Franchising

Franchising is the practice of using another firm's successful business model. The word 'franchise' is of Anglo-French derivation - from franc - meaning free, and is used both as a noun and as a (transitive) verb.^[1] For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods that avoids the investments and liability of a chain. The franchisor's success depends on the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

Thirty three countries, including the United States, China, and Australia, have laws that explicitly regulate franchising, with the majority of all other countries having laws which have a direct or indirect impact on franchising.

Overview

The following U.S. listing tabulates^[3] the early 2010 ranking of major franchises along with the number of sub-franchisees (or partners) from data available for 2004.^[4] As can be seen from the names of the franchises, the USA 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.^[5]

1. Subway (sandwiches and salads) | startup costs $84,300 – $258,300 (22,000 partners worldwide in 2004).

2. McDonald's | startup costs in 2010, $995,900 – $1,842,700 (37,300 partners in 2010)

3. 7-Eleven Inc. (convenience stores) |startup costs in 2010 $40,500- $775,300, (28,200 partners in 2004)

4. Hampton Inns & Suites (midprice hotels) |startup costs in 2010 $3,716,000 – $15,148,800

5. Great Clips (hair salons) | startup costs in 2010 $109,000 - $203,000

6. H&R Block (tax preparation and now e-filing) | startup costs $26,427 - $84,094 (11,200 partners in 2004)

7. Dunkin' Donuts | startup costs in 2010 $537,750 - $1,765,300

8. Jani-King (commercial cleaning) | startup costs $11,400 - $35,050, (11,000 partners worldwide in 2004)

9. Servpro (insurance and disaster restoration and cleaning) | startup costs in 2010 $102,250 - $161,150

10. MiniMarkets (convenience store and gas station) | startup costs in 2010 $1,835,823 - $7,615,065

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, hospitals, etc. which are discussed further under technological alliances.

Two important payments are made to a franchisor: (a) a royalty for the trademark and (b) reimbursement for the training and advisory services given to the franchisee. These two 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.

A franchise can be exclusive, non-exclusive or 'sole and exclusive'.