Franchising is both an old and a new concept. The term from the French originally meant to be free from servitude. Its meaning in the context of present-day promotions is the opportunity for an individual to own his or her own business, even if he or she is inexperienced and/or lacks adequate capital. During recent years, franchising, as a type of business operations, has been expanding rapidly and entering into new areas of application. The most recent industry study estimates that franchised businesses accounted for $803 billion in annual sales in 1992. Retail (business format) franchising is estimated to account for 35% of total U.S. retail sales. More than 8 million people are employed by franchise establishments.

WHAT IS FRANCHISING?

Franchising is a form of licensing by which the owner (the franchiser) of a product, service or method obtains distribution through affiliated dealers (the franchisees). The holder of the right is often given exclusive access to a defined geographical area.

The product, method or service being marketed is identified by a brand name, and the franchiser maintains control over the marketing methods employed, or assists the franchisee in the operation of the business.

In many cases, the operation resembles that of a large chain with trademarks, uniform symbols, equipment, storefronts and standardized services or products. The franchiser maintains uniform practices as outlined in the franchise agreement.

The International Franchise Association, the major trade association in the field, defines franchising as "a continuing relationship in which the franchiser provides a licensed privilege to do business, plus assistance in organizing, training, merchandising and management, in return for a consideration from the franchisee."

In a way, the franchisee is not his own boss. . .

Franchising has been described as "a convenient and economic means for the filling of a drive or desire (for independence) with a minimum of risk and investment and maximum opportunities for success through the utilization of a proven product or service and marketing method." The owner of a franchised business, however, must give up some options and freedom of action in business decisions that would otherwise be open to the owner of a non-franchised business.

In a way, the franchisee is not his own boss, because in order to maintain the distinctiveness and uniformity of the service and to insure that the operations of each outlet will reflect favorably on the organization as a whole and protect and build its goodwill, the franchiser usually exercises some degree of continuing control over the operations of its franchisees and requires them to meet stipulated standards of quality. The extent of such control varies. In some cases, franchisees are required to conduct every step of their operation in strict conformity with a manual furnished by the franchiser. In other cases, the franchiser may allow considerable latitude on the part of the franchisee.

In return for following the franchiser's guidelines, the individual franchisee can share in the goodwill built up by all of the other franchised outlets bearing the same name.

A company that depends upon the successful operation of franchised outlets needs individual franchisees who are willing to learn the business and who have the energy for a considerable amount of effort. The franchiser can supply the other essentials for the successful operation of the outlet. Among the services the franchisers may provide to the franchise operators are: (1) location analysis and counsel; (2) store development aid, including lease negotiation; (3) store design and equipment purchasing; (4) initial employee and management training and continuing management counseling; (5) advertising and merchandising counsel and assistance; (6) standardized procedures and operations; (7) centralized purchasing with consequent savings; and (8) financial assistance in the establishment of the business.

Reprinted from an article by the U. S. Department of Commerce, Minority Business Development Agency, October 1994.