Fasal Akbar

Contents

  • What Is Franchising?
  • History Of Franchise
  • Why Buy A Franchise?
  • Franchise Statistics
  • Franchise Facts
  • UK Growth And Opportunity For Franchise
  • Franchise Fee
  • The Advantage Of A Franchise business To A Franchisee And Franchisor
  • The disadvantages Of A Franchise Business To A Franchisee And Franchisor
  • Features Of A Franchise Business
  • Quality A Franchisee Requires
  • Ten Common Mistakes Made By A Franchisee
  • Legal Agreement Between The Franchisee And Franchisor
  • The British Franchise Association
  • The Importance Of A Brand Name
  • The Importance Of  Advertising
  • The Importance Of Marketing
  • A Business Plan And It’s Significance
  • Frequently Asked Questions
  • Franchise Articles
  • Survey
  • Brief History And Development Of Favorite Chicken & Ribs
  • Interview With Favourite Chicken & Ribs
  • What Is A Sole Proprietor?
  • Problems A New Business Faces
  • The Advantages And Disadvantages Of Being A Sole Trader
  • Important Issues For A Sole Trader
  • Essential Qualities To Become A Successful Sole Proprietor
  • Interview With Mars a day...
  • Latest Information On Business
  • Key words
  • Useful Contacts
  • Comparison Of A Franchise Business And A Sole Proprietor Business
  • Conclusion
  • Bibliography

What Is Franchising

The term franchise covers a wide range of arrangements under which the owner of a product, process, service or even just a name (e.g. sportsman) will issue a license to make or use something in exchange for some form of payment    

Here are some various types of franchise businesses (which are common to business format franchise):

  • A license to a manufacture a certain product within a certain territory and over a given period of time, have access to any secret process this involves and the use of its brand name in exchange for royalty on the sales.
  • The use of a celebrity name to enhance the sales with the guarantee of the product. The most common example is the endorsement, by a sport personality, of equipment associated with his/her activity and bearing his/her name, in return for a royalty payment by the manufacturer.

A business format franchise is a joint venture between an independent third party (franchisee) and a business (franchisor) that wishes to expand it’s business in the least cost effective way. The franchisee will have to pay an initial fee for an agreement (license) to allow certain rights over the franchisor’s organisation. Many aspects are still strictly controlled by the franchisor including image, products or service, system and administration.

In return the franchisee will have to pay the franchisor an ongoing management service fee and for materials supplied by the franchisor (the franchisee has to buy from the franchisor), exclusive territorial rights, advertising, promotion, training etc. The franchisee may also have to contribute towards the national advertising costs.

History Of Franchise

The word franchise came from old French meaning privilege. In those days

local sovereign or lord would grant the right to hold markets or fairs, to operate the local ferry or to hunt on his land.

In the 1840’s in Germany certain major ale brewers granted franchisee’s to certain taverns the exclusive right to sell their ale. This was the beginning of the concept of franchising as we know to day. In 1851, the Singer Sewing Machine began granting distribution franchises for their sewing machines. Singer had written franchise contracts which were the forerunners of modern franchise agreement.

In the 1880’s cities began to grant monopoly franchises to street car companies and utilities for water, sewerage, gas and later electricity.

Around the turn of the century, the oil refinery companies and automobile manufacturers began to grant the right to sell their products. At this stage in the evolution of franchising it was essentially just the granting of the right to distribute and sell a manufacturers product.

Business format franchising came onto the scene after World War 2. This method of licensed trading was rediscovered  in the United States. As there was a demand for all types of products and services, franchise was the ideal way for businesses to expand rapidly which included hotels and fast food industries.  

At this rapid expansion time in the 1960’s and 1970’s franchise growth accelerated but there was also many abuses of franchising occurring. There was a number of total fraud franchise companies which literally took peoples money and ran, and there were a number of companies that were undercapitalized and poorly managed which went bankrupt, leaving a number of franchisee’s who lost everything.

This was when the International Franchise Association (IFA) was formed with the aim of improving the entire industry. To become a member of the IFA you will need to achieve the high standards set by the IFA’s Code of Ethics. Franchising is now used throughout the world as a successful formula to expand their business in the least cost-effective way.

Why Buy A Franchise

Franchising is a business which has a substantial risk minimisation from other businesses. All the studies ever carried out show the success rate of sole trade business start-up conclude to the same thing. Starting a new business is very dangerous. Most of the studies show 90% fail within three years. The  primary reason for this failure rate is so high because the owners have to go through the learning curve of operating that specific type of business. However, the market is not very tolerant for these inexperienced entrepreneur to learn how to operate a new business. If you can’t survive in the market place you will lose your money, credit, home, reputation and in some cases your family. Thousand of U.S. business men experience this every year. Unless you have considerable experience in the specific type of business that you are considering going into, it is very probable that you fail.

Business format franchising is the nearest you will come to a guarantee of success in today’s market. All of the studies done have found the franchise new business start-ups rarely fail and when you do it is because the franchisee did not obey by the franchisors system. The learning curve of trying and failing and eventually leading to trying and succeeding has already been achieved by the franchisor in the form of secrets of success for the specific business. In business format franchising all that has been learned by going through the learning curve is transferred to the franchisee. This is fundamentally why you buy a franchise, to minimise risk and give yourself the best possible chance to succeed.

Another reason why to buy a franchise is that a franchise investment can be thoroughly researched before any significant expenditures are made. With a sole trade business you are always operating in the dark and no matter how much research you do it is very difficult to handle many aspects. With a franchise business the franchisee is provided with A wealth of information about the business by the franchisor. i.e. prepare best personality traits for the business. But for the true answer to all your key questions will come from existing franchisees. i.e. Do you feel you were properly trained.    

Franchise Statistics

Franchise is regarded as the world’s most successful business formula. The UK industry is currently worth around £7 billion, with over 570 alternative types of business franchise and about 316,000 employed.

Here are more statistics:

  • Turnover in the sector grew by 1 per cent to a record £9.3 billion.
  • Franchised units increased  by 1 per cent to 31,200,  growth is being held back by a lack of suitable candidates.
  • Franchisors rose by 23 to 665, an increase of 3.6 per cent. Some 129 new franchisors came into the market and 102 withdrew. Only 12 withdrawals were due to commercial failure. In the vast majority of cases, the firms decided not to continue franchising, sometimes due to their inability to attract sufficient interest from prospective franchisees.  
  • There was a marked increase in resales of franchised units from 2,210 to 3,705.
  • The biggest growth business categories were hotel and catering , property services, transport and vehicles services and personal services. The declining categories were business and commercial services, and retailing.
  • Management service fees were charged by 77 per cent of franchisors and averaged 7.2 per cent of the franchisees turnover. Some 56 per cent charged an advertising levy which averaged 2.7 per cent turn over.
  • Of the 95 per cent of franchisees who claimed that their franchise profitable, 7 per cent said it was highly profitable, 45 per cent quite profitable, and 43 per cent marginally profitable.
  • Of the 85 per cent of franchisees who said they were satisfied with their relationship with their franchisor, 44 per cent were definitely satisfied and 41 per cent mainly satisfied. The figure for those who found the relationship unsatisfactory was at its highest for 6 years at 15 per cent, in the previous year it was 9 per cent.

I obtained these statistics from the annual franchise survey published by Natwest/BFA in March 2001.


Franchise Facts

  • Numbers Employed In The UK
    The employment generated by franchising is calculated at 316,000 people, directly employed in the franchising sector- a figure that
    has remained similar over the past 12 months.
  • Franchisee Performance
    95% of franchisees report profitability.
  • Franchisees Profile And Qualities
    Franchisors are always looking for determined, motivated self-starters. Past experience is generally not a pre-requisite - commitment, enthusiasm and family support.
  • Franchisee Relationships With Franchisor
    85% of franchisees regard their relationship with the franchisor as either definitely or mainly satisfactory.
  • Amount of Franchises in the UK
    The number of business format franchises has increased by 40% in the last 5 years to 665.

Size Of The Franchise Sector
The 2000 annual turnover from the UK business format franchise sector was £9.3 billion, a 5% increase on 1999.

UK Growth And Opportunities For Franchise

The issues that triggered the growth of franchising in the 1990s were divided between changes in the economics and in he political climates. The recessions of the early 1990s generated more people with large redundancy payments, who after losing their jobs went in business themselves. Franchising was viewed as a way of combining the independence of the self-employment with security of a proven business formula.

The table shows how franchising has grown:

Year                                       Annual sales,                            Number of                                Jobs

                                               £bn                                              units                                        Created

1986                                       1.9                                               10,900                                      126,000  

1987                                       3.1                                               15,000                                      169,000        

1988                                       3.8                                               16,000                                      181,500      

1989                                       4.7                                               16,600                                      185,000    

1990                                       5.2                                               18,260                                      184,000      

1991                                       4.8                                               18,600                                      189,500            

1992                                       4.5                                               18,100                                      184,000    

1993                                       5.0                                               24,900                                      188,500    

1994                                       5.5                                               26,400                                      192,300        

1995                                       5.9                                               25,700                                     212, 200

1996                                       6.2                                               27,100                                      228,000    

1997                                       7.0                                               29,100                                      235,000    

1998                                       7.4                                               29,950                                      301,500      1999                                       8.9                                               35,200                                      316,900

Market issues have been a major help too. The growth in popularity of fast food as a result of changing lifestyles, for example it has increased demand for franchised food outlets. The growing number of women starting to work has encouraged demand for dry cleaning services.

The banks, accountancy firms and legal practices have also played a part in their various ways to legitimise franchising and to encourage and advice the new generation of franchisees.

The Franchise Fee

The franchise fee are separated in three main areas which are:

  • The Initial Fee

This is a one off payment imposed by the franchisor to procure your right to operate the franchised system. The fee will account for the franchisor’s cost for setting you up in business and will include for the initial training, the provision of operating manuals, marketing, opening stock and equipment.

The franchisee fee should not include large profits for the franchisor. The profit should be generated through the ongoing fees and the royalty payments. However A proportion of the fee will be used by the franchisor to help finance costs such as franchisee recruitment and developing the franchise system which is perfectly justified as it will benefit the whole network.

  • The Ongoing Management Service Fees
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These are regularly paid to the franchisor on either weekly or monthly basis. The fees are in return for the continued management services provided by the franchisor such as advice, training and support. The method of calculating the fees vary between the franchised businesses. The following methods are commonly used or a combination of both:

  • a percentage of your gross turnover.
  • a mark-up on stock supplied by the franchisor.

  • Royalty Fees

These fees are commonly calculating using similar methods as the management fees but are for separate purposes. The royalty fees are in respect of the legal ...

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