Franchising Business
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The Unofficial Guide® to Opening a Franchise
The inside scoop... for when you want more than the official line!. So you dream of escaping the 9-to-5 rat race, starting your own business, and becoming your own boss, but you don't have a clue where to start.
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Franchising 101
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This new, definitive guide provides clear, concise explanations of the issues involved in finding, buying and ultimately operating and growing a successful franchise business from top experts from the Association of Small Business Development Cent...
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Franchising (from the French for free) is a method of doing business wherein a franchisor licenses trademarks and methods of doing business to a franchisee in exchange for a recurring payment.
According to Financial Times, if sales by US franchise businesses were translated into national product, they would qualify as the 7th largest economy in the world.
Advantages
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).
As long as their brand and formula are carefully designed and properly executed, franchisors are able to expand their brand very rapidly across countries and continents, and can reap enormous profits in the process, while the franchisees do all the hard work of dealing with customers face-to-face. See customer service. Additionally, the franchisor is able to build a captive distribution network, with no or very little financial commitment.
For some consumers, having franchises offer a consistent product or service makes life easier. They know what to expect when entering a franchised establishment.
Disadvantages
For franchisees, the main disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, and marketing, the franchisee is required to follow the system and get approval of changes with the franchisor.
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." newrules.org (external)
Another problem is that the franchisor/franchisee relationship can easily give rise to litigation if either side is incompetent (or just not acting in good 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.
Because litigation is expensive, 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 three times, and two of those cases involved a franchisee who was resisting the franchisor's motion to compel arbitration. Both of the latter cases involved large, well-known restaurant chains (Burger King and Subway).