Franchising
Franchising is a way for firms to increase their turnover without increasing their assets. One of the best known franchises is the McDonald’s chain of hamburger restaurants. Approximately 80% of McDonald’s restaurant businesses around the world are owned and operated by franchisees. However, almost every type of business has been franchised at some time or other, from Big Apple Bagels to DreamMaker Baths & Kitchens. Franchising involves two parties, the franchiser and the franchisee.
The franchiser owns a trademark or brand, which he (or she) agrees to allow the franchisee to use for a fee (often an original purchase price plus a percentage of sales). The franchiser provides the franchisee with assistance (financial, choice of site, and so on) in setting up their opera tion, and then maintains continuing control over various aspects of the franchisee’s business; for example, via the supply of products, discussion of marketing plans and/or centralised staff training.
The franchisee buys into a proven business plan and considerable expertise. Other advantages of franchising to the franchisee include cost savings from the bulk buying capacity of a large operation, and the marketing benefits of central advertising and promotion of the business. Many franchisees sign a franchise agreement believing it to be less risky than setting up a business on their own. Things can go badly wrong, however, even with well-known and well-established franchise operations.
Some franchisers have antagonised their franchisees by selling new franchises for sites close to existing operations. Many contracts now stipulate that franchises cannot be sold less than a certain distance apart. Franchising has been subject to some smart practices, and in many American states there is now legislation controlling the sale of franchises. This is similar to legislation controlling the sale of securities, often requiring the franchiser to disclose regular financial and other details to the state authorities.
McDonald’s, the doyen of franchisers, says that its system is successful because it is “built on the premise that the corporation should only make money from its franchisees’ food sales, which avoids the potential confiicts of interest that exist in so many franchising operations [where fees are not tied so closely to sales]. All our franchisees are independent,full-time franchisees rather than conglomerates or passive investors”. McDonald’s also says that it is “committed to franchising as our predominant way of doing business”.