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Encyclopedia > Franchising

Franchising (from the French franchir: vt to clear an obstacle or difficulty)[1] refers to the method of practicing and using another persons philosophy of business. The "franchisor" authorizes the proven methods and trademarks of his business to the "franchisee" for a fee and a percentage of gross monthly sales. Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor. Agreements typically last five to twenty years, with premature cancellations or terminations of most contracts bearing serious consequences for franchisees. The Bass Red Triangle, was the first trademark registered in Britain in 1876. ... // Advert redirects here. ... Training refers to the acquisition of knowledge, skills, and competencies as a result of the teaching of vocational or practical skills and knowledge that relates to specific useful skills. ...

Contents

Overview

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 franchise for a particular kind of vending machine, including a trademark and a royalty, but no method of doing business. This is called "product franchising" or "trade name franchising". A typical U.S. snack vending machine A vending machine is a machine that provides various snacks, beverages and other products to consumers. ...


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). Next big thing redirects here. ...


The franchisor typically earns royalties on the gross sales of the franchisee.[2] In such cases, franchisees must pay royalties whether or not they are realizing profits from their franchised business.


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 canceled or terminated for any reason before the expiration of the entire term of the contract.[citation needed] (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)


History

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.[3] Early American examples include the telegraph system, which was operated by various railroad companies but controlled by Western Union[4], and exclusive agreements between automobile manufacturers and operators of local dealerships.[5] 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. For the Jewish American writer, see Isaac Bashevis Singer. ... Elias Howes lockstitch machine, invented 1845 A sewing machine is a textile machine used to stitch fabric or other material together with thread. ... Dr. John Stith Pemberton (July 8, 1831 - August 16, 1888) was an American druggist who invented Coca-Cola. ... The wave shape (known as the dynamic ribbon device) present on all Coca-Cola cans throughout the world derives from the contour of the original Coca-Cola bottles. ... Telegraphy (from the Greek words tele = far away and grapho = write) is the long distance transmission of written messages without physical transport of letters, originally over wire. ... This is the top-level page of WikiProject trains Rail tracks Rail transport refers to the land transport of passengers and goods along railways or railroads. ... Western Union (NYSE: WU) is a financial services and communications company based in the United States. ... Car redirects here. ... This article is about car dealerships. ...


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.[6] In 1935, Howard Deering Johnson teamed up with Reginald Sprague to establish the first modern restaurant franchise. [7] [8] The idea was to let independent operators use the same name, food, supplies, logo and even building design in exchange for a fee. Year 1933 (MCMXXXIII) was a common year starting on Sunday (link will display full calendar) of the Gregorian calendar. ... A&W Root Beer is one of the major root beer franchises in the United States. ... Howard Deering Johnson (February 2, 1897 - June 20, 1972) was a U.S. hotel and restaurant industrialist. ...


The growth in franchises picked up steam in the 1930s when such chains as Howard Johnson's started franchising motels.[9] The 1950s saw a boom of franchise chains in conjunction with the development of the U.S. interstate highway system.[10] 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. The 1930s were described as an abrupt shift to more radical and conservative lifestyles, as countries were struggling to find a solution to the Great Depression, also known as the [[. In East Asia, the rise of militarism occurred. ... The current logo for Howard Johnsons motor lodges. ... The 1950s decade refers to the years 1950 to 1959 inclusive. ... Interstate Highways in the 48 contiguous states. ... Fast food is food prepared and served quickly at a fast-food restaurant or shop at low cost. ... McDonalds Corporation (NYSE: MCD) is the worlds largest chain of fast-food restaurants [1]. Although McDonalds did not invent the hamburger or fast food, its name has become nearly synonymous with both. ...


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.[2]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 there is continuing to grow and that franchising is growing in the national economy. [11] The University of Louisville (also known as U of L) is a public, state-supported university located in Louisville, Kentucky, United States. ... The Small Business Administration (SBA) is a United States government agency that provides support to small businesses. ...


Franchising is a business model used in more than 70 industries and that generates more than $1 trillion in U.S. sales annually.[12]


Businesses for which franchising works best

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.

Advantages

Image File history File links Question_book-3. ...

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 Retail redirects here. ... This article does not cite any references or sources. ...


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 franchisers 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.


Disadvantages

Control

For franchisees, the main disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, marketing, the franchisee is required to follow the system and get approval for changes from the franchisor. For these reasons, franchisees and entrepreneurs are very different. The United States Office of Advocacy of the SBA indicates that a franchisee "is merely a temporary business investment where he may be one of several investors during the lifetime of the franchise. In other words, he is "renting or leasing" the opportunity, not "buying a business for the purpose of true ownership." [13] Additionally, "A franchise purchase consists of both intrinsic value and time value. A franchise is a wasting asset due to the finite term, unless the franchisor chooses to contractually obligate itself it is under no obligation to renew the franchise." [14] For the computer game by Peter Molyneux, see The Entrepreneur. ...


Price

Starting and operating a franchise business carries expenses. In choosing to adopt the standards set by the franchisor, the franchisee often has no further choice as to signage, shop fitting, uniforms etc. The franchisee may not be allowed to source less expensive alternatives. Added to that is the franchise fee and ongoing royalties and advertising contributions. The contract may also bind the franchisee to such alterations as demanded by the franchisor from time to time. (As required to be disclosed in the state disclosure document and the franchise agreement under the FTC Franchise Rule) A franchise fee is a fee that a person pays to operate a franchise branch of a larger company and enjoy the profits therefrom. ...


Conflicts

The franchisor/franchisee relationship can easily cause conflict if either side is incompetent (or acting in bad faith). For example, an incompetent franchisee can easily damage the public's goodwill towards the franchisor's brand by providing inferior goods and services, and an incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits. Franchise agreements are unilateral contracts or contracts of adhesion wherein the contract terms generally are advantageous to the franchisor when there is conflict in the relationship. [15] Additionally, the legal publishing website Nolo.com listed the "Lack of Legal Recourse" as one of Ten Good Reasons Not to Buy a Franchise: It has been suggested that this article or section be merged into Incompetence. ... Look up Goodwill in Wiktionary, the free dictionary. ...

As a franchisee, you have little legal recourse if you're wronged by the franchisor. Most franchisors make franchisees sign agreements waiving their rights under federal and state law, and in some cases allowing the franchisor to choose where and under what law any dispute would be litigated. Shamefully, the Federal Trade Commission (FTC) investigates only a small minority of the franchise-related complaints it receives.[16]

Legal aspects

Australia

In Australia, franchising is regulated by the Franchising Code of Conduct, a mandatory code of conduct made under the Trade Practices Act 1974. Look up Code of Conduct in Wiktionary, the free dictionary Things called code of conduct or Code of Conduct include: code of conduct — a set of rules to guide behaviour and decisions Code of Conduct — a 2001 movie starring Kevin Bacon Code of Conduct — a book by Kirstine Smith that... The Trade Practices Act 1974 is an act of the Parliament of Australia. ...


The Code requires franchisors to produce a disclosure document which must be given to aprospective franchisee at least 14 days before the franchise agreement is entered into.


The Code also regulates the content of franchise agreements, for example in relation to marketing funds, a cooling-off period, termination and the resolution of disputes by mediation. For Wikipedias dispute resolution guidelines, see Wikipedia:Dispute resolution. ... For statistical mediation, see Mediation (Statistics). ...


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. States may 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.[17] 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. | logo_caption = | seal = US-FederalTradeCommission-Seal. ... UFOC is an abbreviation for Uniform Franchise Offering Circular, a legal document used in the franchising process in the United States. ...


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.[17] "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......." [18] This article or section should include material from Tenancy agreement A lease is a contract conveying from one person (the lessor) to another person (the lessee) the right to use and control some article of property for a specified period of time (the term), without conveying ownership, in exchange for...


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."[19]


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) . Arbitration is a legal technique for the resolution of disputes outside the courts, wherein the parties to a dispute refer it to one or more persons (the arbitrators or arbitral tribunal), by whose decision (the award) they agree to be bound. ... The Supreme Court Building, Washington, D.C. The Supreme Court Building, Washington, D.C., (large image) The Supreme Court of the United States, located in Washington, D.C., is the highest court (see supreme court) in the United States; that is, it has ultimate judicial authority within the United States... Burger King (NYSE: BKC), often abbreviated to BK, is a global chain of hamburger fast food restaurants. ... Burger King v. ... SUBWAY® is the name of a franchise fast food restaurant that mainly sells sandwiches and salads. ... 7-Eleven is an international conglomerate which operates the largest chain of convenience stores in twenty countries including: the United States, Canada, Norway, Sweden, Denmark, South Korea, Japan, Australia, Republic of China (Taiwan), Peoples Republic of China, Hong Kong, Malaysia, Mexico, The Philippines, Thailand, Singapore, Puerto Rico, and South... For other uses, see 7-Eleven (disambiguation). ...


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.[citation needed] Dunkin Donuts is an international coffee and donut retailer founded in 1950 in Quincy, Massachusetts, U.S. by William Rosenberg. ...


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.[citation needed] 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.[citation needed] 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.[who?]


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.[20] is the 142nd day of the year (143rd in leap years) in the Gregorian calendar. ... Year 2007 (MMVII) was a common year starting on Monday of the Gregorian calendar in the 21st century. ...


Kazakhstan

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. A civil code is a systematic compilation of laws designed to comprehensively deal with the core areas of private law. ...  Member state  Associate member Headquarters Minsk, Belarus Working language Russian Type Commonwealth Membership 11 member states 1 associate member Leaders  -  Executive Secretary Sergei Lebedev Establishment December 21, 1991 Website http://cis. ...


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. Social enterprises are organizations which trade in goods or services, and link that trade to a social mission. ...


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. CAP Märkte (CAP Markets) are medium-sized neighbourhood supermarkets in Germany employing disabled people. ... Packaged food aisles in a Fred Meyer store in Portland, Oregon A supermarket is a departmentalized self-service store offering a wide variety of food and household merchandise. ... For other uses, see Edinburgh (disambiguation). ... For other uses, see Trieste (disambiguation). ...


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. Look up event in Wiktionary, the free dictionary. ... For other uses, see Brand (disambiguation). ... For other uses, see Logo (disambiguation). ... This article or section does not cite any references or sources. ... Davos viewed from air Davos is a town in eastern Switzerland, in the canton of Graubünden, on the Landwasser River. ... Latin America consists of the countries of South America and some of North America (including Central America and some the islands of the Caribbean) whose inhabitants mostly speak Romance languages, although Native American languages are also spoken. ...


See also

  • Franchise consulting

Franchise consulting, a specialized category of professional assistance for investors, entrepreneurs, and enterprises, is a field which has arisen from the increased popularity and profitability of franchising, a business practice with reputed beginnings in mid-19th century America[1]. Potential franchise owners ( “franchisees” ) employ the services of a franchise consultant...

References

  1. ^ "Harrap's shorter French and English dictionary" ISBN 0-245-55046-1
  2. ^ a b Frandata Corporation (February 2000) The Profile of Franchising: A Statistical Abstract of UFOC Data accessed 2007-12-20
  3. ^ Franchising - Types Of Franchises, History Of Franchising, The Spread Of Franchising
  4. ^ Lemelson Center: Archives: Western Union Collection
  5. ^ http://findarticles.com/p/articles/mi_m0FJN/is_n8_v30/ai_18728418
  6. ^ http://www.aw-drivein.com/About_Us.cfm A&W official site: About Us
  7. ^ Allen, Robin Lee. (1998). Foodservice’s theory of evolution: Survival of the fittest. Nation’s Restaurant News 32(4), pages 14 -17.
  8. ^ Howard, T. (1996). Howard Johnson: Initiator of franchised restaurants. Nation’s Restaurant News, 30(2), pages 85-86.
  9. ^ http://www.wdfi.org/fi/securities/franchise/history.htm
  10. ^ Special Report: The Interstate Highway System at 50, Civil Engineering—ASCE, Vol. 76, No. 6, (June 2006), page 36
  11. ^ Johnson, Darrell. Franchising continues to grow across the United States Franchising World (Nov 1, 2007)
  12. ^ Econ Study cover_title pg
  13. ^ Letter, SBA Office of Advocacy, to Donald S. Clark, Secretary, The Federal Trade Commission, Re: 16 CFR Part 436, dated April 10, 1997
  14. ^ Steinberg, Paul and Lescatre, Gerald. Beguiling Heresy: Regulating the Franchise Relationship, Penn State Law Review, The Dickinson School of Law, Pennsylvania State University, Volume 109, 2004, Number 1, page 211.
  15. ^ Steinberg, Paul and Lescatre, Gerald. Beguiling Heresy: Regulating the Franchise Relationship, Penn State Law Review, Dickinson School of Law, Pennsylvania State University, Volume 109, (2004), Number 1, page 107.
  16. ^ "Ten Good Reasons Not to Buy a Franchise" Entrepreneurs (2006-10-02)
  17. ^ a b Disclosure requirements and prohibitions concerning franchising and business opportunity ventures. United States Federal Trade Commission (1986-01-01).
  18. ^ Page 114 Penn State Law Review, The Dickinson School of Law, The Pennsuylvania State University, Beguiling Heresy: Regulating the Franchise Relationship, by Paul Steinberg, Gerald Lescatre, Volume 109, 2004, Number 1.
  19. ^ New Rules Website
  20. ^ "Franchise Industry" (22 May 2007). Daily Hansard: Column 363WH. 
  21. ^ Kissikov Beknur. Franchising. 

Year 2007 (MMVII) was a common year starting on Monday of the Gregorian calendar in the 21st century. ... is the 354th day of the year (355th in leap years) in the Gregorian calendar. ... November 1 is the 305th day of the year (306th in leap years) in the Gregorian Calendar, with 60 days remaining. ... Year 2007 (MMVII) was a common year starting on Monday of the Gregorian calendar in the 21st century. ... Year 2006 (MMVI) was a common year starting on Sunday of the Gregorian calendar. ... is the 275th day of the year (276th in leap years) in the Gregorian calendar. ... Year 1986 (MCMLXXXVI) was a common year starting on Wednesday (link displays 1986 Gregorian calendar). ... is the 1st day of the year in the Gregorian calendar. ...

External links


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