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Franchising is the practice of using another firm's successful business model

Business model

A business model describes the rationale of how an organization creates, delivers, and captures value...

. The word 'franchise' is of anglo-French derivation - from franc- meaning free, and is used both as a noun and as a (transitive) verb.
For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. The franchisor's success is 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.

Except in the US, and now in China (2007) where there are explicit Federal (and in the US, State) laws covering franchise, most of the world recognizes 'franchise' but rarely makes legal provisions for it. Only Australia, various provinces within Canada, France and Brazil have significant Disclosure laws but Brazil regulates franchises more closely.

Where there is no specific law, franchise is considered a distribution system, whose laws apply, with the trademark (of the franchise system) covered by specific covenants.

Overview

Businesses for which franchising work best have one or several of the following characteristics:

A good track record of profitability.
Easily duplicated.
Detailed systems, processes and procedures.
Around a unique or unusual concept.
Broad geographic appeal.
Relatively easy to operate.
Relatively inexpensive to operate.

As practiced in retailing, franchising offers franchisees the advantage of starting up quickly based on a proven trademark, and the tooling and infrastructure as opposed to developing them.

The following US-listing tabulates the early 2010 ranking of major franchises along with the number of sub-franchisees (or partners) from data available for 2004.een from the names of the franchise that the US is a leader in franchising innovations, a position it has held since the 1930s when it took the major form of fast-food restaurants, food inns and, slightly later, the motels during the first depression. Franchising is a business model used in more than 70 industries that generates more than $1 trillion in U.S. sales annually (2001 study). Franchised businesses operated 767,483 establishments in the United States in 2001, counting both establishments owned by franchisees and those owned by franchisors:

1. Subway

Subway (restaurant)

Subway is an American restaurant franchise that primarily sells submarine sandwiches and salads. It is owned and operated by Doctor's Associates, Inc. . Subway is one of the fastest growing franchises in the world with 35,519 restaurants in 98 countries and territories as of October 25th, 2011...

(Sandwiches and Salads) | Startup costs $84,300 – $258,300 (22000 partners worldwide in 2004).

2. McDonald's

McDonald's

McDonald's Corporation is the world's largest chain of hamburger fast food restaurants, serving around 64 million customers daily in 119 countries. Headquartered in the United States, the company began in 1940 as a barbecue restaurant operated by the eponymous Richard and Maurice McDonald; in 1948...

| Startup costs in 2010, $995,900 – $1,842,700 (37,300 partners in 2010)

3. 7-Eleven

7-Eleven

7-Eleven is part of an international chain of convenience stores, operating under Seven-Eleven Japan Co. Ltd, which in turn is owned by Seven & I Holdings Co...

Inc. (Convenience Stores) |Startup Costs $40,500- 775,300 in 2010,(28,200 partners in 2004)

4. Hampton Inn

Hampton Inn

'Hampton Hotels, Hampton Inn, Hampton Inn & Suites, and Hampton by Hilton are the names of a brand of hotels trademarked by Hilton Worldwide. Most Hampton hotels are independently owned and operated by franchisees, though a few are owned and/or managed by the Hilton Hotels Corporation...

s & Suites (Midprice Hotels) |Startup costs $3,716,000 – $15,148,800 in 2010

5. Great Clips

Great Clips

Great Clips is a hair salon franchise in the United States and Canada with over 5,000 locations across the United States and Canada. It is headquartered in Edina, a suburb of Minneapolis, Minnesota...

(Hair Salons) | Startup Costs $109,000 - $203,000 in 2010

6. H&R Block

H&R Block

H&R Block is a tax preparation company in the United States, claiming more than 22 million customers worldwide, with offices in Canada, Australia and the United Kingdom. The Kansas City-based company also offers banking, personal finance and business consulting services.Founded in 1955 by brothers...

(Tax Preparation and e-Filing)| Startup Costs $26,427 - $84,094 (11,200 partners in 2004)

7. Dunkin Donuts | Startup Costs $537,750 - $1,765,300 in 2010

8. Jani-King

Jani-King

Jani-King is the world's largest commercial cleaning franchise company reporting more than 12,000 franchisees serving tens of thousands of customers worldwide....

(Commercial Cleaning) | Startup Costs $11,400 - $35,050, (11,000 partners worldwide in 2004)

9. Servpro

Servpro

Servpro Industries, Inc. is a franchisor for more than 1,500 fire and water cleanup and restoration franchises in 48 states in the USA. The company is headquartered in Gallatin, Tennessee...

(Insurance and Disaster Restoration and Cleaning) | Startup Costs $102,250 - $161,150 in 2010

10. MiniMarkets (Convenience Store and Gas Station) | Startup Costs $1,835,823 - $7,615,065 in 2010

The midi-franchises like restaurants, gasoline stations, trucking stations involve substantial investment and require all the attention of a business.

There are also the large franchises - hotels, spas, hospitals, etc. - which are discussed further in Technological Alliances.

Two important payments are made to a franchisor: (a) a royalty

Royalties

Royalties are usage-based payments made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property...

for the trade-mark 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 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 buying 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'.

Although franchisor revenues and profit may be listed in a franchise disclosure document (FDD), no laws require the estimate of franchisee profitability, which depends on how intensively the franchisee 'works' the franchise. Therefore, franchisor fees are always based on 'gross revenue from sales' and not on profits realized. See Remuneration

Remuneration

Remuneration is the total compensation that an employee receives in exchange for the service they perform for their employer. Typically, this consists of monetary rewards, also referred to as wage or salary...

.

Various tangibles and intangibles such as national or international advertising

Advertising

Advertising is a form of communication used to persuade an audience to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive consumer behavior with respect to a commercial offering, although political and ideological advertising is also common...

, training

Training

The term training refers to the acquisition of knowledge, skills, and competencies as a result of the teaching of vocational or practical skills and knowledge that relate to specific useful competencies. It forms the core of apprenticeships and provides the backbone of content at institutes of...

, and other support services are commonly made available by the franchisor.

Franchise brokers help franchisors find appropriate franchisees. There are also main 'master franchisors' who obtain the rights to sub-franchise in a territory.

According to the International Franchise Association

International Franchise Association

The International Franchise Association is the world's oldest and largest organization representing franchising. Founded in 1960, it is a Washington, DC based trade group and non-profit association that represents a growing membership of more than 1,300 franchise systems, 10,000-plus franchisees...

approximately 4% of all businesses in the United States are franchisee-worked.

It should be recognized that franchising is one of the only means available to access venture investment capital without the need to give up control of the operation of the chain and build a distribution system for their services. After the brand and formula are carefully designed,and properly executed, franchisors are able to sell franchises and expand rapidly across countries and continents using the capital and resources of their 'franchisees' while reducing risk.

Franchisor rules imposed by the franchising authority are usually very strict and important in the US and most countries need to study them to help the small or start-up franchisee in their countries to protect them. Besides the trademark, there are proprietary service marks which may be copyright - and corresponding regulations.

Obligations of the parties

Each party to a franchise has several interests to protect. The franchisor is most involved in securing protection for their trademark, controlling the business concept and securing their know-how. This requires the franchisee to carry out the services for which the trademark has been made prominent or famous. There is a great deal of standardization proposed. The place of service has to carry the franchisor's signs, logos and trademark in a prominent place. The uniforms worn by the staff of the franchisee have to be of a particular shade and colour. The service has to be in accordance to the pattern followed by the franchisor in their successful operations. Thus, the franchisee is not in full control of the business as they would be in retailing.

A service can be successful by buying equipment and supplies from the franchisor or those recommended by the franchisor if they are not over-priced. A coffee brew, for example, can be readily identified by the trademark when its raw materials come from a particular supplier. If the franchisor requires purchase from his stores, it may come under anti-trust legislation or equivalent laws of other countries. So too the purchase of uniforms of personnel, signs, etc. But it also applies to sites of franchise if they are owned or controlled by the franchisor.

The franchisee must carefully negotiate the license. They, along with the franchisor must develop a marketing plan or business plan. The fees must be fully disclosed and there should not be any hidden fees. The start-up and costs and working capital must be known before taking the license. There must be assurance that additional licensees will not crowd the "territory" if the franchise is worked to plan. The franchisee must be seen as an independent merchant. He must be protected by the franchisor from any trademark infringement by third-parties. A franchise attorney is required to assist the franchisee during negotiations.

Most often the training period - the costs of which are in great part covered by the initial fee - is too short to operate complicated equipment and the franchisee has to learn on his own from Manuals. The training period must be adequate but in low-cost franchises it would be considered expensive. Many frachisors have set up corporate universities to train staff online. This is in addition to literature and sales documents and reach by email.

Also, franchise agreements carry no guarantees or warranties

Warranty

In business and legal transactions, a warranty is an assurance by one party to the other party that specific facts or conditions are true or will happen; the other party is permitted to rely on that assurance and seek some type of remedy if it is not true or followed.In real estate transactions, a...

and the franchisee has little or no recourse to legal intervention in the event of a dispute. Franchise contracts tend to be unilateral contracts in favor of the franchisor; they are generally protected from lawsuits from their franchisee because of the non-negotiable contracts that require franchisees to acknowledge, in effect, that they are buying the franchise knowing that there is risk, and that they have not been promised success or profits by the franchisor. Contracts are renewable at their sole option. Most franchisors make franchisees sign agreements waiving their rights under federal and state law, and in some cases allowing the franchisor to choose where and under what law any dispute would be litigated.

Regulations

Franchising is the practice of using another firm's successful business model

Business model

A business model describes the rationale of how an organization creates, delivers, and captures value...

Overview

Businesses for which franchising work best have one or several of the following characteristics:

A good track record of profitability.
Easily duplicated.
Detailed systems, processes and procedures.
Around a unique or unusual concept.
Broad geographic appeal.
Relatively easy to operate.
Relatively inexpensive to operate.

As practiced in retailing, franchising offers franchisees the advantage of starting up quickly based on a proven trademark, and the tooling and infrastructure as opposed to developing them.

The following US-listing tabulates the early 2010 ranking of major franchises along with the number of sub-franchisees (or partners) from data available for 2004.een from the names of the franchise that the US is a leader in franchising innovations, a position it has held since the 1930s when it took the major form of fast-food restaurants, food inns and, slightly later, the motels during the first depression. Franchising is a business model used in more than 70 industries that generates more than $1 trillion in U.S. sales annually (2001 study).{{Citation needed|date=April 2010}} Franchised businesses operated 767,483 establishments in the United States in 2001, counting both establishments owned by franchisees and those owned by franchisors:

1. Subway

Subway (restaurant)

(Sandwiches and Salads) | Startup costs $84,300 – $258,300 (22000 partners worldwide in 2004).

2. McDonald's

McDonald's

| Startup costs in 2010, $995,900 – $1,842,700 (37,300 partners in 2010)

3. 7-Eleven

7-Eleven

7-Eleven is part of an international chain of convenience stores, operating under Seven-Eleven Japan Co. Ltd, which in turn is owned by Seven & I Holdings Co...

Inc. (Convenience Stores) |Startup Costs $40,500- 775,300 in 2010,(28,200 partners in 2004)

4. Hampton Inn

Hampton Inn

s & Suites (Midprice Hotels) |Startup costs $3,716,000 – $15,148,800 in 2010

5. Great Clips

Great Clips

(Hair Salons) | Startup Costs $109,000 - $203,000 in 2010

6. H&R Block

H&R Block

(Tax Preparation and e-Filing)| Startup Costs $26,427 - $84,094 (11,200 partners in 2004)

7. Dunkin Donuts | Startup Costs $537,750 - $1,765,300 in 2010

8. Jani-King

Jani-King

Jani-King is the world's largest commercial cleaning franchise company reporting more than 12,000 franchisees serving tens of thousands of customers worldwide....

(Commercial Cleaning) | Startup Costs $11,400 - $35,050, (11,000 partners worldwide in 2004)

9. Servpro

Servpro

Servpro Industries, Inc. is a franchisor for more than 1,500 fire and water cleanup and restoration franchises in 48 states in the USA. The company is headquartered in Gallatin, Tennessee...

(Insurance and Disaster Restoration and Cleaning) | Startup Costs $102,250 - $161,150 in 2010

10. MiniMarkets (Convenience Store and Gas Station) | Startup Costs $1,835,823 - $7,615,065 in 2010

Royalties

Royalties are usage-based payments made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property...

for the trade-mark 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 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 buying 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'.
{{Expand section|date=August 2010}}

Although franchisor revenues and profit may be listed in a franchise disclosure document (FDD), no laws require the estimate of franchisee profitability, which depends on how intensively the franchisee 'works' the franchise. Therefore, franchisor fees are always based on 'gross revenue from sales' and not on profits realized. See Remuneration

Remuneration

.

Various tangibles and intangibles such as national or international advertising

Advertising

, training

Training

International Franchise Association

approximately 4% of all businesses in the United States are franchisee-worked.

It should be recognized{{Citation needed|date=April 2010}} that franchising is one of the only means available to access venture investment capital without the need to give up control of the operation of the chain and build a distribution system for their services. After the brand and formula are carefully designed,and properly executed, franchisors are able to sell franchises and expand rapidly across countries and continents using the capital and resources of their 'franchisees' while reducing risk.

Franchisor rules imposed by the franchising authority are usually very strict and important in the US and most countries need to study them to help the small or start-up franchisee in their countries to protect them.{{Citation needed|date=April 2010}} Besides the trademark, there are proprietary service marks which may be copyright - and corresponding regulations.

Obligations of the parties

Warranty

Regulations

Franchising is the practice of using another firm's successful business model

Business model

A business model describes the rationale of how an organization creates, delivers, and captures value...

Overview

Businesses for which franchising work best have one or several of the following characteristics:

A good track record of profitability.
Easily duplicated.
Detailed systems, processes and procedures.
Around a unique or unusual concept.
Broad geographic appeal.
Relatively easy to operate.
Relatively inexpensive to operate.

As practiced in retailing, franchising offers franchisees the advantage of starting up quickly based on a proven trademark, and the tooling and infrastructure as opposed to developing them.

The following US-listing tabulates the early 2010 ranking of major franchises along with the number of sub-franchisees (or partners) from data available for 2004.een from the names of the franchise that the US is a leader in franchising innovations, a position it has held since the 1930s when it took the major form of fast-food restaurants, food inns and, slightly later, the motels during the first depression. Franchising is a business model used in more than 70 industries that generates more than $1 trillion in U.S. sales annually (2001 study).{{Citation needed|date=April 2010}} Franchised businesses operated 767,483 establishments in the United States in 2001, counting both establishments owned by franchisees and those owned by franchisors:

1. Subway

Subway (restaurant)

(Sandwiches and Salads) | Startup costs $84,300 – $258,300 (22000 partners worldwide in 2004).

2. McDonald's

McDonald's

| Startup costs in 2010, $995,900 – $1,842,700 (37,300 partners in 2010)

3. 7-Eleven

7-Eleven

7-Eleven is part of an international chain of convenience stores, operating under Seven-Eleven Japan Co. Ltd, which in turn is owned by Seven & I Holdings Co...

Inc. (Convenience Stores) |Startup Costs $40,500- 775,300 in 2010,(28,200 partners in 2004)

4. Hampton Inn

Hampton Inn

s & Suites (Midprice Hotels) |Startup costs $3,716,000 – $15,148,800 in 2010

5. Great Clips

Great Clips

(Hair Salons) | Startup Costs $109,000 - $203,000 in 2010

6. H&R Block

H&R Block

(Tax Preparation and e-Filing)| Startup Costs $26,427 - $84,094 (11,200 partners in 2004)

7. Dunkin Donuts | Startup Costs $537,750 - $1,765,300 in 2010

8. Jani-King

Jani-King

Jani-King is the world's largest commercial cleaning franchise company reporting more than 12,000 franchisees serving tens of thousands of customers worldwide....

(Commercial Cleaning) | Startup Costs $11,400 - $35,050, (11,000 partners worldwide in 2004)

9. Servpro

Servpro

Servpro Industries, Inc. is a franchisor for more than 1,500 fire and water cleanup and restoration franchises in 48 states in the USA. The company is headquartered in Gallatin, Tennessee...

(Insurance and Disaster Restoration and Cleaning) | Startup Costs $102,250 - $161,150 in 2010

10. MiniMarkets (Convenience Store and Gas Station) | Startup Costs $1,835,823 - $7,615,065 in 2010

Royalties

Royalties are usage-based payments made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property...

for the trade-mark 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 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 buying 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'.
{{Expand section|date=August 2010}}

Although franchisor revenues and profit may be listed in a franchise disclosure document (FDD), no laws require the estimate of franchisee profitability, which depends on how intensively the franchisee 'works' the franchise. Therefore, franchisor fees are always based on 'gross revenue from sales' and not on profits realized. See Remuneration

Remuneration

.

Various tangibles and intangibles such as national or international advertising

Advertising

, training

Training

International Franchise Association

Obligations of the parties

Warranty

Regulations

{{Empty section|date=January
In Australia

Australia

Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...

, franchising is regulated by the "Franchising Code of Conduct", a mandatory code of conduct

Code of Conduct

A code of conduct is a set of rules outlining the responsibilities of or proper practices for an individual, party or organization. Related concepts include ethical codes and honor codes....

made under the Trade Practices Act 1974

Trade Practices Act 1974

The Competition and Consumer Act 2010 is an act of the Parliament of Australia. On 1 January 2011 the Trade Practices Act 1974 was renamed the Competition and Consumer Act 2010. The act provides for protection of consumers and prevents some restrictive trade practices of companies. It is the key...

.

The Code requires franchisors to produce a disclosure document which must be given to a prospective franchisee at least 14 days before the franchise agreement is entered into.

The Code also regulates the content of franchise agreements, for example in relation to marketing funds, a cooling-off period

Cooling-off period

Cooling-off period may refer to:* Period of time after a purchase during which the purchaser has the right to return goods for a refund, or to cancel a contract without penalty...

, termination and the resolution of disputes by mediation

Mediation

Mediation, as used in law, is a form of alternative dispute resolution , a way of resolving disputes between two or more parties. A third party, the mediator, assists the parties to negotiate their own settlement...

.

The federal government is currently considering recommended changes to the Code of Conduct contained in the report, "Opportunity not Opportunism: Improving conduct in Australian Franchising" tabled by a Parliamentary inquiry into franchising on 4 December 2008.

Some experts have warned that any push to increase regulation of the franchising sector, could make it a less attractive means of doing business.

New Zealand

New Zealand is served by around 423 franchise systems operating 450 brands, giving it the highest proportion of franchises per capita in the world. Despite (or because of) the recession, the total number of franchised units increased by 5.3% from 2009 to 2010. There is no separate law covering franchises, so franchises are covered by normal commercial law. This functions very well in New Zealand and includes law as it applies to contract, restrictive trade practices, intellectual property and the law of misleading or deceptive conduct.

The Franchise Association of New Zealand introduced a self-regulatory Code of Practice for its members in 1996. This contains many provisions similar to those of the Australian Franchising Code of Practice legislation, although it should be noted that only around a third of all franchises are members of the Association and are therefore bound by the Code.

A case of fraud in 2007 perpetrated by a former master franchisee of the country’s largest franchise system led to a review of the need for franchise law by the Ministry of Economic Development. The New Zealand Government decided there was no case for franchise-specific legislation at this time. This decision was criticised by the Opposition, which had initiated the review when in power, and the review process was questioned by a leading academic. The Franchise Association originally supported the positive regulation of the franchise sector but its eventual submission to the Review was in favour of the status quo – self-regulation.

Brazil

In 2008, there were about 1,013 franchises with more than 62,500 outlets, making it one of the largest countries in the world in terms of number of units. Around 11 percent of this total are foreign-based franchisors.

The Brazilian Franchise Law (Law No. 8955 of December 15, 1994) defines the franchise as a system in which the franchisor licenses the franchisee, for a payment, the right to use a trademark/ patent along with the right to distribute products or services on an exclusive or semi-exclusive basis.
The "Franchise Offer Circular" or disclosure document is mandatory before execution of agreement and is valid for all of Brazilian territory. Failure to disclose voids the agreement with refunds and serious damages.The Franchise Law does not distinguish between Brazilian and foreign franchisors. The National Institute of Industrial Property (INPI) is the registering authority. Indispensable documents are the Statement of Delivery (of disclosure documentation) and Certification of Recording (INPI). The latter is necessary for payments. All sums amounts may not be convertible into foreign currency. Certification may also mean compliance with Brazil's antitrust legislation.

Parties to international franchising may decide to adopt the English language for the document, as long as the Brazilian party knows English fluently and expressly acknowledges that fact, to avoid translation (but it follows). The Registration accomplishes three things:

*It make the agreement effective against third parties

* Permits the remittance of payments

* Qualifies the franchisee for tax deductions

Page reference in franchising in this country: Guide of Franchising - Guia do Franchising (http://www.guiadofranchising.com.br)

China

China has the most franchises in the world but the scale of their operations is relatively small. Each system in China has an average of 43 outlets, compared to more than 540 in the United States. Together, there are 2600 brands in some 200,000 retail markets. KFC was the most significant foreign entry in 1987 and is widespread Many franchises are in fact joint-ventures, as at their forming the franchise law was not explicit. For example, McDonalds is a joint venture. Pizza Hut, TGIF, Wal-mart, Starbucks followed a little later. But total franchising is only 3% of retail trade which is hungry for foreign franchise growth.

The year 2005 saw the birth of an updated franchise law, "Measures for the Administration of Commercial Franchise". Previous legislation (1997) made no specific inclusion of foreign investors. Today the Franchise Law is much clearer by virtue of the 2007 law, a revision of the 2005 Law.

The laws are applicable if there are transactions involving a trademark combined with payments with many obligations on the franchisor. The Law comprises 42 Articles and 8 chapters.

Among the franchisor obligations are:

the FIE (foreign-invested enterprise) franchisor must obtain registration by the regulator
The franchisor (or its subsidiary) must have operated at least operated two company-owned franchises in China (revised to anywhere)for more than 12 months ("the two-store, one-year” rule)
the franchisor must disclosure any information requested by the franchisee
cross-border franchising, with some caveats, is possible (2007 law).

The franchisor must meet a list of requirements for registration, among which are:

the standard franchise agreement, working Manual and working capital requirements,
track-record of operations, and ample ability to supply materials, and
the ability to train the Chinese personnel and provide them
long-term operational guidance.
the franchise agreement must have a minimum three-year term

Among other provisions is:

the franchisor will be liable for certain actions of its suppliers
monetary and other penalties apply for infractions of the regulations.

The Disclosure has to take place 20 days in advance. It has to contain:

Details of the franchisor’s experience in the franchised business with scope of business
identification of the franchisor’s principal officers
litigation of the franchisor during the past five years
full details about all franchise fees
the amount of a franchisee’s initial investment
a list of the goods or services the franchisor can supply, and the terms of supply
the training franchisees will receive
information about the trademarks,including registration, usage, and litigation
demonstration of the franchisor’s capabilities to provide training and guidance
statistics about existing units, including number, locations, and operational results, and the percentage of franchises that have been terminated; and
an audited financial report and tax information (for an unspecified period of time)

Other elements of this legislation are:

the franchisee’s confidentiality obligations continue indefinitely after termination or expiration of the franchise agreement
if the franchisee has paid a deposit to the franchisor, it must be refunded on termination of the franchise agreement; and, upon termination, the franchisee is prohibited from continuing to use the franchisor’s marks.

India

Franchising of goods and services, foreign to India, is in its infancy. The first International Exhibition was only held in 2009. India is, however, one of the biggest franchising markets because of its large middle-class of 300 million who are not reticent on spending and because the population is entrepreneurial in character. In a highly diversified society, (see Demographics of India

Demographics of India

The demographics of India are inclusive of the second most populous country in the world, with over 1.21 billion people , more than a sixth of the world's population. Already containing 17.5% of the world's population, India is projected to be the world's most populous country by 2025, surpassing...

) McDonalds is a success story despite its fare differing from the rest of the world.

So far, franchise agreements are covered under two standard commercial laws: the Contract Act 1872 and the Specific Relief Act 1963, which provide for both specific enforcement of covenants in a contract and remedies in the form of damages for breach of contract.

Kazakhstan

In Kazakhstan franchise turnover for 2010 is 1 billion US$ dollars per year. Kazakhstan is the leader in Central Asia in the franchising market. There is a special law on the franchising of 2002, there are about 300 franchise systems and franchises near the 2000 outlets Kazakhstan franchise began with the emergence of a factory "Coca-Cola", opened to sublicense Turkish licensor of the same brand. The plant was built in 1994. Other brands that are also present in Kazakhstan through the franchise system include Pepsi, Hilton, Marriott, Intercontinental, Pizza Hut etc.

Europe

Franchising has grown rapidly in Europe in recent years, but the industry is largely unregulated. Unlike the United States, the European Union has not adopted a uniform franchise disclosure policy. Only five countries in Europe have adopted pre-sale disclosure obligations. They are France (1989), Spain (1996), Romania (1997), Italy (2004) and Belgium (2005).

The Code of Ethics of the European Franchising Federation is self-enforced in seventeen European states where their national franchise associations are members of EFF members, and UNIDROIT.

All formal disclosure countries are require to give ‘’Contract Summaries’’ to be furnished, highlighting:

the object of the contract
the rights and obligations of the parties
* the financial conditions
:* the term of the contrac

Legal consultation is a must to enter and finalize the agreement(s) as it in all regions. Most often one of the principal tasks in Europe is to find retail space, not so significant a factor in the US. This is where the franchise broker, or the master franchisor, plays a significant role. Cultural factors are also significant as the populations tend to be homogeneous.

France

France is one of Europe’s largest markets. Similar to the United States, it has a long history of franchising, dating back to 1930s. Growth came in the 70s. The market is considered tough for outside franchisors because of its cultural angularities; yet, McDonald’s and Century 21 are found everywhere. There are some 30 US Firms involved in franchising.

There are no government agencies regulating franchises. The Loi Doubin of 1989 was the first European Franchise Disclosure law. Combined with Decree No. 91-337, they regulate disclosure, although the decree also applies to any person who provides to another person a corporate name, trademark or trade name other business arrangements. The law applies to ‘’exclusive or quasi-exclusive territory’’.

In brief, the disclosure document must be delivered at least 20 days before the execution of the agreement or any payments are made.

The specific and important disclosures to be made are :

a) the date of the founding of the franchisor's enterprise and a summary of its business history and all information necessary to assess the business experience of the franchisor including bankers,

b) a description of the local market for the goods or services,

c) franchisor's financial statements for the previous two years,

d) a list of all other franchisees currently in the network,

e) all franchisees who have left the network during the preceding year, whether by termination or non-renewal, and

f) the conditions for renewal, assignment,termination and the scope of exclusivity.

Initially, there was some uncertainty whether any
breach of the provisions of the Doubin law would
enable the Franchisee to walk away from the contract.
However, the Supreme Court (Cour de cassation)
eventually ruled that agreements should only be
annulled where missing or incorrect information
affected the decision of the franchisee to enter into the
Agreement. The burden of proof is on the franchisee.
Dispute Settlement features are only incorporated in some European countries. By not being rigorous, franchising is encouraged.

Italy

Under the Italian law franchise is defined as an arrangement between two financially independent parties where a franchisee is granted, in exchange for consideration, the right to market goods and services under trademarks. In addition, articles which dictate the form and content of the franchise agreement and define the documents that must be made available 30 days prior to execution. The franchisor must disclose:

a) a summary of the franchise activities and operations,

b) a list of franchisees currently operating in the franchise system in Italy,

c) year-by-year details of the changes in the number of franchisees for the previous three years in Italy,

d) a summary of any court or arbitral proceedings in Italy related to the franchise system, and

e) if requested by the franchisee, copies of franchisor's balance sheets for the previous three years, or, since start-up if period is shorter.

Norway

There are no specific laws regulating franchising in Norway. However, the Norwegian Competition Act section 10 prohibits cooperation which may prevent, limit or diminish the competition. This may also apply to vertical co-operation such as franchising.

Russia

In Russia, under chapter 54 of the Civil Code (passed 1996), franchise agreements are invalid unless written and registered, and franchisors cannot set standards or limits on the prices of the franchisee’s goods. Enforcement of laws and resolution of contractual disputes is a problem:{{source?|date=October 2011}} Dunkin' Donuts

Dunkin' Donuts

Dunkin' Donuts is an international doughnut and coffee retailer founded in 1950 by William Rosenberg in Quincy, Massachusetts; it is now headquartered in Canton...

chose to terminate its contract with Russian franchisees that were selling vodka and meat patties contrary to their contracts, rather than pursue legal remedies.

Spain

Legal definition of Franchising in Spain is the activity in which an undertaking, the franchisor, grants to another party, the franchisee, for a specific market and in exchange of an economic financial compensation (either direct, indirect or both) the right to exploit an own system to commercialize products or services already exploited by the franchisor with enough success and experience.

The Spanish Retail Trading Act regulates franchising. The contents of the Franchise must include, at least:

The use of a common name or brand or any other intellectual property right and a uniform presentation of the premises or the transport means included in the agreement.

The communication by the franchisor to the franchise of certain technical knowledge or a substantial and singular know-how that has to be owned by the franchisor, and

A technical or commercial assistance or both, provided by the franchisor to the franchisee during the agreement, without prejudice of any supervision faculty that the parties could freely agree in the contract.

In Spain, the franchisor submits the Disclosure information 20 days prior to the signature of the Agreement or prior to any payment made by the franchisee to the franchisor.
Franchisors should disclose to the potential franchisee some specific information in writing. This
information has to be true and not misleading and includes:

Identification of the franchisor;

Justification of ownership or license for use of any trademark or similar sign and judicial claims affecting them as well as the duration of the license;

General description of the sector in which the franchise operates;

Experience of the franchisor;

Contents and characteristics of the franchise and its exploitation;

Structure and extension of the network in Spain;

Essential elements of the franchise agreement.

Franchisors (with some exceptions) should be registered in the Franchisors’ Register and provide some information. According to the regulation in force in 2010 this obligation has to be done within the term of three months since the starting of its activities in Spain.

United Kingdom

In the United Kingdom, there are no franchise-specific laws; franchises are subject to the same laws that govern other businesses. For example, franchise agreements are produced under regular contract law and do not have to conform to any further legislation or guidelines. There is some self-regulation through the British Franchise Association (BFA).

However there are many franchise businesses which do not become members, and many businesses that refer to themselves as franchisors do not conform to these rules. {{Citation needed|date=December 2007}} There are several people and organisations in the industry calling for the creation of a framework to help reduce the number of "cowboy" franchises and help the industry clean up its image.{{Who|date=December 2007}}

On 22 May 2007, hearings were held in the UK Parliament concerning citizen initiated petitions for special regulation of franchising by the government of the UK due to losses of citizens who had invested in franchises. The Minister of Industry, Margaret Hodge, conducted hearings but resisted any government regulation of franchising with the advice that government regulation of franchising might lull the public into a false sense of security. The Minister of Industry indicated that if due diligence were performed by the investors and the banks, the current laws governing business contracts in the UK offered sufficient protection for the public and the banks.

United States

Isaac Singer

Isaac Merritt Singer was an inventor, actor, and entrepreneur. He made important improvements in the design of the sewing machine and was the founder of the Singer Sewing Machine Company...

, in the 1850s, who made improvements to an existing model of a sewing machine, was among the first franchising efforts in the United States, followed later by Coca-Cola

Coca-Cola

Coca-Cola is a carbonated soft drink sold in stores, restaurants, and vending machines in more than 200 countries. It is produced by The Coca-Cola Company of Atlanta, Georgia, and is often referred to simply as Coke...

, Western Union

Western Union

The Western Union Company is a financial services and communications company based in the United States. Its North American headquarters is in Englewood, Colorado. Up until 2006, Western Union was the best-known U.S...

, etc. and agreements between automobile manufacturers and dealers.

Modern franchising came to prominence with the rise of franchise-based food service establishments. In 1932, Howard Deering Johnson established the first modern restaurant franchise based on his successful Quincy, Massachusetts Howard Johnson's

Howard Johnson's

Howard Johnson's is a chain of hotels and restaurants, located primarily throughout the United States and Canada. Throughout the 1960s and 1970s, Howard Johnson's was the largest restaurant chain in the United States, with over 1,000 restaurants...

restaurant founded in the late 1920s. The idea was to let independent operators use the same name, food, supplies, logo and even building design in exchange for a fee.

The growth in franchises picked up steam in the 1930s when such chains as Howard Johnson's

Howard Johnson's

started franchising motels. The 1950s saw a boom of franchise chains in conjunction with the development of the U.S. Interstate Highway System.

In the United States, the Federal Trade Commission

Federal Trade Commission

The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...

has oversight of franchising, rather than the US Securities and Exchange Commission.
The FTC administrates oversight via the FTC Franchise Rule.

In the U.S. the (FTC) Federal Trade Commission

Federal Trade Commission

The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...

requires that the franchisee be furnished with a Franchise Disclosure Document (FDD) by the franchisor at least fourteen days before money changes hands or a franchise agreement is signed. The final agreement is always a negotiated document setting forth fees and other terms. Whereas elements of the disclosure may be available from third parties only that provided by the franshisor can be depended upon. The U.S. Franchise Disclosure Document (FDD) is very lengthy (300-700 pp +) and detailed (see Uniform Franchise Offering Circular (UFOC) for elements of disclosure), and generally provides audited financial statements of the franchisor in a particular format, although audited financial statements may not be required under some circumstances, such as where a franchisor is new. It will include data on the names, addresses and telephone numbers of the franchisees in the licensed territory (who may be contacted and consulted before negotiations), estimate of total franchise revenues and franchisor profitability. The States may require the FDD to contain specific requirements but the requirements in the State disclosure documents must be in compliance with the Federal Rule that governs federal regulatory policy. There is no private right of action of action under the FTC Rule for franchisor violation of the rule but fifteen or more of the States have passed statutes that provide this right of action to franchisees when fraud can be proven under these special statutes. The majority of franchisors have inserted mandatory arbitration clauses into their agreements with their franchisees, in some of which the U.S. Supreme Court has dealt with.

There is no federal registry of franchises or any federal filing requirements for information. States are the primary collectors of data on franchising companies, and enforce laws and regulations regarding their presence and their spread in their jurisdictions.

Where the franchisor has many partners, the agreement may take the shape of a business format franchise - an agreement that is identical for all franchisees.

Social franchises

In recent years, the idea of franchising has been picked up by the social enterprise

Social enterprise

A social enterprise is an organization that applies business strategies to achieving philanthropic goals. Social enterprises can be structured as a for-profit or non-profit....

sector, which hopes to simplify and expedite the process of setting up new businesses. A number of business ideas, such as soap making, wholefood retailing, aquarium maintenance, and hotel operation, have been identified as suitable for adoption by social firms employing disabled and disadvantaged people.

The most successful example is probably the CAP Markets

CAP Markets

CAP Märkte are medium-sized neighbourhood supermarkets in Germany employing disabled people. Each unit is typically run by a local disablement association, but the brand is owned by a co-operative of sheltered workshops. As well as good working conditions, they provide a cherished community service...

, a steadily growing chain of some 50 neighborhood supermarket

Supermarket

A supermarket, a form of grocery store, is a self-service store offering a wide variety of food and household merchandise, organized into departments...

s in Germany

Germany

Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...

. Other examples are the St. Mary's Place Hotel in Edinburgh

Edinburgh

Edinburgh is the capital city of Scotland, the second largest city in Scotland, and the eighth most populous in the United Kingdom. The City of Edinburgh Council governs one of Scotland's 32 local government council areas. The council area includes urban Edinburgh and a rural area...

and the Hotel Tritone in Trieste

Trieste

Trieste is a city and seaport in northeastern Italy. It is situated towards the end of a narrow strip of land lying between the Adriatic Sea and Italy's border with Slovenia, which lies almost immediately south and east of the city...

.

Social franchising

Social franchising

Social franchising is the application of commercial franchising concepts to achieve socially beneficial ends, rather than profit .-Overview:Social franchising, similar to commercial franchising, is a contractual relationship wherein an independent coordinating organization offers...

also refers to a technique used by governments and aid donors to provide essential clinical health services in the developing world.

Event franchising

Event franchising is the duplication of public events

Media Event

A media event, as loosely defined by evolving modern usage, is an occasion or happening, spontaneous or planned, that attracts prominent coverage by mass media organizations, particularly television news and newspapers in both print and Internet editions....

in other geographical areas, while retaining the original brand

Brand

The American Marketing Association defines a brand as a "Name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other sellers."...

(logo

Logo

A logo is a graphic mark or emblem commonly used by commercial enterprises, organizations and even individuals to aid and promote instant public recognition...

), mission, concept and format of the event. As in classic franchising, event franchising is built on precisely copying successful events. Good example of event franchising is the World Economic Forum

World Economic Forum

The World Economic Forum is a Swiss non-profit foundation, based in Cologny, Geneva, best known for its annual meeting in Davos, a mountain resort in Graubünden, in the eastern Alps region of Switzerland....

, or just Davos

Davos

Davos is a municipality in the district of Prättigau/Davos in the canton of Graubünden, Switzerland. It has a permanent population of 11,248 . Davos is located on the Landwasser River, in the Swiss Alps, between the Plessur and Albula Range...

forum which has regional event franchisees in China

China

Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...

, Latin America

Latin America

Latin America is a region of the Americas where Romance languages – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...

etc. Likewise, the alter-globalist World Social Forum

World Social Forum

The World Social Forum is an annual meeting of civil society organizations, first held in Brazil, which offers a self-conscious effort to develop an alternative future through the championing of counter-hegemonic globalization...

has launched many national events. When The Music Stops is an example of an events franchise in the UK, in this case, running speed dating

Speed dating

Speed dating is a formalized matchmaking process or dating system whose purpose is to encourage people to meet a large number of new people. Its origins are credited to Rabbi Yaacov Deyo of Aish HaTorah, originally as a way to help Jewish singles meet and marry. "SpeedDating", as a single word, is...

and singles events.

External links

International Franchise Association

Franchising

Overview

Obligations of the parties

Regulations

Overview

Obligations of the parties

Regulations

Overview

Obligations of the parties

Regulations

New Zealand

Brazil

China

India

Kazakhstan

Europe

France

Italy

Norway

Russia

Spain

United Kingdom

United States

Social franchises

Event franchising

See also

External links