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Franchising (from the French for honesty or freedom^[1]) is a method of doing business wherein a "franchisor" authorizes proven methods of doing business to a "franchisee" for a fee and a percentage of sales or profits. Various tangibles and intangibles such as national or international advertising, training, and other support services are commonly made available by the franchisor, and may indeed be required by the franchisor, which generally requires audited books, and may subject the franchisee or the outlet to periodic and surprise spot checks. Failure of such tests typically involve non-renewal or cancellation of franchise rights.

Contents 1 Overview 2 History 3 Advantages 3.1 Quick start 3.2 Expansion 3.3 Training 3.4 Chance of Failure 4 Disadvantages 4.1 Control 4.2 Price 4.3 Conflicts 5 Legal aspects 5.1 United States 5.2 Russia 5.3 UK 6 Social franchises 7 See also 8 References 9 External links

The term "franchising" is used to describe business systems which may or may not fall into the legal definition provided above. For example, a vending machine operator may receive a franchise for a particular kind of vending machine, including a trademark and a royalty, but no method of doing business. This is called "product franchising" or "trade name franchising".

A franchise agreement will usually specify the given territory the franchisee retains exclusive control over, as well as the extent to which the franchisee will be supported by the franchisor (e.g. training and marketing campaigns).

The franchisor typically earns royalties on the gross sales of the franchisee.^[2] In such cases, franchisees must pay royalties whether or not they are realizing profits from their franchised business. Franchisors typically have no capital investment in the tangible assets of the franchised units within their networks. Franchisors maintain control and achieve ownership of rhe intangible asset, the gross sales and good will of the franchised business, through the franchise agreement terms governing the relationship and the payment of royalties on the gross sales of the franchised business that leases the brand name and plan.

Cancellations or terminations of franchise agreements before the completion of the contract have serious consequences for franchisees. Franchise agreement terms typically result in a loss of the sunk costs of the first-owner franchisees who build out the branded physical units and who lease the branded name, marks, and business plan from the franchisors if the franchise is cancelled or terminated for any reason before the expiration of the entire term of the contract.(fact) Typically. franchise agreements permit franchisees who have not completed their contracts to transfer their franchise rights and to sell the tangible and intangible assets of their franchised businesses only with the express permission and written approval of the franchisors, as described in the terms of the franchise agreements. Typically, franchise agreements are not automatically renewed upon completion of the contract and the franchisor has the option to renew or not to renew the agreement under the same terms, or different terms, as described and detailed in the original franchise agreement.

The examples and perspective in this section may not represent a worldwide view of the subject. Please improve this article or discuss the issue on the talk page.

Franchising dates back to at least the 1850s; Isaac Singer, who made improvements to an existing model of a sewing machine, wanted to increase the distribution of his sewing machines. His effort, though unsuccessful in the long run, was among the first franchising efforts in the United States. A later example of franchising was John S. Pemberton's successful franchising of Coca-Cola.^[3] Early American examples include the telegraph system, which was operated by various railroad companies but controlled by Western Union^[4], and exclusive agreements between automobile manufacturers and operators of local dealerships.^[5]

Modern franchising came to prominence with the rise of franchise-based food service establishments. This trend started as early as 1919 with quick service restaurants such as A&W Root Beer.^[6] In 1935, Howard Deering Johnson teamed up with Reginald Sprague to establish the first modern restaurant franchise. ^{[7] [8]} 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 started franchising motels.^[9] The 1950s saw a boom of franchise chains in conjunction with the development of the U.S. interstate highway system.^[10] Fast food restaurants, diners and motel chains exploded. In regard to contemporary franchise chains, McDonalds is unarguably the most successful worldwide with more restaurant units than any other franchise network.

According to Franchising in the Economy, 1991-1993, a study done by the University of Louisville, franchising helped to lead America out of its economic downturn at the time.^{[citation needed][2]}

Franchising is a business model used in more than 70 industries and that generates more than $1 trillion in U.S. sales annually.^[11]Franchising is a growing business model that allows for the capture and purchase of cheap labor and capital that maximizes the growth of profits of the franchisor and perpetuates the growth of franchisors in national economies because the franchisor, under contract, has transferred the risk of ownership, i.e., the expense of building and operating physical business units, and the risk of the failure of these units, to franchisees who lease the brand name and/or plan with the view of profiting greatly from the lease of the brand name and/or plan.

As practiced in retailing, franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators). A well run franchise would offer a turnkey business: from site selection to lease negotiation, training, mentoring and ongoing support as well as statutory requirements and troubleshooting. Brand name recognition by the public can result in faster growth of gross sales on which royalties are paid and on which profits can be grown for the franchisees after the franchisees achieve breakeven status.

After their brand and formula are carefully designed and properly executed, successful franchisors are able to quickly grow their networks and expand rapidly across countries and continents, and can earn profits commensurate with their contribution to those societies. Additionally, the franchisor may choose to leverage the franchisee to build a distribution network and franchisees with multiple units may grow their profits as well.

Also with the help of the expertise provided by the franchisers the franchisees are able to take their franchised business to that level which they wouldn't have had been able to without the expert guidance of their franchisors whose brands are well advertised and visible and attractive to the consumer public.

Franchisors often offer franchisees significant training, which is not available for free to individuals starting their own business. Although training is not free for franchisees, it is supported through the traditional franchise fee that the franchisor collects. Franchisees typically pay for their own travel and personal expenses when attending mandatory training sessions conducted by their franchisor in his home state, or outside of the geographical area in which the franchisee intends to locate his business.

Opening up a business as a Sole Trader has just under a 50% chance of failure.^{[citation needed]} Opening up your business as a franchise drastically reduces your chances of failure. One in twelve business establishments is a franchise.^{[citation needed]} There are conflicting statements published in the media and on the Internet concerning less chance of failure between independent small businesses and franchised small businesses. This is discussed in the article Beguiling Heresy: Regulating the Franchise Relationship, Paul Steinberg and Gerald Lescatre, The Penn State Law Review, Volume 129, 2004, Number 1, Page 139.

For franchisees, the main disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, marketing, the franchisee is required to follow the system and get approval for changes from the franchisor. For these reasons, franchisees and entrepreneurs are very different. The United States Office of Advocacy of the SBA indicates that a franchisee "is merely a temporary business investment where he may be one of several investors during the lifetime of the franchise. In other words, he is "renting or leasing" the opportunity, not "buying a business for the purpose of true ownership." ^[12] Additionally, If original franchisees only attain breakeven status with no actual profits in the operation of their framchised businesses, on which they are able to pay their royalties and overhead and service their debt, they are contractualy obligated under the terms of the typical franchise agreement to complete the entire term of the contract. Franchisees are free only under the terms of the franchise agreements to transfer/sell their breakeven businesses with the approval of their franchisor, but generally the sale of a breakeven franchised business results in a wash or a loss for the original owner of the franchise who financed and built the original physical unit that leases and wears the brand name.

Starting and operating a franchise business can be expensive. Because of standards set by the franchisor, the franchisee often has no choice as to signage, shop fitting, uniforms etc. and may not be allowed to source less expensive alternatives. Added to that is the franchise fee and ongoing royalties and advertising contributions. The franchisee may also be contractually bound to spend money on upgrading or alterations as demanded by the franchisor from time to time.

The franchisor/franchisee relationship can easily cause conflict if either side is incompetent (or not acting in good faith). For example, an incompetent franchisee can easily damage the public's goodwill towards the franchisor's brand by providing inferior goods and services, and an incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits. Franchise agreements are unilateral contracts or contracts of adhesion wherein the contract terms generally are advantageous to the franchisor when there is conflict in the relationship. ^[13]

In the United States, franchising falls under the jurisdiction of a number of state and federal laws. Franchisors are required by the Federal Trade Commission to have a Uniform Franchise Offering Circular (UFOC) to disclose potential franchisees about their purchase. States may require the UFOC 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. The federal rule that governs franchising does not provide a private right of action to franchisees for franchisor violation of the rule but many states have statutes that permit a private right of action for substantive violations of the the State UFOC and state laws governing the franchise relationship.

The franchise agreement is a standard part of franchising. It is the essential contract signed by the franchisee and the franchisor that formalizes and specifies the terms of the business arrangement, as well as many issues discussed in less detail in the UFOC. Unlike the UFOC, the franchise agreement is a fluid document, crafted to meet the specific needs of the franchise, with each having its own set of standards and requirements. But much like a lease, there are elements commonly found in every agreement. ^[14]

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 spread. In response to the soaring popularity of franchising, an increasing number of communities are taking steps to limit these chain businesses and reduce displacement of independent businesses through limits on "formula businesses."^[15]

The majority of franchisors have inserted mandatory arbitration clauses into their agreements with their franchisees as well as waivers of jury trials. Since 1980, the U.S. Supreme Court has dealt with cases involving direct franchisor/franchisee conflicts at least four times, and three of those cases involved a franchisee who was resisting the franchisor's motion to compel arbitration. Two of the latter cases involved large, well-known restaurant chains (Burger King and Subway); the third involved Southland Corporation, the parent company of 7-Eleven.^{[citation needed]}

In Russia, under ch. 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: Dunkin' Donuts chose to terminate its contract with Russian franchisees that were selling vodka and meat patties contrary to their contracts, rather than pursue legal remedies.^{[citation needed]}

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.^{[citation needed]} 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 that do not conform to these rules.^{[citation needed]} 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.^{[attribution needed]}

In 2007, hearings were held in the 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.^[16]

In recent years, the idea of franchising has been picked up by the social enterprise 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, a steadily growing chain of some 50 neighborhood supermarkets in Germany. Other examples are the St. Mary's Place Hotel in Edinburgh and the Hotel Tritone in Trieste.

• Franchise consulting

• U.S. Federal Trade Commission - Disclosure requirements and prohibitions concerning franchising and business opportunity ventures
• International Franchise Association
• Franchise Business Review
• Franchising Association of India