Franchising
Franchising is a contractual agreement between a manufacturer or business-idea owner—the franchiser—and a WHOLESALER or retailer—the franchisee. The franchiser sells to the franchisee the right to market its products or ideas and to use its TRADEMARKs and brand names. The franchisee agrees to meet the franchiser’s operating requirements, usually pays an initial fee for the franchise, and agrees to pay a percentage of sales to the franchiser. Franchising is big business in the United States. While it has existed for centuries, it boomed in the country after World War II. Growth of the interstate highway system in the 1950s and 1960s stimulated travel in the United States, and franchises offered travelers the expectation of standardized PRODUCTs or levels of service. Ray Kroc’s McDonald’s fast-food restaurants and the many hotel chains symbolized the growth of this type of business. Today over one-third of all retail sales in the United States are transacted through franchises. Critics argue the growth of franchising is creating “sameness” in America, reducing local and regional differences and creating cultural homogenization. Franchising is a business strategy that allows rapid and flexible penetration of markets, growth, and CAPITAL development. In the United States, franchises are typically distinguished as either product franchises or business-format franchises. Product franchises involve manufacturers who produce goods that are distributed through franchise agreements. Many ice-cream stores, soft-drink bottling outlets, and gasoline retailers are product franchises. Business-format franchises involve the LICENSING of INTELLECTUAL PROPERTY rights in conjunction with a unique “formula for success” of a business. Many service businesses, including hotels, fast food restaurants, and employment services, are examples of business-format franchising. Franchising provides both advantages and disadvantages to the franchiser and franchisee. Based on the growth of franchising in the United States, generally both sides benefit from this type of business relationship. For the franchisee the benefits include use of trademarks and brands that are recognized and preferred by customers, support and training from the franchiser organization, national ADVERTISING, a protected territory, reduced costs through bulk buying, and reduced risk from a proven business concept. The disadvantages for the franchisee include payments for use of the franchise trademark or brands, restrictions on business practices, and the potential to be hurt by actions taken by the franchiser or other franchisees. From the franchiser’s perspective, franchising allows faster growth into new markets before competitors copy its ideas, expansion without additional CAPITAL EXPENDITUREs, royalty payments from franchisees, and ECONOMIES OF SCALE through larger operations. Franchising also allows firms to expand internationally in conjunction with franchisees who understand and adapt to cultural differences. Franchises are subject to significant government regulation both from state and federal agencies. Many states and the FEDERAL TRADE COMMISSION enacted disclosure statutes for franchise agreements. The typical franchisedisclosure statute created criminal penalties for material misrepresentation or omission in franchise promotions. It usually permits withdrawal from any franchise agreement if the franchisee did not receive a copy of the PROSPECTUS. In the 1950s and 1960s, franchising was known for having many unscrupulous operators promising instant success and making unsubstantiated claims to potential franchisees. Franchising was and is often promoted as a way for people who do not have business experience to start their own enterprise, and it does reduce the RISK for new businesspeople through the knowledge gained by the franchiser. Most state franchise-disclosure laws require the franchiser to register with an agency by filing a franchise-offering circular. The state agency reviews the circular to ensure it meets the necessary disclosure requirements. Once registered, the franchiser is licensed to sell franchises in that state. Many states also review franchisers’ capitalization before permitting the sale of franchises. This is done to protect potential investors from franchisers who have made little initial investment in the proposed franchise system. States have also enacted laws dealing with the termination of franchise agreements. These laws typically prohibit franchisers from initiating termination of the franchise CONTRACT without “good cause,” which is usually defined as a material breach of the franchise agreement. Franchising is designed to provide standardized products and services even though the parent company (franchiser) does not own all the business outlets. Franchise agreements protect the image and reputation of the franchiser and the other franchisees from inappropriate actions by individual franchisees.
See also BRANDS, BRAND NAMES.
Franchising
Franchising is a contractual agreement between a manufacturer or business-idea owner—the franchiser—and a WHOLESALER or retailer—the franchisee. The franchiser sells to the franchisee the right to market its products or ideas and to use its TRADEMARKs and brand names. The franchisee agrees to meet the franchiser’s operating requirements, usually pays an initial fee for the franchise, and agrees to pay a percentage of sales to the franchiser. Franchising is big business in the United States. While it has existed for centuries, it boomed in the country after World War II. Growth of the interstate highway system in the 1950s and 1960s stimulated travel in the United States, and franchises offered travelers the expectation of standardized PRODUCTs or levels of service. Ray Kroc’s McDonald’s fast-food restaurants and the many hotel chains symbolized the growth of this type of business. Today over one-third of all retail sales in the United States are transacted through franchises. Critics argue the growth of franchising is creating “sameness” in America, reducing local and regional differences and creating cultural homogenization. Franchising is a business strategy that allows rapid and flexible penetration of markets, growth, and CAPITAL development. In the United States, franchises are typically distinguished as either product franchises or business-format franchises. Product franchises involve manufacturers who produce goods that are distributed through franchise agreements. Many ice-cream stores, soft-drink bottling outlets, and gasoline retailers are product franchises. Business-format franchises involve the LICENSING of INTELLECTUAL PROPERTY rights in conjunction with a unique “formula for success” of a business. Many service businesses, including hotels, fast food restaurants, and employment services, are examples of business-format franchising. Franchising provides both advantages and disadvantages to the franchiser and franchisee. Based on the growth of franchising in the United States, generally both sides benefit from this type of business relationship. For the franchisee the benefits include use of trademarks and brands that are recognized and preferred by customers, support and training from the franchiser organization, national ADVERTISING, a protected territory, reduced costs through bulk buying, and reduced risk from a proven business concept. The disadvantages for the franchisee include payments for use of the franchise trademark or brands, restrictions on business practices, and the potential to be hurt by actions taken by the franchiser or other franchisees. From the franchiser’s perspective, franchising allows faster growth into new markets before competitors copy its ideas, expansion without additional CAPITAL EXPENDITUREs, royalty payments from franchisees, and ECONOMIES OF SCALE through larger operations. Franchising also allows firms to expand internationally in conjunction with franchisees who understand and adapt to cultural differences. Franchises are subject to significant government regulation both from state and federal agencies. Many states and the FEDERAL TRADE COMMISSION enacted disclosure statutes for franchise agreements. The typical franchisedisclosure statute created criminal penalties for material misrepresentation or omission in franchise promotions. It usually permits withdrawal from any franchise agreement if the franchisee did not receive a copy of the PROSPECTUS. In the 1950s and 1960s, franchising was known for having many unscrupulous operators promising instant success and making unsubstantiated claims to potential franchisees. Franchising was and is often promoted as a way for people who do not have business experience to start their own enterprise, and it does reduce the RISK for new businesspeople through the knowledge gained by the franchiser. Most state franchise-disclosure laws require the franchiser to register with an agency by filing a franchise-offering circular. The state agency reviews the circular to ensure it meets the necessary disclosure requirements. Once registered, the franchiser is licensed to sell franchises in that state. Many states also review franchisers’ capitalization before permitting the sale of franchises. This is done to protect potential investors from franchisers who have made little initial investment in the proposed franchise system. States have also enacted laws dealing with the termination of franchise agreements. These laws typically prohibit franchisers from initiating termination of the franchise CONTRACT without “good cause,” which is usually defined as a material breach of the franchise agreement. Franchising is designed to provide standardized products and services even though the parent company (franchiser) does not own all the business outlets. Franchise agreements protect the image and reputation of the franchiser and the other franchisees from inappropriate actions by individual franchisees.
See also BRANDS, BRAND NAMES.