The History and Evolution of Franchising  During the Colonial Period, European

monarchs bestowed franchises on

 The word “franchise” is derived from the daring entrepreneurs who agreed to
Anglo-French word meaning “liberty.” establish colonies and gain the
 In Middle French, it is “franchir”– to free. protection of the “Crown” in exchange
In Old French, it is “franc,” signifying for taxes or royalties.
free. The French term “francis” means
granting rights or power to a peasant or B. Drinks, Cars and Sewing Machines —
serf. Franchising From 1800 to 1900
 The English term “enfranchise” is  In 19th Century England and Germany,
defined as empowering those who have pub proprietors with financial difficulties
no rights. became exclusive distributors of beer
 The term “Royal Tithes” is the purchased from specific brewers. The
predecessor of royalties and originated breweries did not exercise any day-to-
as the practice of certain English men day control over the pubs.
(referred to as “freemen”) receiving a  The first franchise in Australia under
percentage of the land fees paid by “royal privilege” was granted by
serfs to nobility. Governor Macquarie in 1809. The
 Throughout history, franchising has franchisee was granted the right to
promoted economic liberation, synergy, import 45,000 gallons of rum over three
and opportunity, and has been true to its years in exchange for building the
etymological roots – “freeing” commerce Sydney Hospital (the so-called “rum
from many of the traditional chains that hospital”).
had bound it.  During the mid-1800’s,
 Naisbitt’s famous comment in trademark/product franchising
Megatrends is no exaggeration – developed when the Singer sewing
“Franchising is the single most machine company formed a franchise in
successful marketing concept ever.” 1851.
 Due to the lack of necessary capital and
I. THE HISTORY OF FRANCHISING the incipient stage of the sewing
industry, Singer had difficulty in
A. Kings, Courts and Lord – Franchising marketing sewing machines, and turned
Pre-1800 to franchising. Singer commissioned
 During the Middle Ages, local agents to sell and repair its line of
governments granted high church machines. However, once the machines
officials and other personages a license were accepted by the public, Singer
to maintain civil order and to assess changed its marketing strategy and
taxes. Medieval courts or lords granted commenced selling the machines
others the right to operate ferries, hold through its company-owned outlets in
markets, and perform professional the 1860’s.
business activities.  In the 1880’s, U.S. cities granted
The licensee paid a royalty to the monopoly “franchises” to utility
powers that be in exchange for, among companies for water, sewage, gas, and
other things, “protection.” This was later electricity.
equivalent to a monopoly on commercial  In 1898, William E. Metzger of Detroit,
ventures. The practice was perpetuated Michigan became the first official
throughout the Middle Ages, and dealer/franchisee of General Motors
eventually became part of European Corporation (GM). Under GM’s system,
common law. dealers purchased the land and built the
 buildings for the dealership. In return, A. McDonald’s
the dealers were allowed to buy GM’s
vehicles at a discount.  Raymond Albert Kroc (“Kroc”),
 In 1899, Coca Cola sold its first born in Chicago, Illinois,
franchise. became a volunteer ambulance
C. A Period of Steady Growth – driver in World War I, a dance-
Franchising From 1901 to 1950 band musician, a salesman, a
 In the early 1900’s, Henry Ford representative for Lily-Tulip
franchised dealers for his Model T. paper cups and plates, and,
The oil companies followed suit, later in his career, a promoter of
franchising gas stations. a milk shake mixing machine.
 In 1920, the “Ben Franklin” store Never completing high school,
systems appeared with general Kroc espoused a conservative,
merchandise stores. anti-regulatory philosophy, and
 In 1925, A&W established “walk up” fought for a modification of the
root beer stands, and Howard minimum wage law to allow
Johnson offered his three flavors of entrepreneurs to employ
“superior” ice cream from his teenage and student workers.
Wollaston, Massachusetts  In 1954, Kroc visited the
drugstore. McDonald brothers’ small San
Bernardino, California,
D. Build Along the Highway – Growth hamburger stand, because he
In Franchising from 1951-1969 was curious why the brothers
needed so many of Kroc’s milk
 Franchising in the U.S. exploded in shake mixers. What Kroc found
the 1950s was a specialized labor system
 By 1960, more than 900 companies that produced quality
had franchise operations involving sandwiches at an affordable
an estimated 200,000 franchised price. Kroc obtained the
outlets. exclusive license to market the
 Holiday Inn, Roto-Rooter, Dunkin McDonald name and methods,
Donuts, McDonald’s, Burger King, and founded McDonald’s
H&R Block, Lee Myles, Midas, 7- Corporation. Kroc also opened a
Eleven, Dunhill Personnel, Wendy’s, drive-in location in Des Plaines,
Pearle Vision Center, Dairy Queen, Illinois, to demonstrate the
Orange Julius, Tastee Freeze, and business format’s profitability.
Sheraton all began to franchise  Along with his associate, Harry
 By the late 1960’s, McDonald’s, Sonnenborn, Kroc purchased
Holiday Inn, and KFC were all the land to build franchise
approaching or had surpassed the locations, and then rented the
one-thousand unit mark. — Between real estate to franchisees on
1964 and 1969, fueled by an ever long-term leases. This action
expanding economy, an estimated increased access to capital
100,000 new franchise businesses funds. In 1957, there were 37
commenced. McDonald’s locations, by 1959
there were 100 locations, and
by 1961, there were 228
Two Short Case Studies – the Beginnings of locations.
McDonald’s and KFC
 B. KFC home-based, or require a modest office
space.
 The story of Harlan Sanders
is equally intriguing. In the Example: travel, plumbing, real estate
Great Depression era of the
1930’s, Sanders operated a 2. PRODUCT (OR DISTRIBUTION)
gas station in Corbin, FRANCHISE
Kentucky, feeding weary - are based on suplier-dealer
travelers a unique fried relationships, where franchisee
chicken that earned distributes the franchisor's products.
Sanders accolades from the The franchisor licenses its
governor of Kentucky. trademark but usually does not
 From gas station owner to provide franchisees an entire
restaurateur, Sanders’ system for running their business.
business flourished until Examples: PEPSI, COCA-COLA
1955, when the new etc.
interstate road system left
him impecunious, as his 3. BUSINESS FORMAT FRANCHISE - is
chicken restaurant was not the type most identifiable. In a business
sufficiently close to the format franchise, the franchisor provides
interstate. In 1956, Sanders to the franchisee not just its trade name,
took to the road and products and services, but an entire
convinced restaurateurs in system for operating the business.
Kentucky, Ohio, and Indiana Example: Fast food Restaurant
to pay him a five cent (Jollibee, McDonalds, Chowking, KFC
royalty for using his etc.)
proprietary recipe. 4. INVESTMENT FRANCHISE- is usually
 By 1960, there were 200 a large-scale business that requires a
KFC franchised outlets, by huge capital investment (huge
1963, 600 outlets, and by compared to other franchising options).
the end of the decade, The franchisee is actually a major
approximately 1,000. investor who provides the money and
Sanders managed the management team, or sometimes
burgeoning company from engages their own franchisee, to
his home in Shelbyville, operate the business.
Kentucky, with a relatively Example: Hotel and large restaurant
modest staff. KFC continued franchises, retail franchises and gym
to grow, reaching the 6,000 brands
mark in the 1980’s, and 5. CONVERSION FRANCHISE- is a
eventually 10,000 outlets. modification of standard franchise
relationships. Many franchise systems
TYPES OF FRANCHISE grow by converting independent
businesses in the same industry into
1. JOB FRANCHISE- is one in which the franchise units. The franchisees adopt
franchisee performs the work required to trademarks, marketing and advertising
supply the service to clients. The programs, training system and critical
franchise is typically in the form of a client service standards.
trade that supplies, sells, or delivers Examples: real-estate brokers, florists,
items or services, and it can be mobile, professional services companies, home-
services, like plumbing, electricians, air 7. Initial investment- generally
conditioning. includes the franchise fee, the cost
of fixed assets, leasehold
What are the common terms of improvements, inventory, deposits,
Franchise? other fees and costs, and working
1. Franchisor - is the person or capital required during the start-up
corporation that owns the trade- period.
marks and business model. The 8. Franchise agreements- are long
franchisor licenses the use of the term. A typical term is 10
trade-mark and business model to years. Some are 20 years. A long
the franchisee, usually in exchange term agreement protects you as the
for an upfront payment and ongoing franchisee as well as the franchisor.
royalty payments. Franchise opportunities can be
2. Franchisee- is a business owner expensive, and you will want to
who is licensed to operate a protect your investment.
branded outlet of a retail chain. The
franchisee pays a fee to the Alternatives to Franchising
franchisor for the right to sell its
1. Cooperative Organizations - where a
established products and use its
brand company creates rules and
trademarks and proprietary
procedures for franchisees to follow, co-
knowledge.
op member companies collectively
3. Franchise Agreement- is a legal,
decide how the business is operated for
binding contract between a
the common needs and goals of the
franchisor and franchisee.
members.
4. Franchise Disclosure Document
Examples: Cooperative Business
(FDD) -is to provide prospective
2. Distributorships- the business owner,
franchisees with information about
the Supplier, appoints a Distributor to
the franchisor, the franchise system
sell or distribute the Supplier's products
and the agreements they will need
in an agreed territory. The Distributor
to sign so that they can make an
purchases the products on their account
informed decision.
and trades under their name.
5. Franchise Fee- (also called the
Examples: Beauty products, clothing
“initial franchise fee”) is the one-time
line
payment made by a franchisee to
3. Licensing Ownerships- a licensee
the franchisor for joining the
pays for the rights to use your
franchise system, usually upon
trademark.
signing the Franchise Agreement.
Examples: songs, sports team logos,
6. Royalty fee- is an ongoing fee that
intellectual property, software, and
the franchisee pays to the
technology
franchisor. The franchisor uses the
royalty fees to support its existing Advantages and Disadvantages of
franchisees and maintain and grow Franchising
the franchise system.
Example: If you own a food 1. Business Assistance - They may be
franchise doing $1.5 million provided with the brand, the equipment,
annually, and your franchisor supplies, and the advertising plan—
charges a 5% royalty, you'd be essentially everything they need to
paying $75, 000 in royalties to the operate the business. Other franchises
franchisor every year. may not provide everything, but all
 franchises provide the knowledge and the approved products or services that have
wisdom of the franchisor. already been established by the brand. You will
2. Brand Recognition- When you start a also be required to rely on the franchisor’s
suppliers and vendors.
business from scratch, you have to
spend time and money marketing your
new business. With a franchise, your 3. Initial Cost
brand is already well established and
people automatically know what they
The initial cost to buy into a franchise is typically
can expect from your business. more than you would spend to open an
3. Capital- One of the biggest hurdles with independent business. You will have to pay an
starting your own business is the capital initial fee to cover the cost of licensing the rights
that entrepreneurs must invest into their to their brand in addition to training expenses.
business. Franchising provides 4. Potential for Conflict
opportunities where the franchisee
provides the capital for the franchised While one of the benefits of owning a franchise
location. This means there is lower risk is the support you receive, this can also have the
potential for conflict. As you begin to get more
for the business owner as opposed to
involved in the business, there may be aspects
opening an independent business. that you don’t agree with but you will have
4. Lower Failure Rate- When you buy into limited freedom to make changes. This can set
a franchise, you know you are buying the stage for potential conflict.
into a successful brand that already has 5. Lack of Financial Privacy
an existing customer base. They already
have a proven business concept so you The franchise agreement will state that the
have reassurance that there is a franchisor can oversee the entire financial
demand for your product or service. system. All financial information will be shared
with the franchisor, leaving you little privacy in
5. Legal Protections- Franchising is this area.
regulated at state and federal levels and
franchisors must adopt a Franchise
Disclosure Document (FDD) in order to What Are Some Common Legal Issues in
franchise the business. These laws can Franchising?
be a shield to protect you against a slew
of legal ramifications. 1. Franchisor Liability for Franchisee
Actions- If a franchisee or one of the
Disadvantages of Franchising franchisee’s employees makes an error,
even if the error seems unconnected to
1. Limited Creative Opportunities the franchise system, the franchisor may
bear some risk of liability. If the
When you start your own business, you have the franchisor incurs some of the blame for
freedom to operate your business any way you an action, an experienced franchise law
choose. With a franchise, however, you will have
and business attorney can help navigate
to adhere to existing rules so you won’t have as
much creativity when it comes to marketing or the legal landscape and minimize
designing a logo for your business. damage to his or her client.
2. Lack of Control 2. Errors in the Franchise Disclosure
Document
Franchisees have limited control over the daily - Franchisees use the franchise
operations of their business. You will be required disclosure document to help make
to comply with existing management operations, the best decisions possible for the
procedures, training standards, and hours of franchise. However, if there are
operation. You are also limited to offering only
 mistakes in this document, these payments to the franchisor. Depending
mistakes may result in expensive on the type of franchise and payment,
litigation. Using an experienced the franchisor and franchisee may agree
franchise attorney to draft the that such payments are made with
disclosure document is critical for different periodicities.
franchisors to manage the risk of  Among others, the franchisee might pay
litigation and liability. some or all of the following types of
3. Inadequate Franchisee Support- payments to the franchisor: initial
Franchise contracts may require franchise fee, continuing royalties on
franchisors to provide a certain amount sales, rent, advertising assistance, or
of support to their franchisees. If equipment and supplies.
franchisees perceive they are not  The franchise agreement should outline
receiving the support they are owed the rights and obligations of both the
under the contract, they may decide to franchisor and the franchisee. The main
take legal action to resolve the issue. A purpose of this contract is to protect
franchise attorney can help clarify what the intellectual property of the
the legal requirements are for the franchisor. It also seeks to guarantee
franchisor to support franchisees. that each franchisee operates the
4. Franchising Law Changes franchise consistently with the
- A change in legal regulations franchisor’s trademark and know-how.
involving franchising activities can
make it difficult for new franchisors
to stay in compliance. This is why a
franchising law attorney is valuable
for franchisors. An attorney with
knowledge in and experience with
franchising laws remain up-to-date
on changes in the law to protect
their franchisor clients from as many
negative effects of these changes as
possible, and/or maximize any
positive effects of the changes.

The Franchise Agreement

 franchise agreement is a contract under

which the franchisor grants
the franchisee the right to operate
a business, or offer, sell, or distribute
goods or services identified or
associated with the
franchisor’s trademark
 In exchange, the franchisee makes one-
time or periodical payments to the
franchisor in the amount, terms, and
conditions established in the franchise
agreement.
 The franchisee may have to make one-
time, monthly, quarterly, or annual