The origins, history and definitions of franchising

Question 1

What is business format franchising?

Answer 1

business format franchising is what most people are referring to when they speak of franchising.

it refers to a system in which the franchisor
grants a franchisee rights to operate a business under the banner of the franchisor using all of its systems, including signage, marketing, and the method of delivering goods and services.

Modern day franchising systems have evolved from
responses to logistical problems that arose out of the distribution and servicing of goods across large geographic regions

Question 2

What are the elements of contemporary business format franchising?

Answer 2

A main company (the franchisor) produces a product and trades under an established brand or trade name

The main company licenses others (the franchisees) to sell, service and repair the products using the trade name of the company, in exchange for the payment of certain fees

The main company’s image is replicated through uniform fit out of premises (or vehicles)

The main company develops a standardised system of delivering goods and services.

Question 3

What is product franchising

Answer 3

distributor of a specific product, such a petrol or soda, develops networks of independent retailers that sell that distributor’s product and use the distributor’s signage in exchange for payment of certain license fees.

Question 4

How does one determine a franchise for legal purposes?

Answer 4

A description of a business will usually provide a good idea of whether or not a particular business would be considered to be a franchise.
A franchise will display the four cornerstones of franchising. These are:
1) Brand ownership (by the
franchisor);
2) A franchise agreement (between the franchisor and a franchisee);
3) A licence (granted by the franchisor to the franchisee)
4) the payment of fees (by the franchisee to the franchisor).

Question 5

What is a franchisor?

Answer 5

A franchisor is a person or company that has created a commercial business and who wishes to allow other persons or companies to operate businesses under their brand.

Question 6

What is a franchisee?

Answer 6

A person or company that agrees to purchase the rights to operate an independent business using the franchisor’s specialist know-how and brand in exchange for a financial consideration.

Question 7

What is a franchising agreement?

Answer 7

The contract that exists between the franchisor and franchisee, setting out the terms and scope of the agreement that exists between
them.

Question 8

What is a franchising system?

Answer 8

The business network in which a number of franchisees
operate independent businesses all using the same brand, know-how and specialist knowledge of the franchisor for the payment of fees, pursuant to the terms and conditions of franchise agreements.

Question 9

What are the practical necessities that mark the difference between a franchise and a franchise that is financially viable for both the franchisor and the
franchisee?

Answer 9

The business developed by the franchisor is successful and that success is able to be replicated in different localities. If it is not possible to clone or replicate a business, there is no opportunity for franchising.

The franchisee needs to be trained in the methods of the franchisor, for without training the franchisee will not be able to replicate the business of the franchisor.

There needs to be ongoing support during the term (or period) of the franchise.

The franchisee must derive enough financial benefits as a part of the franchise system to warrant the payment of the franchise fees.

There should be a marketing system in place to benefit the franchisees and the system.

Question 10

What are common arguments as to why businesses can’t be franchised?

Answer 10

Personal services such as hairdressers and doctors, or creativity such as graphic design and art, are difficult to replicate.

Businesses with low profit margins are not suitable candidates because the payment of franchise fees would make such businesses unviable.

Businesses with a short life such as some technology businesses or fads are unsuitable because franchises are long term relationships that do not easily adapt to changing fashions of technology.

HOWEVER

Some businesses lend themselves to franchising more easily than others, but most businesses, or a discrete part of them, can be franchised.

Examples include:
Drop in hairdressers - Just Cuts
Priceline pharmacy
Tutor Doctor
Mobile Phone Hospital