help the nationwide e&pansion of homegrown franchise concepts
To assist small and medium enterprises with high potential to franchise
FA*s (ision for the Ne+t Five 'ears
?arge +cale$ International 0&pansion
Franchising to become a top%dollar earner
0&port of top >hilippine franchises
Top Filipino entrepreneurs to own territorial master franchises for the "sia%>acific region
>hilippines as the regional head'uarters for global franchisors in the "sia%>acific region
Mediu, Scale- National E+%ansion
0&pand e&isting franchises in the >hilippines into nationwide networ! of at least 1<<
units
Tap the overseas Filipino mar!et for franchise opportunities in the >hilippines
.evelop incubation centers to introduce regional food franchise concepts into
mainstream locations
-a!e +-0 franchise affordable at >hp 1<<<<< to 1 million
0&pand these concepts nationwide via franchising
FA .e$ &/0ectives
To promote and sustain the growth of franchising as a tool for national developmentN
To professionali#e and educate people in the franchise industry through seminars
training programs and overseas cooperationN
To self%regulate members in order to enhance and protect the image of the >hilippine
franchise sectorN
To empower and professionali#e small businesses to be able to meet global competition
in preparation for borderless international tradeN
To bring to the country the best franchising formats from all over the world for
benchmar!ing of best practicesN
To liaise with government departments and agencies on matters concerning franchising
to promote the growth and development of the sectorN
To provide a forum for Filipino franchisors franchisees and suppliers to networ!
e&change ideas and e&plore areas of cooperationN
To establish and maintain affiliations andBor cooperation with relevant organi#ations
globallyN
To formulate guidelines for the franchise businessN and
To actively promote Filipino franchises internationally.
There are three /asic t$%es of franchises-
roduct Franchises1
-anufacturers use the product franchise to govern how a retailer distributes their product. The
manufacturer grants a franchisee the authority to distribute goods by the manufacturer and
allows the owner to use the name and trademar! owned by the manufacturer. The franchisee
must pay a fee or purchase a minimum inventory of stoc! in return for these rights. 0&amples of
>roduct Franchises include$ -obil =oodyear 9as!in Fobbins and Ford -otor @ompany.
2usiness For,at Franchising1
This is the most popular form of franchising. In this approach a company provides a franchisee
with a proven method for operating a business using the name and trademar! of the company.
The company will usually provide a significant amount of assistance to the business owner in
starting and managing the company. The franchisee pays a fee or royalty in return. 0&amples of
9usiness Format Franchises include$ -c.onalds .un!in .onuts @arvel "--@O and
Fantastic +ams.
Manufacturing Franchise1
These types of franchises provide an organi#ation with the right to manufacture a product and
sell it to the public using the franchisor*s name and trademar!. This type of franchise is found
most often in the food and beverage industry but can be applied to other industries. 0&amples
of -anufacturing Franchises include$ @oca%@ola and +ealmaster.
WHAT ARE THE 3IFFERENT T'ES &F FRANCHISING?
There are two different types of franchising product franchising and business format
franchising.
>roduct franchising also !nown as trade name franchising is that type of franchising wherein a
manufacturer grants a franchisee the right to sell its products but with no method of doing
business. 0&amples of this type of franchising are car dealerships and service stations. >roduct
franchising usually peg royalty collection on a product basis and not on gross sales as
compared to business format franchising.
" more comple& form of franchising is the business format franchising. "lso identified as a name
and process franchise this format features a broader and ongoing relationship between the
franchisor and the franchisee. "side from granting the right to use the name and mar!et the
products and services of the franchisor the franchisee is also provided a complete plan for
managing and operating the business a transfer of the proven way of doing business that has
been developed by the franchisor. This plan often includes a full range of services including site
selection training product supply mar!eting plans and even assistance in obtaining financing.
"ll of the franchisors operating systems technical e&pertise mar!eting systems training
systems management methods and essentially all relevant information are transferred to the
franchisee.
9usiness format franchising offers franchisees the advantage of a proven trademar! and
formula of doing business as opposed to having to build a new business and brand from
scratch. Franchisors are also able to e&pand rapidly across countries and continents.
Franchisees are offered significant training which is not available for free to individuals starting
their own business.
In this arrangement franchisors typically control how franchisees conduct business to ensure
uniformity. Though these controls may significantly restrict the franchisees ability to e&ercise its
own business Judgment the end result is to the benefit of the consumers because certain
standards are maintained. To this end franchisors may re'uire the franchisee to operate in a
particular manner % operation during certain hours using only pre%approved signs employee
uniforms and advertisements or abiding by certain accounting or boo!!eeping procedures. The
franchisor may also re'uire the franchisee to purchase supplies only from an approved supplier
in order to ensure that the consuming public does not suffer from inconsistency in product
'uality.
Dith the means of distributing goods and services perfected rapid e&pansion of a successful
business concept occur more 'uic!ly. -odern day franchising is primarily in the business format
mode accounting for around A<L of franchise businesses worldwide. >F" is an association of
franchisors who are into business format franchising.
THE FRANCHISE AGREEMENT
The Franchise "greement (F") is the legal document that binds the franchisor and the
franchisee together.
What is included in the Franchise Agree,ent?
Ter,s of Agree,ent
The F" carries a contract e&planation detailing the type of relationship a franchisee is entering
into with the franchisor. +ince a franchise relationship is temporary in nature the F" should
specify how long the agreement will last. "t the end of that appointed period the franchise is
considered null and void.
Rene)al
Fenewal periods grants the franchisor the chance to review the F" thus enabling him to decide
whether to renew the agreement or not. The franchisees good performance is the most
common of all criteria. 8owever a renewal does not guarantee the retention of the original
terms and conditions of the agreement. If applicable a renewal fee is also charged by the
franchisor.
Ter,ination
The F" carries in it the grounds for termination of the contract. In some cases violations of such
conditions may still be remedied however if repeated over time or failure to act on them will still
lead to termination of the contract.
Fees
This part of the F" e&plains the due cost and date a franchisor is to be paid. Included in these
fees are franchise fees royalties and mar!eting contribution. The initial franchise fee which
may be non%refundable is paid at the start of a franchise relationship thus giving the franchisee
the right to engage in the business using the franchisors name and business system.
Foyalties are usually a percentage of the franchisees sales and are typically paid wee!ly
biwee!ly or monthly.
+ystem%wide mar!eting contributions are also based on the percentage of franchisees sales.
Territor$
The Territory determines the geographical boundaries a franchisee may operate or within which
no other unit of the franchisors businesses may compete.
urchase of roducts
>roducts and supplies used in the franchise system should maintain consistency. 8ence the F"
specifies that the franchisee may only buy from suppliers accredited by the franchisor. " detailed
list of approved suppliers is also provided in the Operations -anual.
3ISTRI24T&RSHI
" manufacturer or a supplier of goods appoints an independent third party the distributor to
mar!et its goods. The independent third party purchases the goods on his own account and
trades under his own name as an authorised distributor. 8is business name will usually have no
connection with the name of the supplier of the goods nor will the supplier regulate the way in
which the distributor operates his business other than perhaps to oblige the distributor to reach
minimum turnover levels to maintain advertising and >F material to maintain minimum stoc!s
both of goods and spare parts and to employ e&perienced servicing representatives.
The obligations on a distributor should be compared to the much more e&tensive restrictions
which a franchisor see!s to impose on its franchisees. Furthermore no royalties are payable to
the supplier by the distributor. The suppliers profit arises from the difference between the price
at which he manufactures or which he pays for the goods and the price at which he is able to
sell the goods to the distributor.
Dhilst a clear distinction can be drawn between franchising and distribution it should not be
forgotten that franchising has evolved through the development of distributorship agreements.
What Is A 3istri/utorshi%?
2$- ?awInfo
" distributorship is an arrangement where the manufacturer ma!es its money on the sale of the
actual goods that are distributed rather than for the right to distribute the goods. Thus a
distributor normally doesn*t have to pay fees for the right to distribute a manufacturer*s products
andBor services unli!e a franchise business arrangement. .istributorships fall under
distributorship laws as well as contract and other business laws. .istributorship laws vary from
state to state and they are very comple& which is why you should consult with an attorney
before entering into a distributorship agreement.
9eing in business on your own can be a daunting proposition. -any entrepreneurs begin
businesses that are related to TparentT companies such as franchises and distributorships. 9oth
franchises and distributorships receive products instruction mar!eting materials and other
support from their umbrella companies. 9ut there are important differences to consider when
choosing between the two.
+tart%,p @osts
One crucial difference between franchises and distributorships is the start%up costs. ?aunching a
franchise generally re'uires tens of thousands of dollars or even in e&cess of I1<<<<<. That
includes everything from franchise fees re'uired e'uipment purchases space leasing signage
training materials and employees. In contrast distributorships generally re'uire nothing more
than a setup fee (for some) and the purchase of initial products or mar!eting materials. -any
distributorships are launched with e&penses of I1<< or less.
>roduct +ources
Franchises and distributorships are also distinguished by their product sources. In most
franchises the franchise owner gathers materials often from a limited number of corporate%
approved vendors and puts together the product or delivers a service. For distributorships the
distributor does nothing to create the product %% either it is shipped from the parent company and
sold by the local distributor or the distributor ta!es orders for products which are filled and
shipped directly by the parent company.
Time Fe'uirements
"nother factor distinguishing franchises from distributorships is the time re'uired to operate the
business. "lthough most distributorships can be pursued either part%time or full%time depending
on the goals and desires of the distributor most franchises must by nature be full%time
operations often with hours of operation dictated by the parent company. The time involved in
setting up a franchise can be si& months or more while most distributorships can begin within a
few days of signing up.
@orporate @ontrol
>erhaps most contrasting is the level of corporate control involved in a franchise operation
versus a distributorship. Dith a distributorship the parent company supplies a line of products
and ma!es suggestions on how the distributor might mar!et and deliver the products. 8owever
it doesn*t dictate to the distributor how he must operate his businessN whether he sells only to
friends or goes door to door is entirely up to him. 9ecause franchise owners display the parent
company*s brand and represent it to the community they face much tighter control over their
daily business operations. Issues such as e&acting product or service procedures employee
training hours pricing mar!eting decor and even type and brand of e'uipment re'uired might
all be dictated by the franchisee*s parent company.
@orporate Fees
Franchise operations also bear substantial corporate fees which distributorships avoid. -ost
franchises re'uire that local franchisees pay not only a percentage of their gross sales to the
parent company in the form of a franchise royalty or ta& but also a percentage of their gross
sales for corporate mar!eting efforts. 9eyond these fees franchise owners must periodically
renew their franchise license with another franchise fee. .istributors simply pay a discounted
price for their products and sell them to customers for a profit.
The +ystem
One great attraction for franchisees is that the franchises they purchase have already been
developed into successful business operations 'uite often with nationally recogni#ed brands
integrated area or national mar!eting programs intensive training to operate the business and
a corporate structure for support with everything from low%cost supplier agreements to test
products to insurance. "lthough distributors enJoy much more personal freedom than do
franchisees they*re e&pected to operate their businesses with very little training or support from
their parent companies beyond supply and fulfillment services.