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Franchising is based on a
marketing
Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
concept which can be adopted by an organization as a strategy for business expansion. Where implemented, a franchisor licenses some or all of its know-how, procedures,
intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
, use of its
business model
A business model describes how an organization creates, delivers, and captures value,''Business Model Generation'', Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2010 in economic, soci ...
, brand, and rights to sell its branded products and services to a franchisee. In return, the franchisee pays certain fees and agrees to comply with certain obligations, typically set out in a franchise agreement.
The word ''franchise'' is of Anglo-French derivation—from , meaning 'free'—and is used both as a noun and as a (transitive) verb.
For the franchisor, use of a franchise system is an alternative business growth strategy, compared to expansion through corporate owned outlets or "
chain store
A chain store or retail chain is a retail outlet in which several locations share a brand, central management and standardized business practices. They have come to dominate the retail and dining markets and many service categories, in many pa ...
s". Adopting a franchise system business growth strategy for the sale and distribution of goods and services minimizes the franchisor's capital investment and liability risk.
Franchising is rarely an equal partnership, especially in the typical arrangement where the franchisee is an individual, unincorporated partnership or small privately-held corporation, as this will ensure the franchisor has substantial legal and/or economic advantages over the franchisee. The usual exception to this rule is when the prospective franchisee is also a powerful corporate entity controlling a highly lucrative location and/or captive market (for example, a large sports stadium) in which prospective franchisors must then compete to exclude one another from. However, under specific circumstances like transparency, favourable legal conditions, financial means and proper market research, franchising can be a vehicle of success for both a large franchisor and a small franchisee.
Thirty-six countries have laws that explicitly regulate franchising, with the majority of all other countries having laws which have a direct or indirect effect on franchising.
Franchising is also used as a
foreign market entry mode.
History
The boom in franchising did not take place until after World War II. Nevertheless, the rudiments of modern franchising date back to the Middle Ages when landowners made franchise-like agreements with tax collectors, who retained a percentage of the money they collected and turned the rest over. The practice ended around 1562 but spread to other endeavors. For example, in 17th-century England franchisees were granted the right to sponsor markets and fairs or operate ferries. There was little growth in franchising, though, until the mid-19th century, when it appeared in the United States for the first time.
One of the first successful American franchising operations was started by an enterprising druggist named
John S. Pemberton
John Stith Pemberton (July 8, 1831 – August 16, 1888) was an American pharmacist and Confederate States Army veteran who is best known as the inventor of Coca-Cola. In May 1886, he developed an early version of a beverage that would later bec ...
. In 1886, he concocted a beverage comprising sugar, molasses, spices, and cocaine. Pemberton licensed selected people to bottle and sell the drink, which was an early version of what is now known as Coca-Cola. His was one of the earliest—and most successful—franchising operations in the United States.
The
Singer Company
Singer Corporation is an American manufacturer of consumer sewing machines, first established as I. M. Singer & Co. in 1851 by Isaac Singer, Isaac M. Singer with New York lawyer Edward Cabot Clark, Edward C. Clark. Best known for its sewing ma ...
implemented a franchising plan in the 1850s to distribute its sewing machines. The operation failed, though, because the company did not earn much money even though the machines sold well. The dealers, who had exclusive rights to their territories, absorbed most of the profits because of deep discounts. Some failed to push Singer products, so competitors were able to outsell the company. Under the existing contract, Singer could neither withdraw rights granted to franchisees nor send in its own salaried representatives. So, the company started repurchasing the rights it had sold. The experiment proved to be a failure. That may have been one of the first times a franchisor failed, but it was by no means the last. (Even Colonel Sanders did not initially succeed in his
Kentucky Fried Chicken franchising efforts.) Still, the Singer venture did not put an end to franchising.
Other companies tried franchising in one form or another after the Singer experience. For example, several decades later,
General Motors Corporation
The General Motors Company (GM) is an American multinational automotive manufacturing company headquartered in Detroit, Michigan, United States. It is the largest automaker in the United States and was the largest in the world for 77 years bef ...
established a somewhat successful franchising operation in order to raise capital. Perhaps the father of modern franchising, though, is
Louis K. Liggett
Louis Kroh Liggett (April 4, 1875 – June 5, 1946) was an American drug store magnate who founded L.K. Liggett Drug Company and then Rexall. He was later chairman of United Drug Company. He was a member of the Republican National Committe ...
. In 1902, Liggett invited a group of druggists to join a "drug cooperative." As he explained to them, they could increase profits by paying less for their purchases, especially if they set up their own manufacturing company. His idea was to market private label products. About 40 druggists pooled $4,000 of their own money and adopted the name
Rexall
Rexall was a chain of American drugstores, and the name of their store-branded products. The stores, having roots in the federation of United Drug Stores starting in 1903, licensed the Rexall brand name to as many as 12,000 drug stores across th ...
. Sales soared, and Rexall became a franchisor. The chain's success set a pattern for other franchisors to follow.
Although many business owners did affiliate with cooperative ventures of one type or another, there was little growth in franchising until the early 20th century, and in whatever form franchising existed, it looked nothing like what it is today. As the United States shifted from an agricultural to an industrial economy, manufacturers licensed individuals to sell automobiles, trucks, gasoline, beverages, and a variety of other products. The franchisees did little more than selling the products, though. The sharing of responsibility associated with contemporary franchising arrangement did not exist to a great extent. Consequently, franchising was not a growth industry in the United States.
It was not until the 1960s and 1970s that people began to take a close look at the attractiveness of franchising. The concept intrigued people with entrepreneurial spirit. However, there were serious pitfalls for investors, which almost ended the practice before it became truly popular.
![Pizza Hut (SM City BF Parañaque branch) storefront](https://upload.wikimedia.org/wikipedia/commons/a/a8/Pizza_Hut_%28SM_City_BF_Para%C3%B1aque_branch%29_storefront.jpg)
The United States is a leader in franchising, a position it has held since the 1930s when it used the approach for fast-food restaurants, food inns and, slightly later, motels at the time of the
Great Depression. As of 2005, there were 909,253 established franchised businesses, generating $880.9 billion of output and accounting for 8.1 percent of all private, non-farm jobs. This amounts to 11 million jobs, and 4.4 percent of all private sector output.
Mid-sized franchises like restaurants, gasoline stations and trucking stations involve substantial investment and require all the attention of a businessperson.
There are also large franchises like hotels, spas and hospitals, which are discussed further under
technological alliance
There are various patterns of technological alliancesPatterns of Internationalization (Alliances and joint ventures), UNIDO, Vienna, 2008 ISBN 978-92--1-106443-8 from R&D enterprises to associations formed with the main purpose of sub-contracted m ...
s.
"No poaching" agreements are prevalent within franchises, thus limiting the ability of employers at one franchise establishment to hire employees at an affiliated franchise. Economists have characterized these agreements as a contributor to
oligopsony
An oligopsony (from Greek ὀλίγοι (''oligoi'') "few" and ὀψωνία (''opsōnia'') "purchase") is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in a mark ...
.
Fees and contract arrangement
Three important payments are made to a franchisor: (a) a
royalty
Royalty may refer to:
* Any individual monarch, such as a king, queen, emperor, empress, etc.
* Royal family, the immediate family of a king or queen regnant, and sometimes his or her extended family
* Royalty payment for use of such things as int ...
for the trademark, (b) reimbursement for the training and advisory services given to the franchisee, and (c) a percentage of the individual business unit's sales. These three fees may be combined in a single 'management' fee. A fee for "disclosure" is separate and is always a "front-end fee".
A franchise usually lasts for a fixed time period (broken down into shorter periods, which each require renewal), and serves a specific territory or geographical area surrounding its location. One franchisee may manage several such locations. Agreements typically last from five to thirty years, with premature cancellations or terminations of most contracts bearing serious consequences for franchisees. A franchise is merely a temporary business investment involving renting or leasing an opportunity, not the purchase of a business for the purpose of ownership. It is classified as a wasting asset due to the finite term of the license.
Franchise fees are on average 6.7% with an additional average marketing fee of 2%. However, not all franchise opportunities are the same and many franchise organizations are pioneering new models that challenge antiquated structures and redefine success for the organization as well as the franchisee.
A franchise can be exclusive, non-exclusive or "sole and exclusive".
Although franchisor revenues and profit may be listed in a
franchise disclosure document (FDD), no laws require an estimate of franchisee profitability, which depends on how intensively the franchisee "works" the franchise. Therefore, franchisor fees are typically based on "gross revenue from sales" and not on profits realized. See
remuneration
Remuneration is the pay or other financial compensation provided in exchange for an employee's ''services performed'' (not to be confused with giving (away), or donating, or the act of providing to). A number of complementary benefits in addition ...
.
Various tangibles and intangibles such as national or international
advertising
Advertising is the practice and techniques employed to bring attention to a product or service. Advertising aims to put a product or service in the spotlight in hopes of drawing it attention from consumers. It is typically used to promote a ...
,
training
Training is teaching, or developing in oneself or others, any skills and knowledge or fitness that relate to specific useful competencies. Training has specific goals of improving one's capability, capacity, productivity and performance. I ...
and other support services are commonly made available by the franchisor.
Franchise brokers help franchisors find appropriate franchisees. There are also main 'master franchisors' who obtain the rights to sub-franchise in a territory.
According to the International Franchise Association approximately 44% of all businesses in the United States are franchisee-worked.
Rationale and risk shift
Franchising is one of the few means available to access
venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...
without the need to give up control of the operation of the chain and build a distribution system for servicing it. After the brand and formula are carefully designed and properly executed, franchisors are able to sell franchises and expand rapidly across countries and continents using the capital and resources of their franchisees while reducing their own risk.
There is also risk for the people buying the franchises. However, failure rates are much lower for franchise businesses than independent business startups.
Franchisor rules imposed by the franchising authority are becoming increasingly strict. Some franchisors are using minor rule violations to terminate contracts and seize the franchise without any reimbursement.
Advantages and disadvantages of franchising as an entry mode
Franchising brings with it several advantages and disadvantages for firms looking to expand into new areas and foreign markets. The primary advantage is that the firm does not have to bear the development cost and risks of opening a foreign market on its own, as the franchisee is typically responsible for those costs and risks, putting the onus on them to build a profitable operation as quickly as possible.
Through franchising, a firm has the potential of building a global presence quickly and also at a low cost and risk.
For the franchisee, the primary advantages are access to a well-known brand, support in setting up the business using operating manuals, and ongoing operational support including access to suppliers and employee training.
A primary disadvantage to franchising is quality control, as the franchisor wants the firm's brand name to convey a message to consumers about the quality and consistency of the firm's product.
They want the consumer to experience the same quality regardless of location or franchise status.
This can prove to be an issue with franchising, as a customer who had a bad experience at one franchise may assume that they will have the same experience at other locations with other services. Distance can make it difficult for firms to detect whether or not the franchises are of poor quality.
One way around this disadvantage is to set up extra subsidiaries in each country or state in which the firm expands. This creates a smaller number of franchisees to oversee, which will reduce the quality control challenges.
Obligations of the parties
Each party to a franchise has several interests to protect. The franchisor is involved in securing protection for the trademark, controlling the business concept and securing
know-how
Know-how (or knowhow, or procedural knowledge) is a term for practical knowledge on how to accomplish something, as opposed to "know-what" (facts), "know-why" (science), or "know-who" (communication). It is also often referred to as street smar ...
. The franchisee is obligated to carry out the services for which the trademark has been made prominent or famous. There is a great deal of standardization required. The place of service has to bear the franchisor's signs, logos and trademark in a prominent place. The uniforms worn by the staff of the franchisee have to be of a particular design and color. The service has to be in accordance with the pattern followed by the franchisor in the successful franchise operations. Thus, franchisees are not in full control of the business, as they would be in retailing.
A service can be successful if equipment and supplies are purchased at a fair price from the franchisor or sources recommended by the franchisor. A coffee brew, for example, can be readily identified by the trademark if its raw materials come from a particular supplier. If the franchisor requires purchase from her stores, it may come under
anti-trust legislation
Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust l ...
or equivalent laws of other countries. So, too, with purchases such as the uniforms of personnel and signs, as well as the franchise sites, if they are owned or controlled by the franchisor.
The franchisee must carefully negotiate the license and must develop a marketing or business plan with the franchisor. The fees must be fully disclosed and there should not be any hidden fees. The start-up costs and working capital must be known before the license is granted. There must be assurance that additional licensees will not crowd the "territory" if the franchise is worked according to plan. The franchisee must be seen as an independent merchant. It must be protected by the franchisor from any trademark infringement by third parties. A franchise attorney is required to assist the franchisee during negotiations.
Often the training period – the costs of which are in great part covered by the initial fee – is too short in cases where it is necessary to operate complicated equipment, and the franchisee has to learn on their own from instruction manuals. The training period must be adequate, but in low-cost franchises it may be considered expensive. Many franchisors have set up corporate universities to train staff online. This is in addition to providing literature, sales documents and email access.
Also, franchise agreements carry no guarantees or
warranties
In contract law, a warranty is a promise which is not a condition of the contract or an innominate term: (1) it is a term "not going to the root of the contract",Hogg M. (2011). ''Promises and Contract Law: Comparative Perspectives''p. 48 Cambri ...
and the franchisee has little or no recourse to legal intervention in the event of a dispute. Franchise contracts tend to be unilateral and favor of the franchisor, who is generally protected from lawsuits from their franchisees because of the non-negotiable contracts that franchisees are required to acknowledge, in effect, that they are buying the franchise knowing that there is risk, and that they have not been promised success or profits by the franchisor. Contracts are renewable at the sole option of the franchisor. Most franchisors require franchisees to sign agreements that mandate where and under what law any dispute would be litigated.
Regulations
Australia
In 2016 there were an estimated 1,120 franchise brands operating in Australia and an estimated 79,000 units operating in business format franchises, with a total brand turnover of approximately $146 billion and a sales revenue of approximately $66.5 billion.
In 2016 the majority of franchise brands were retailers with the largest segment being non-food retailing, accounting for 26 percent of brands, a further 19 percent of brands were involved in food retailing, 15 percent of franchisors operated in administration and support services, 10 percent in other services, 7 percent in education and training and 7 percent in rental, hire and real estate services.
[
Franchising in Australia commenced in a significant way in the early 1970s under the influence of the franchised US fast food systems such as KFC, ]Pizza Hut
Pizza Hut is an American multinational restaurant chain and international franchise founded in 1958 in Wichita, Kansas by Dan and Frank Carney. They serve their signature pan pizza and other dishes including pasta, breadsticks and dessert a ...
, and McDonald's
McDonald's Corporation is an American multinational fast food chain, founded in 1940 as a restaurant operated by Richard and Maurice McDonald, in San Bernardino, California, United States. They rechristened their business as a hambur ...
. It was however underway prior to this and a decade earlier in 1960 Leslie Joseph Hooker
Sir Leslie Joseph Hooker (18 August 1903 – 29 April 1976) (born Leslie Joseph Tingyou) was an Australian property entrepreneur, businessman and philanthropist. From humble beginnings he created the LJ Hooker empire and was at one time Austral ...
, considered a pioneer of franchising, created Australia's first national real estate agency network of Hooker real estate agencies.
In Australia, franchising is regulated by the Franchising Code of Conduct, a mandatory code of conduct
A code of conduct is a set of rules outlining the norms, rules, and responsibilities or proper practices of an individual party or an organization.
Companies' codes of conduct
A company code of conduct is a set of rules which is commonly writt ...
concluded under the Trade Practices Act 1974.
The ACCC regulates the Franchising Code of Conduct, which is a mandatory industry code that applies to the parties to a franchise agreement.
This code requires franchisors to produce a disclosure document which must be given to a prospective 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.
Franchising code of conduct
On 1 January 2015, the old Franchising Code was repealed and replaced with a new Franchising Code of Conduct. The new Code applies to conduct on or after 1 January 2015.
The new Code:
* introduces an obligation under the Code for parties to act in good faith in their dealings with one another
* introduces financial penalties and infringement notices for serious breaches of the Code
* requires franchisors to provide prospective franchisees with a short information sheet outlining the risks and rewards of franchising
* requires franchisors to provide greater transparency in the use of and accounting for money used for marketing and advertising and to set up a separate marketing fund for marketing and advertising fees
* requires additional disclosure about the ability of the franchisor and a franchisee to sell online
* prohibits franchisors from imposing significant capital expenditure except in limited circumstances.
These are significant changes and it is important that franchisors, franchisees and potential franchises understand their rights and responsibilities under the Code.
For further information about the changes to the Code, please see the updated Franchisor Compliance Manual and the Franchisee Manual.
The Code explanatory materials are available from the ComLaw website (link is external).
New Zealand
New Zealand is served by around 423 franchise systems operating 450 brands, giving it the highest proportion of franchises per capita in the world. Despite (or because of) the 2008–2009 recession, the total number of franchised units increased by 5.3% from 2009 to 2010. There is no separate law covering franchises, so they are covered by normal commercial law. This functions very well in New Zealand and includes law as it applies to contracts, restrictive trade practices, intellectual property, and the law of misleading or deceptive conduct.
The Franchise Association of New Zealand introduced a self-regulatory code of practice for its members in 1996. This contains many provisions similar to those of the Australian Franchising Code of Practice legislation, although only around a third of all franchises are members of the association and therefore bound by the code.
A case of fraud in 2007 perpetrated by a former master franchisee of the country's largest franchise system led to a review of the need for franchise law by the Ministry of Economic Development. The New Zealand Government decided there was no case for franchise-specific legislation at that time. This decision was criticised by the opposition, which had initiated the review when in power, and the review process was questioned by a leading academic. The Franchise Association originally supported the positive regulation of the franchise sector but its eventual submission to the review was in favour of the status quo of self-regulation.
Brazil
By the end of 2012, about 2,031 franchise brands were operating in Brazil, with approximately 93,000 locations, making it one of the largest countries in the world in terms of number of units. Around 11 percent of this total were foreign-based franchisors.
The Brazilian Franchise Law (Law No. 8955 of December 15, 1994) defines the franchise as a system in which the franchisor licenses the franchisee, for a payment, the right to use a trademark or patent along with the right to distribute products or services on an exclusive or semi-exclusive basis.
The provision of a "Franchise Offer Circular", or disclosure document, is mandatory before execution of agreement and is valid for all of the Brazilian territory. Failure to disclose voids the agreement, which leads to refunds and serious payments for damages. The Franchise Law does not distinguish between Brazilian and foreign franchisors. The National Institute of Industrial Property (INPI) is the registering authority. Indispensable documents are a Statement of Delivery (of disclosure documentation) and a Certification of Recording (INPI). The latter is necessary for payments. All sums may not be convertible into foreign currency. Certification may also mean compliance with Brazil's antitrust legislation.
Parties to international franchising may decide to adopt the English language for the document, as long as the Brazilian party knows English fluently and expressly acknowledges that fact, to avoid translation. The registration accomplishes three things:
: * It make the agreement effective against third parties
: * It permits the remittance of payments
: * It qualifies the franchisee for tax deductions.
Canada
In Canada, recent legislation has mandated better disclosure and fair treatment of franchisees. The regulations also ensure their right to form associations and launch collective action, even if they signed contracts prohibiting such moves. Franchising in Canada involves 1,300 brands, 80,000 franchise units accounting for about 20% of all consumer spending.
China
China has the most franchises in the world but the scale of their operations is relatively small. The average franchise system in China has about 45 outlets, compared to more than 540 in the United States. Together, there are 2600 brands in some 200,000 retail markets. KFC was the most significant foreign entry in 1987 and is widespread. ["Franchising in China" ''Franchise.org''] Many franchises are in fact joint-ventures, as at their forming the franchise law was not explicit. For example, McDonald's
McDonald's Corporation is an American multinational fast food chain, founded in 1940 as a restaurant operated by Richard and Maurice McDonald, in San Bernardino, California, United States. They rechristened their business as a hambur ...
is a joint venture. Pizza Hut
Pizza Hut is an American multinational restaurant chain and international franchise founded in 1958 in Wichita, Kansas by Dan and Frank Carney. They serve their signature pan pizza and other dishes including pasta, breadsticks and dessert a ...
, TGIF, Wal-mart
Walmart Inc. (; formerly Wal-Mart Stores, Inc.) is an American multinational retail corporation that operates a chain of hypermarkets (also called supercenters), discount department stores, and grocery stores from the United States, headquarter ...
, Starbucks followed not long thereafter. But total franchising is only 3% of retail trade, which seeks foreign franchise growth.
The year 2005 saw the birth of an updated franchise law,[ "Measures for the Administration of Commercial Franchise". Previous legislation (1997) made no specific inclusion of foreign investors. Further updates were made in 2007, with the objective of increased clarity of the law.
The laws are applicable if there are transactions involving a trademark combined with payments with many obligations on the franchisor. The law comprises 42 articles and eight chapters.
Among the franchisor obligations are:
* The FIE (foreign-invested enterprise) franchisor must be registered by the regulator
* The franchisor (or its subsidiary) must have operated at least two company-owned franchises in China (revised to "anywhere") for more than 12 months ("the two-shop, one-year" rule)
* The franchisor must disclose any information requested by the franchisee
* Cross-border franchising, with some caveats, is possible (2007 law).
The franchisor must meet a list of requirements for registration, among which are:
* The standard franchise agreement, working manual and working capital requirements,
* A track-record of operations, and ample ability to supply materials,
* The ability to train the Chinese personnel and provide long-term operational guidance,
* The franchise agreement must have a minimum three-year term.
Among other provisions:
* The franchisor is liable for certain actions of its suppliers
* Monetary and other penalties apply for infractions of the regulations.
The disclosure must take place 20 days in advance. It has to contain:
* Details of the franchisor's experience in the franchised business with scope of business
* Identification of the franchisor's principal officers
* Litigation of the franchisor during the past five years
* Full details about all franchise fees
* The amount of a franchisee's initial investment
* A list of the goods or services the franchisor can supply, and the terms of supply
* The training franchisees will receive
* Information about the trademarks, including registration, usage and litigation
* Demonstration of the franchisor's capabilities to provide training and guidance
* Statistics about existing units, including number, locations and operational results, and the percentage of franchises that have been terminated, and
* An audited financial report and tax information (for an unspecified period of time).
Other elements of this legislation are:
* The franchisee's confidentiality obligations continue indefinitely after termination or expiration of the franchise agreement
* If the franchisee has paid a deposit to the franchisor, it must be refunded on termination of the franchise agreement; upon termination, the franchisee is prohibited from continuing to use the franchisor's marks.
]
India
The franchising of foreign goods and services to India is in its infancy. The first International Exhibition was only held in 2009. India is, however, one of the biggest franchising markets because of its large middle-class of 300 million who are not reticent about spending and because the population is entrepreneurial in character. In a highly diversified society, (see Demographics of India
India is the second most populated country in the world with a sixth of the world's population. According to official estimates, India's population stood at 1.38 billion.
Between 1975 and 2010, the population doubled to 1.2 billio ...
) McDonald's is a success story despite its menu differing from that of the rest of the world.
So far, franchise agreements are covered under two standard commercial laws: the Contract Act 1872 and the Specific Relief Act 1963, which provide for both specific enforcement of covenants in a contract and remedies in the form of damages for breach of contract.
Kazakhstan
In Kazakhstan franchise turnover for 2013 is 2.5 billion US$ dollars per year. Kazakhstan is the leader in Central Asia in the franchising market. A special law on franchising came into effect in 2002. There are more than 300 franchise systems and the number of franchised outlets approaches 2000. Kazakhstan franchising began with the emergence of a Coca-Cola factory, opened to sublicense a Turkish licensor of the same brand. The plant was built in 1994. Other brands that are also present in Kazakhstan through the franchise system include Pepsi, Hilton, Marriott, Intercontinental, and Pizza Hut.
Europe
Franchising has grown rapidly in Europe in recent years, but the industry is largely unregulated. The European Union has not adopted a uniform franchise law. Only six of the 27 member states have a pre-contract disclosure law. They are France (1989), Spain (1996), Romania (1997), Italy (2004), Sweden (2004) and Belgium (2005). Estonia and Lithuania have franchise laws that impose mandatory terms on franchise agreements. In Spain there is also mandatory registration on a public registry. Although they have no franchise specific laws, Germany and those countries with a legal system based upon that of Germany, such as Austria, Greece and Portugal, probably impose the greatest regulatory burden on franchisors due to their tendency to treat franchisees as quasi consumers in certain circumstances and the willingness of the judiciary to use the concept of good faith to make pro-franchisee decisions. In the UK, the recent Papa John case shows that there is also a need for pre-contractual disclosure and the Yam Seng case shows that there is a duty of good faith in franchise relationships.
The European Franchising Federation's Code of Ethics has been adopted by seventeen national franchise associations. However this has no legal force and enforcement by the national associations is neither uniform of rigorous. Commentators like Dr Mark Abell, in his book "The Law and Regulation of Franchising in the EU" (published in 2013 by Edward Elgar, ) consider this lack of uniformity to be one of the greatest barriers to franchising realising its potential in the EU.
When adopting a European strategy, it is important that a franchisor takes expert legal advice. Most often one of the principal tasks in Europe is to find retail space, which is not so significant a factor in the USA. This is where the franchise broker, or the master franchisor, plays an important role. Cultural factors are also relevant, as local populations tend to be heterogeneous.
France
France is one of Europe's largest markets. Similar to the United States, it has a long history of franchising, dating back to the 1930s. Growth came in the 1970s. The market is considered difficult for outside franchisors because of cultural characteristics, yet McDonald's and Century 21 are found everywhere. There are some 30 U.S. firms involved in franchising in France.
There are no government agencies regulating franchises. The Loi Doubin Law of 1989 was the first European franchise disclosure law. Combined with Decree No. 91-337, it regulates disclosure, although the decree also applies to any person who provides to another person a corporate name, trademark or trade name or other business arrangements. The law applies to "exclusive or quasi-exclusive territory". The disclosure document must be delivered at least 20 days before the execution of the agreement or any payments are made.
The specific and important disclosures to be made are:
# The date of the founding of the franchisor's enterprise and a summary of its business history and all information necessary to assess the business experience of the franchisor, including bankers,
# A description of the local market for the goods or services,
# The franchisor's financial statements for the previous two years,
# A list of all other franchisees currently in the network,
# All franchisees who have left the network during the preceding year, whether by termination or non-renewal, and
# The conditions for renewal, assignment, termination and the scope of exclusivity.
Initially, there was some uncertainty whether any breach of the provisions of the Doubin Law would enable the franchisee to walk away from the contract.
However, the French supreme court () eventually ruled that agreements should only be annulled where missing or incorrect information affected the decision of the franchisee to enter into the agreement. The burden of proof is on the franchisee.
Dispute settlement features are only incorporated in some European countries. By not being rigorous, franchising is encouraged.
Italy
Under Italian law franchise is defined as an arrangement between two financially independent parties where a franchisee is granted, in exchange for a consideration, the right to market goods and services under particular trademarks. In addition, articles dictate the form and content of the franchise agreement and define the documents that must be made available 30 days prior to execution. The franchisor must disclose:
:a) A summary of the franchise activities and operations,
:b) A list of franchisees currently operating in the franchise system in Italy,
:c) Year-by-year details of the changes in the number of franchisees for the previous three years in Italy,
:d) A summary of any court or arbitral proceedings in Italy related to the franchise system, and
:e) If requested by the franchisee, copies of franchisor's balance sheets for the previous three years, or since start-up if that period is shorter.
Norway
There are no specific laws regulating franchising in Norway. However, the Norwegian Competition Act section 10 prohibits cooperation which may prevent, limit or diminish the competition. This may also apply to vertical cooperation such as franchising.
Russia
In Russia, under chapter 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 who were selling vodka and meat patties contrary to their contracts, rather than pursue legal remedies.
Spain
The legal definition of franchising in Spain is an activity in which an undertaking, the franchisor, grants to another party, the franchisee, for a specific market and in exchange for financial compensation (either direct, indirect or both), the right to exploit an owned system to commercialize products or services already exploited by the franchisor with enough success and experience.
The Spanish Retail Trading Act regulates franchising. The contents of the franchise must include, at least:
* The use of a common name or brand or any other intellectual property right and a uniform presentation of the premises or the transport means included in the agreement.
* The communication by the franchisor to the franchise of certain technical knowledge or substantial and singular know-how that has to be owned by the franchisor, and
* Technical or commercial assistance or both, provided by the franchisor to the franchisee during the agreement, without prejudice to any supervision faculty to which the parties could freely agree in the contract.
In Spain, the franchisor submits the disclosure information 20 days prior to signing the agreement or prior to any payment made by the franchisee to the franchisor. Franchisors are to disclose to the potential franchisee specific information in writing. This information has to be true and not misleading and include:
* Identification of the franchisor;
* Justification of ownership or license for use of any trademark or similar sign and judicial claims affecting them as well as the duration of the license;
* General description of the sector in which the franchise operates;
* Experience of the franchisor;
* Contents and characteristics of the franchise and its exploitation;
* Structure and extension of the network in Spain;
* Essential elements of the franchise agreement.
Franchisors (with some exceptions) should be registered in the Franchisors' Register and provide the requested information. According to the regulation in force in 2010 this obligation has to be met within three months after the start of its activities in Spain.
Turkey
Franchising is a sui generis contract which bears the characteristics of several explicitly regulated contracts such as; agency, sales contract and so forth. The regulations concerning these kinds of contracts in Turkish Commercial Code and in Turkish Code of Obligations are applied to franchising. Franchising is described in doctrine and has several essential components such as; the independence of the franchisee from the franchisor, the use of know-how and the uniformity of product and services, standard use of the brand and logo, payment of a royalty fee, increasement of sales by the franchisee and continuity.
Franchising may be for a determined or undetermined period of time. The undetermined one can only be annulled either by a notice before a reasonable amount of time or by a just cause. The franchising agreement with a determined time period ends within the end of the time period if not specified otherwise in the agreement. However, termination based on just cause is also foreseen for franchising agreement with a determined time period.
United Kingdom
In the United Kingdom there are no franchise-specific laws; franchises are subject to the same laws that govern other businesses. There is some self-regulation through the British Franchise Association (BFA) and the Quality Franchise Association (QFA).
There are a number of franchise businesses which are not members of the BFA and many which do not meet the BFA membership criteria. Part of the BFA's role in self-regulation is to work with franchisors through the application process and recommend changes which will lead to the franchise business meeting BFA standards. A number of businesses that refer to themselves as franchises do not conform to the BFA Code of Ethics are therefore excluded from membership.
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 incurred by citizens who had invested in franchises. The Minister for Industry and the Regions, Margaret Hodge, conducted hearings but saw no need for any government regulation of franchising with the advice that government regulation of franchising might lull the public into a false sense of security. Mr Mark Prisk MP suggested that the costs of such regulation to the franchisee and franchisor could be prohibitive and would in any case provide a system which mirrored the work already being completed by the BFA. The Minister for Industry and the Regions 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. The debate also made reference to the self-regulatory function performed by the BFA recognizing that the association "punched above its weight".
In the 2010 case of MGB Printing v Kall Kwik UK Ltd., the High Court established that a franchisor may assume a duty of care to a franchisee in certain circumstances. Kall Kwik, a design and print franchisor, had incorrectly advised MGB, who was purchasing a franchise, of the costs of undertaking refit work needed to meet Kall Kwik's franchising requirements. In this particular case, Kall Kwik had stated that they would provide professional advice to potential franchisees, and because they had not provided details of the fitting standards which must be met, they had encouraged MGB to rely on the advice offered by themselves.
On 3 June 2021, it was announced that the Approved Franchise Association (AFA) would merge with the British Franchise Association (BFA) and that both franchise associations would operate under the bfa umbrella.
United States
Isaac Singer
Isaac Merritt Singer (October 27, 1811 – July 23, 1875) was an American inventor, actor, and businessman. He made important improvements in the design of the sewing machine and was the founder of what became one of the first American multi-n ...
, who made improvements to an existing model of a sewing machine in the 1850s, began one of the first franchising efforts in the United States, followed later by Coca-Cola
Coca-Cola, or Coke, is a carbonated soft drink manufactured by the Coca-Cola Company. Originally marketed as a temperance drink and intended as a patent medicine, it was invented in the late 19th century by John Stith Pemberton in Atlant ...
, Western Union
The Western Union Company is an American multinational financial services company, headquartered in Denver, Colorado.
Founded in 1851 as the New York and Mississippi Valley Printing Telegraph Company in Rochester, New York, the company cha ...
, and by agreements between automobile manufacturers and dealers.
Modern franchising came to prominence with the rise of franchise-based food service establishments. In 1932, Howard Deering Johnson established the first modern restaurant franchise based on his successful Quincy, Massachusetts Howard Johnson's
Howard Johnson's, or Howard Johnson by Wyndham, is an American hotel chain and former restaurant chain. Founded by Howard Deering Johnson in 1925 as a restaurant, it was the largest restaurant chain in the U.S. throughout the 1960s and 1970s, ...
restaurant founded in the late 1920s. 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 franchising accelerated in the 1930s when such chains as Howard Johnson's
Howard Johnson's, or Howard Johnson by Wyndham, is an American hotel chain and former restaurant chain. Founded by Howard Deering Johnson in 1925 as a restaurant, it was the largest restaurant chain in the U.S. throughout the 1960s and 1970s, ...
started to franchise motels. The 1950s saw a boom in franchise chains in conjunction with the development of the U.S. Interstate Highway System and the growing popularity of fast food.
The Federal Trade Commission has oversight of franchising via the FTC Franchise Rule.
The FTC requires that the franchisee be furnished with a Franchise Disclosure Document (FDD) by the franchisor at least fourteen days before money changes hands or a franchise agreement is signed. Whereas elements of the disclosure may be available from third parties, only that provided by the franchisor can be depended upon. The U.S. Franchise Disclosure Document (FDD) is lengthy (300–700 pp +) and detailed (see Franchise Disclosure Document, above), and generally requires audited financial statements from the franchisor in a particular format, except in some circumstances, such as where a franchisor is new. It must include such data as the names, addresses and telephone numbers of the franchisees in the licensed territory (who may be contacted and consulted before negotiations), estimate of total franchise revenues and franchisor profitability.
Individual states may require the FDD to contain their own specific requirements, but the requirements in state disclosure documents must be in compliance with the federal rule that governs federal regulatory policy. There is no private right of action
A cause of action or right of action, in law, is a set of facts sufficient to justify suing to obtain money or property, or to justify the enforcement of a legal right against another party. The term also refers to the legal theory upon which a p ...
of action under the FTC rule for franchisor violation of the rule, but fifteen or more of the states have passed statutes that provide this right of action to franchisees when fraud can be proven under these special statutes. The majority of franchisors have inserted mandatory arbitration clauses into their agreements with their franchisees, some of which the U.S. Supreme Court has dealt with.
In response to the implementation of California Assembly Bill 5 (2019) which limits the use of classifying workers as independent contractors rather than employees in California, the United States Court of Appeals for the Ninth Circuit
The United States Court of Appeals for the Ninth Circuit (in case citations, 9th Cir.) is the U.S. federal court of appeals that has appellate jurisdiction over the U.S. district courts in the following federal judicial districts:
* District ...
reinstated its decision in Vazquez v. Jan-Pro which impacts California franchise law and California independent contractor law by making it unclear that if a franchisor licenses its trademark to a franchisee, whether the franchisor incurs the liabilities of an employer for a franchisee's employees.
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.
Where the franchisor has many partners, the agreement may take the shape of a business format franchise – an agreement that is identical for all franchisees.
Social franchises
In recent years, the idea of franchising has been picked up by the social enterprise
A social enterprise is an organization that applies commercial strategies to maximize improvements in financial, social and environmental well-being. This may include maximizing social impact alongside profits for co-owners.
Social enterprises ca ...
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 examples are probably the ''Kringwinkel'' second-hand shops employing 5,000 people in Flanders, franchised by KOMOSIE, the CAP Markets, a steadily growing chain of 100 neighbourhood supermarkets in Germany. and the Hotel Tritone in Trieste
Trieste ( , ; sl, Trst ; german: Triest ) is a city and seaport in northeastern Italy. It is the capital city, and largest city, of the autonomous region of Friuli Venezia Giulia, one of two autonomous regions which are not subdivided into provi ...
, which inspired the Le Mat social franchise, now active in Italy and Sweden.
Social franchising also refers to a technique used by governments and aid donors to provide essential clinical health services in the developing world.
Social Franchise Enterprises objective is to achieve development goals by creating self sustainable activities by providing services and goods in un-served areas. They use the Franchise Model characteristics to deliver Capacity Building, Access to Market and Access to Credit/Finance.
Third-party logistics franchising
Third-party logistics
Third-party logistics (abbreviated as 3PL, or TPL) in logistics and supply chain management is an organization's use of third-party businesses to outsource elements of its distribution, warehousing, and fulfillment services.
Third-party logisti ...
has become an increasingly more popular franchise opportunity due to the quickly growing transportation industry and low cost franchising. In 2012, ''Inc. Magazine'' ranked three logistics and transportation companies in the top 100 fastest growing companies in the annual Inc. 5000 rankings.
Event franchising
Event franchising is the duplication of public events
Event may refer to:
Gatherings of people
* Ceremony, an event of ritual significance, performed on a special occasion
* Convention (meeting), a gathering of individuals engaged in some common interest
* Event management, the organization of ev ...
in other geographical areas, retaining the original brand
A brand is a name, term, design, symbol or any other feature that distinguishes one seller's good or service from those of other sellers. Brands are used in business, marketing, and advertising for recognition and, importantly, to create ...
(logo
A logo (abbreviation of logotype; ) is a graphic mark, emblem, or symbol used to aid and promote public identification and recognition. It may be of an abstract or figurative design or include the text of the name it represents as in a wo ...
), mission, concept and format of the event. As in classic franchising, event franchising is built on precisely copying successful events. An example of event franchising is the World Economic Forum
The World Economic Forum (WEF) is an international non-governmental and lobbying organisation based in Cologny, canton of Geneva, Switzerland. It was founded on 24 January 1971 by German engineer and economist Klaus Schwab. The foundation, ...
, also known as the Davos forum, which has regional event franchisees in China, Latin America, etc. Likewise, the alter-globalist World Social Forum
The World Social Forum (WSF, pt, Fórum Social Mundial ) is an annual meeting of civil society organizations, first held in Brazil, which offers a self-conscious effort to develop an alternative future through the championing of counter-hegemoni ...
has launched many national events. When The Music Stops is an example of an events franchise in the UK, in this case, running speed dating
Speed dating is a formalized matchmaking process which has the purpose of encouraging eligible singles to meet large numbers of new potential partners in a very short period of time.
Organization
Usually advance registration is required for ...
and singles events.
Home-based franchises
The franchising or duplication of another firm's successful home-based business
A home business or home-based business (HBB) is a small business that operates from the business owner's home office. In addition to location, home businesses are usually defined by having a very small number of employees, usually all immediate f ...
model is referred to as a home-based franchise. Home-based franchises are becoming popular as they are considered to be an easy way to start a business as they may provide a low barrier for entry into entrepreneurship
Entrepreneurship is the creation or extraction of economic value. With this definition, entrepreneurship is viewed as change, generally entailing risk beyond what is normally encountered in starting a business, which may include other values t ...
. It may cost little to start a home-based franchise, but experts say that "the work is no less hard."
See also
* American Association of Franchisees and Dealers
The American Association of Franchisees and Dealers (AAFD) acts as a consumer protection organization that exposes the unethical practices that exist in the franchising community, and to educate the public regarding fair franchise rules, and qua ...
* Franchise termination
Franchise termination is termination of a franchise business license by a franchisor or a franchisee.
The United States Federal Trade Commission administrates oversight of preinvestment franchise disclosures via The Franchise Rule.
Franchise ...
* Franchise agreement A franchise agreement is a legal, binding contract between a franchisor and franchisee. In the United States franchise agreements are enforced at the State level.
Prior to a franchisee signing a contract, the US Federal Trade Commission regulates ...
* Franchise consulting
'Franchise consulting' traditionally meant the same consultant-to-client relationship as any other industry wherein the consultant charges a 'fee for services'. But, as of the late 1990s the term 'consultant' has been adopted by many franchise sa ...
* Franchise Disclosure Document
* Franchise fraud
Franchise fraud is defined by the United States Federal Bureau of Investigation as a pyramid scheme.
Franchise fraud in U.S. federal law
The FBI website states:
:"pyramid schemes — also referred to as franchise fraud or chain referral scheme ...
* List of franchises
This is a list of franchised businesses.
#
* 1-800-GOT-JUNK?, junk removal
* 241 Pizza, pizza
* 7-Eleven, convenience store
* 2001 Club, former disco nightclubs
A
* A&W Restaurants, fast food
* AAMCO Transmissions, automotive
* Aaron's, I ...
* The Franchise Rule
The Franchise Rule defines acts or practices that are unfair or deceptive in the franchise industry in the United States. The Franchise Rule is published by the Federal Trade Commission. The Franchise Rule seeks to facilitate informed decisions a ...
* U.S. Securities and Exchange Commission
The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
* Martha Matilda Harper
Martha Matilda Harper (September 10, 1857 – August 3, 1950) was an American businesswoman, entrepreneur, and inventor who launched modern retail franchising and then built an international network of 500 franchised hair salons that emphasized h ...
, another female franchising pioneer
* Leslie Joseph Hooker
Sir Leslie Joseph Hooker (18 August 1903 – 29 April 1976) (born Leslie Joseph Tingyou) was an Australian property entrepreneur, businessman and philanthropist. From humble beginnings he created the LJ Hooker empire and was at one time Austral ...
, Australian pioneer of franchising of LJ Hooker
LJ Hooker is one of Australia's largest real estate groups, with 600 franchise offices and 6,000 people engaged in residential and commercial property sales and property management. The company was founded in 1928 by Sir Leslie Joseph ...
real estate
Further reading
* Callaci, B. (2021).
Control Without Responsibility: The Legal Creation of Franchising, 1960–1980.
''Enterprise & Society,'' ''22''(1), 156–182.
References
External links
International Franchise Association
{{Authority control
Strategic alliances
Contract law
Business models