The rise of franchising

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One of the earliest and well known franchise operations derives from the United States and dates back as far as 1886 when a beverage comprising sugar, molasses, spices, and cocaine (which is no longer an ingredient) was licensed to selected people to bottle and sell. This is the beverage now commonly known worldwide as Coca-Cola.

The United States continues to be the leading country in franchising, a position it has held since the 1930s. However, it is only since the 1960s and 1970s that we have seen a steady growth in the use of the franchising concept.

Throughout its history some factors have remained a constant in the franchising industry such as:

  • the desire to expand into new areas or foreign markets
  • the lack of capital to expand and develop
  • the need to overcome distance when operating multiple outlets.

Franchising is a means for business expansion and the distribution of products and services. In a franchising relationship, a franchisor (the person or company that grants the right to a third party to operate under licence its business concept) will specify the products and services to be offered by a franchisee (the person or company who is granted the right by the franchisor to operate under licence its business concept). A franchisor grants a franchisee the right to use its trade name and trademarks associated to its products and services and will provide the franchisee with a proven system for operating the business concept.

Franchising has both advantages and disadvantages for businesses that may be interested in expansion: a primary advantage being low development costs and risks whilst a primary disadvantage is quality control.

Franchises usually last for a fixed period of time, are granted for a specific territory or geographical area and can be exclusive, non-exclusive or sole and exclusive.

A franchisor receives payment from each franchisee which will usually include:

  • a one off royalty fee for use of its trade name and trademarks
  • reimbursement of training and initial startup costs
  • a percentage of the franchisee’s business sales during the term of the franchise.

Both franchisor and franchisee have interests to protect

  • a franchisor must secure and protect its trade name, trademarks and know-how and have control over its business concept
  • a franchisee must adhere to the business concept when providing the products or services associated with the trade name and trademarks
  • franchises require standardization. Franchisors will require their trade name and trademarks are prominently displayed and that any apparel and premises are of a certain design and colour
  • franchise contracts are usually drafted one sided in favour of the franchisor. Franchisees should be mindful that they carry no guarantees or warranties and are generally non-negotiable.

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