Franchising Key Vocabulary

Advertising fee ― a sum of money paid by the franchisee to contribute to the franchiser’s annual advertising and marketing costs.

Franchise ― an arrangement in which a company gives a business the right to sell its goods or services in return for a fee or a share of the profits.

Franchisee ― someone who is sold a franchise.

Franchiser/franchisor ― a company that sells a franchise.

Franchise agreement ― a contract between the franchiser and the franchisee stipulating the relationship between the two parties.

Franchise fee / front-end fee ― an initial sum of money the franchisee pays to the franchiser in exchange for the right to operate under the franchiser’s name.

Franchising ― a business system in which a company (or franchiser) sells an individual (or franchisee) the right to operate a business using the franchiser’s established system or format.

Liquid capital ― the amount of money that a franchisee must have available before a bank will be prepared to lend additional capital. Also known as ready cash.

Master franchisee ― a person or a company appointed by a franchiser to supervise the business in a particular area.

Management services fee / royalty ― a sum of money paid by the franchisee for continuing advice and assistance from the franchiser, calculated as a percentage of annual turnover.

On-going fees ― the various payments that the franchisee makes to the franchiser for the assistance and services he or she provides.

Operations manual ― a document provided by the franchiser, which contains all the information that the franchisee needs to run his or her business.

Start-up cost / setup cost ― the amount of money needed to start a new business, project.

Working capital ― the money that a franchisee will use to buy the stock and to pay for the labour and services that the business will need.

Warming Up

1. Why is franchising becoming so popular today?

2. Can you give any successful names working in this business format?

3. Does buying a franchise always guarantee success?

Intensive Reading franchising

Franchising represents an opportunity for an entrepreneur to enter into business with the benefit of experience, knowledge, and support from the franchiser. Often the entrepreneur is beginning a new venture with little assurance that the venture will succeed. With a franchise the entrepreneur will be trained and supported in the marketing of the business and will be using a name that had an already established image.

Any person who has the urge to own his or her own business may feel that a franchise is an easy solution. There are, however, some important risks involved in buying a franchise. The important thing is that the entrepreneur should have a clear understanding of what a franchise is, its advantages, and potential risks.

Franchising may be defined as “an arrangement whereby the manufacturer or sole distributor of a trademarked product or service gives exclusive rights of local distribution to independent retailers in return for their payment of royalties and conformance to standardized operating procedures.” The person offering the franchise is known as the franchiser and is someone who has probably had many years of experience in the business and has knowledge of what is and is not successful. The franchisee is the person who purchases the franchise and is given the opportunity to enter a new business with a good chance to succeed. However, it should be understood that there is risk in any new business and that there are some good franchise opportunities and some that are much less desirable.

One of the most important advantages of buying a franchise is that the entrepreneur does not have all the headaches associated with starting a business from scratch. The franchisor will usually provide a plan with clear directions for the operation of the business.

The franchisee is given advice or an already defined location for the business. In retailing franchises, such as McDonald's, a location analysis is done to ensure that the business will reach needed goals. Assessment of traffic, demographics, growth of businesses in the area, competition, and so on are an integral part of the decision as to where to locate the business. Often the franchise involves an established name that will give the franchisee instant recognition in the market area. This doesn't ensure success but it does provide the impetus to begin the business with a positive image.

One of the purposes of franchising a business is that the franchisor can benefit from extensive and rapid expansion without borrowing or taking significant financial risks. If the franchisor provides a strong opportunity for success, he or she will also benefit from the royalty checks received from each franchisee. Thus, to ensure this, it is important to provide standardized accounting and operating procedures and retain control over store design, equipment, and supplies. These structural controls are actually advantageous to the franchisee since he or she will be benefiting from the years of trial and error and experience of someone else in these key decision areas.

Each individual franchise under normal circumstances would not be able to afford extensive media advertising. However, by pooling (contributions made by each franchisee based on volume), the entire organization can conduct major media advertising to strengthen the franchise name. Each individual franchise can then devote effort to any special local promotions within the constraints of the franchise agreement.

Management advice, tax information, and any other business activities may also be provided to the franchise. Thus, known successful management decisions are passed on to the franchisee to ensure their success.