Information about International Franchise

WHAT IS A FRANCHISE?

Franchising is simply a method for expanding a business and distributing goods and services through a licensing relationship.  In franchising, franchisors (a person or company that grants the license to a third party for the conducting of a business under their marks) not only specify the products and services that will be offered by the franchisees (a person or company who is granted the license to do business under the trademark and trade name by the franchisor), but also provide them with an operating system, brand and support.  A brief separate glossary of franchising terms is available on IFA’s website at http://www.franchise.org/what-are-common-franchise-terms

Business Format Franchising

There are two different types of franchising relationships. Business Format Franchising is the type most identifiable to the average person.  In a business format franchise relationship the franchisor provides to the franchisee not just its trade name, products and services, but an entire system for operating the business.  The franchisee generally receives site selection and development support, operating manuals, training, brand standards, quality control, a marketing strategy and business advisory support from the franchisor. 

Traditional or Product Distribution

While less identified with franchising, traditional or product distribution franchising is actually larger in total sales than business format franchising.  In a traditional franchise, the focus is not on the system of doing business, but mainly on the products manufactured or supplied by the franchisor to the franchisee.  In most, but not in all situations, the manufactured products generally need pre- and post-sale service as found in the automobile industry. Examples of traditional or product distribution franchising can be found in the bottling, gasoline, automotive and other manufacturers.

Franchising is About Relationships

Many people, when they think of franchising, focus first on the law.  While the law is certainly important, it is not the central thing to understand about franchising.  At its core, franchising is about the franchisor’s brand value, how the franchisor supports its franchisees, how the franchisee meets its obligations to deliver the products and services to the system’s brand standards and most importantly – franchising is about the relationship that the franchisor has with its franchisees.  Franchising is About Brands

A franchisor’s brand is its most valuable asset and consumers decide which business to shop at and how often to frequent that business based on what they know, or think they know, about the brand.  To a certain extent consumers really don’t care who owns the business so long as their brand expectations are met. If you become a franchisee, you will certainly be developing a relationship with your customers to maintain their loyalty, and most certainly customers will choose to purchase from you because of the quality of your services and the personal relationship you establish with them.  But first and foremost, they have trust in the brand to meet their expectations, and the franchisor and the other franchisees in the system rely upon you to meet those expectations.

Franchising is About Systems and Support

Great franchisors provide systems, tools and support so that their franchisees have the ability to live up to the system’s brand standards and ensure customer satisfaction.  And, franchisors and all of the other franchisees expect that you will independently manage the day-to-day operation of your businesses so that you will enhance the reputation of the company in your market area.

When selecting a franchise system to invest in, you want to evaluate the types of support you will be provided and how well the franchisor is managing the evolution of the products and services so that it keeps up with changing consumer expectations.  Some of the more common services that franchisors provide to franchisees include:

  •             A recognized brand name,
  •             Site selection and site development assistance,
  •             Training for you and your management team,
  •             Research and development of new products and services,
  •             Headquarters and field support,
  •             Initial and continuing marketing and advertising.

You want to select a franchisor that routinely and effectively enforces system standards.  This is important to you as enforcement of brand standards by the franchisor is meant to protect franchisees from the possible bad acts of other franchisees that share the brand with them.  Since customers see franchise systems as a branded chain of operations, great products and services delivered by one franchisee benefits the entire system. The opposite is also true.

Franchising is also a Contractual Relationship

While from the public’s vantage point, franchises look like any other chain of branded businesses, they are very different.  In a franchise system, the owner of the brand does not manage and operate the locations that serve consumers their products and services on a day-to-day basis.  Serving the consumer is the role and responsibility of the franchisee.

Franchising is a contractual relationship between a licensor (franchisor) and a licensee (franchisee) that allows the business owner to use the licensor’s brand and method of doing business to distribute products or services to consumers. While every franchise is a license, not every license is a franchise under the law. Sometimes that can be very confusing.

The definition of a franchise is not uniform in every country.  Some countries for example, may also include a marketing plan or community of interest provision in the definition.  The definition of what is a franchise can vary significantly under the laws in some countries and it is important that you don’t simply rely on the federal definition of a franchise in understanding any particular state’s requirements.

Investing in a franchise or becoming a franchisor can be a great opportunity.  But before you select any franchise investment and sign any franchise agreement, do your homework, understand what the franchise system is offering and get the support of a qualified franchise lawyer.

European Code of Ethics for Franchising

The most important issues of the code of ethics are in short:

The code of ethics  outlines the guidelines for fair practices between franchisees and franchisors. It is the binding basic document for franchisors, who are affiliated with one of the European franchise associations.

The know-how, of which the franchisor is obliged to establish proof, must have manifested itself in at least one pilot project prior to the signing of the contract with the first franchisee. The franchisor is committed to provide an initial training for every franchisee in order to secure his successful market entry.

Before the signing of the contract, the franchisor must hand over the code of ethics, containing the essential rules of fair behavior in the franchise sector, to the franchisee. 
The franchisor must have handed over in writing all important information and documents relevant to the franchise relationship within a reasonable time span prior to the signing of the contract. (However, this does not mean that the franchisor must transfer his complete know-how.)

The franchisee receives a written notification about the purpose of the preliminary agreement and the compensation arrangement before the signing of the contract.
The franchisor must hand over the franchise contract to the franchisee immediately after the contract has been signed by both parties.
For more details see the DFV website (english version):  http://www.franchiseverband.com/43.html

Franchise terms and definitions

There are many ways to distribute and manage a franchise system. There are a lot of definitions you will meet, here are some of the terms you will encounter.

• Single Unit Franchise  - one franchisee operating one franchise unit
• Multi Unit Franchise - one franchisee operating several units
• Area developer - one franchisee that is responsible for establishing the brand in a defined area with own units
• Masterfranchisee - a franchisee that has the right to subfranchise and establish own units within an area
• Multi System Operator - a company that works with several franchisors

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