teza de licenta in domeniul economic in engleza

UNIVERSITY OF ECONOMICS

PRAGUE

DIPLOMA THESIS

2010 Darya Karpushina

ii

University of Economics, Prague

International Business – Central European Business Realities

International Franchising as a Method for Business Expansion

Author: Darya Karpushina

Thesis instructor: Ing. Jaroslav Halík, MBA, Ph.D.

Scholar year: 2009/2010

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Declaration:

I hereby declare that I am the sole author of the thesis entitled “International Franchising as a Method for Business Expansion”. I duly marked out all quotations. The used literature and

sources are stated in the attached list of references.

In Prague on ..................... ……………………

Darya Karpushina

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Acknowledgement

I hereby wish to express my appreciation and gratitude to the instructor of my thesis Ing. Jaroslav Halík, MBA, Ph.D. for his academic support, useful advices and helpful

comments to the topic “International Franchising as a Method for Business Expansion”.

Special thanks go to my parents for providing continuous source of enthusiasm towards learning.


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Content

Introduction ........................................................................................................................ 2

1. Chapter 1: The Essence of Franchising.......................................................................... 5

1.1. Definitions………………………………………………………………………………...6

1.2. Franchise Contract – general provisions……………………………………………….....9

1.3. Types of the Franchises………………………………………………………………….14

2. Chapter 2: Franchising in Action................................................................................. 18

2.1. Franchising Benefits and Opportunities.......…………………………………………….19

2.2. Weaknesses and Risks of Franchising…………………………………………………...25

2.3. Some steps before making a franchise decision…………………………………………35

3. Chapter 3: Franchise Overview.................................................................................... 41

3.1. General Statistics………………………………………………………………………...42

3.2. Franchise Ratings………………………………………………………………………..49

3.3. Franchise Categories and Subcategories………………………………………………...53

Conclusion ......................................................................................................................... 66

Bibliography...................................................................................................................... 69

List of Tables.................................................................................................................... 73

Annexes ............................................................................................................................. 74


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Introduction The choice of the Thesis topic related to phenomenon of International Franchising,

which is becoming one of the most perspective and fast-developing form of business

conducting. Today’s entrepreneur has a plenty of possibilities how to run its business on

national level, but it goes with a plenty of difficulties to operate internationally. A lot of

companies struggle for their brand’s recognition, for the market share, and such competition

becomes even harder on a worldwide scale due to the protectionist policy of some countries.

The strongest ‘players’, that is in minority, take deals effectively in spite of specific tariff and

non-tariff barriers imposed. But the majority suffers the losses. The problem typically lies in

wrong perception of a business they are facing with, and, if it is franchising we are speaking

about, in inadequate evaluation of the opportunities and risks of running a franchise.

The actuality of franchising concept is obvious. Franchising as a legal or business

model, which is not new in a business world, has more and more growing relevance. At the

same time, this topic still causes a kind of suspicion in people’s mind due to the numerous

arguable issues. For instance, franchising is still not legally fixed in most countries’

legislation. And that is actually the problem how to deal with it, how to avoid confusion with

the franchise agreement by which both contractual parties must perform their obligations.

The aim of this Master Thesis is the diversified research of the selected theoretical and

practical aspects of international franchising. I tend to believe that the comprehensive analysis

will help the potential entrepreneurs to create a broader view of what does franchising means

in international business format, what are the typical benefits and risks for the intended

partners, which industries can be advised as the most fortunate options to franchise in. All

these issues should project likely outcomes and trends in the future, which are the basis for

making an intelligent decision about investing in a franchise.

The main hypothesis of this Thesis would be the statement that there are numerous

franchising areas of implementation that exist, and its influence, therefore, has the separate

meaning as well. We could determine specifically the many-sided influences through the

analysis of the business potential opportunities and risks while franchise. The key message

will be stressed on the role of the international franchising as one of the principal driver of the

business globalization now-a-days. There is a wide-spread presumption on franchising as only


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being suitable for large-scale experienced companies with the time-proved brands. I would try

to prove that an immediate expansion of this form of shared investment should be considered

more as the great business opportunity even for small or medium companies rather then a

risky business concern.

My effort in this Diploma Thesis is concentrated also on the franchising impact on the

business environment. And this impact becomes even more crucial in times of economic

troubles. The research should display the most evident franchising trends. And, if the

contribution of an international franchising concept will be proved mainly as a negative

tendency, it is quite reasonable then to focus on the possible ways how to avoid these negative

consequences.

As far as international franchising represents a quite complex system, there is not

enough space within Thesis frames to introduce all related aspects in detail. Therefore, the

scope will be limited by the most critical issues structured in three main chapters.

The first chapter defines the theoretical background needed for the further analysis. It is

important to include this chapter in order to understand the logic and the features of the

franchising itself. This part provides the reader with the basic definitions, introduces the

concept of international franchising in general and its history of development. The special

attention is given to the franchise contract which has the crucial importance for the franchisor-

franchise relationship: typical provisions and the role of an agreement in a business

environment are described. And finally, the chapter is closed with the main types and formats

of franchise system.

Consequently, the second chapter represents franchising in action. Since an international

franchising becomes an urgent and arguable question in a business world, it should be useful

to highlight the arguments and the doubts and then to make a comparison with the real

situation. Therefore, the most obvious trends and features of international franchising through

the analysis of its strong (opportunities) and weak points (risks) will be presented in this part.

It should be done in order to estimate the crucial Pro’s and Con’s for the potential

entrepreneurs who can be easily found among the readers. I would like to stress mostly on the

general franchising model without differentiation between American, European or Asian ones

as, to my opinion, there are no strong differences on them regarding advantages and

disadvantages. In the last subchapter, some recommendations will be given the potential

investor has to take into account before making a franchise decision.


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The last chapter is focused on franchises overview. It was written mostly for consulting

purpose as making easier the evaluation of the potential of a specific industry or business

sector that could be franchised. The practical part starts with general statistics and ratings of

the franchises worldwide. All information is updated and can be used for the benchmarking

between top franchising companies. The chapter is ended with the gap analysis of the four

industrial categories - automotive, business services, food and vending franchises - as being,

to my opinion, the most popular options for the international franchising today. Each industry

and subcategory is described through its trends and characteristics such as typical ongoing

fees and payments to run a franchise within the specific business sector. This part is also

accompanied by practical examples and the annexes enclosed.

As for the literature and other sources of the topic presented, there is a broad list to

choose. First of all, there are some classical authors, such as Daniels, J. and Radebaugh, L.

“International business : environments and operations”, Mendelsohn M.: “The guide to

franchising”, Ramberg J. :“Guide to Export-Import Basics”, Purvin R.: “The franchise fraud.

How to protect yourself before and after you invest”, and many others that has been used as a

theoretical ground. Moreover, particular franchise associations have a specialized magazines,

periodicals and web-pages with numbers of publications and reports which contributed this

Diploma as well.

Finally, the present Master Thesis shall prove the relevance or irrelevance of the

hypothesis statement. The research conclusions will come from the collecting data and

information sources both theoretical and practical oriented.


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Chapter One: The Essence of Franchising

Franchise business is now-a-days of a significant potential on the markets worldwide.

This process is strongly supported by such factors as the considerable changes in customer

behaviour, the progress in the competitive environment and growing spending power.

The world practice have proved that franchising tends to be one of the most effective way of

business expansion (Ramberg J., 2008), especially when it is going internationally. Its

existence was proved by time on a numerous highly competitive markets demonstrated a quite

clear concept of franchise industry1, but, at the same time, there is still no the single

understanding of this concept in numerous literature sources, mainly regarding the

terminology. That is why I would like to start with some theory: definitions themselves, brief

historical background, as well as the main types and features of franchising will be discussed

in the first Chapter.

The franchise industry has a long history behind…“Franchising has developed out of

a number of business transactions, methods, and practices that have been common and

popularly known for many years.”2

There is a widespread assumption that the founder of the Singer sewing machine, Albert

Singer, was the initiator of franchising. That is not really true as the concept of franchising

really began long before. “The term 'franchising', derived from ancient French, is defined as

holding a particular privilege or right.”3 As far back as in the middles ages, the franchising

idea came from the practice of Kings who granted the rights to conduct activities such as beer

brewing and road building. From European brewers franchising then travelled into the United

States, where it was initially taken the form of chain operations.4

The notion of selling off a business in order to expand into new areas usually came from

the lack of investment funds from the business owner. To keep the business alive it was

created the idea of selling franchise abilities to so-called entrepreneurs. Singer, who made use

of franchising to distribute his machines over a widespread geographic area, is the first actual

name recognized as an early franchisor. Moreover, Singer was the first who prepared

franchise contract - the basis for the modern version of franchise agreements.

1 Ševera M.: “Position of starting, small and medium-sized enterprises on the Czech market”, in Czech Franchise Association, (2008), p.74. 2 Mendelsohn M.: “The guide to franchising”, Oxford: Pergamon Press, (1979), p. 1. 3 Daszkowski D.: “The history of franchising”, in About.com Guide, http://franchises.about.com/od/franchisebasics/a/history.htm. 4 See Daszkowski D.


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The modern leading form of franchising, known as business format franchising, expanded

rapidly after the World War II. Some of the well-known franchises, including Kentucky Fried

Chicken in 1930, Dunkin Donuts in 1950, Burger King in 1954, and McDonald's in 1955,

were established in the United States as the first retail and restaurant chains.5

In times of the unfortunate events of 1979’s, when several companies were under-funded,

poorly managed and, therefore, bankrupted, leaving many franchisees destroyed, the

International Franchise Association (IFA) was founded in order to regulate the franchising

industry. In 1978, the Federal Trade Commission created the Uniform Offering Circular

(updated in 2007 as the Franchise Disclosure Document) requiring franchise companies to

provided detailed information to potential franchisees. Furthermore, IFA has established the

Code of Ethics as “a framework for the implementation of best practices in the franchise

relationships of IFA members”.6

Thanks to these historical prerequisites, we now have the opportunity to share in the

success of other businesses as well as business owners have the opportunity for the expansion.

1.1 Definitions

The simplest way to understand what a franchise is to imagine the most famous brands:

McDonalds, Holiday Inn, IKEA. Many people from all across the world have dreams of

owning and operating such a successful business models. In business practice, however, the

lack of uniform rules covering franchise agreements is a strong obstacle which negotiating

counterparties faced with. “There is presently no legal definition of franchising, which is

defined differently by various franchising associations in individual countries”7, that is why it

is necessary at first to achieve the basic theoretical understanding.

To avoid confusion from the very beginning, let is consider franchising concept as a

‘business format’ franchise - the name by which it is commonly known. That means the

utilization “not merely of goods identified by a trade mark or an invention”8, but developing of

the ‘total business concept’ (so called ‘blue print’) of a successful way to conduct a business in

all its aspects.

5 See Daszkowski D.: “The history of franchising”, in About.com Guide. 6 International Franchise Association: “IFA’s Code of Ethics”, http://www.franchise.org/industrysecondary.aspx?id=3554. 7 Kusak B., Zimova M.: “Legal aspects of franchising in Czech Republic”, in Czech Franchise Association, (2008), p.77. 8 Mendelsohn M.: “The guide to franchising”, Oxford: Pergamon Press, (1979), p. 3.


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The Business Dictionary defines franchising as “the act of selling a license to trade as a

franchise”9, using the name of franchising to describe ‘license-type’ transactions, that is very

simplified way. Both concepts, franchising and licensing, are very similar and closely

intertwined, but the crucial distinction takes place. In licensing the licensee is allowed by the

licensor to use a piece of intellectual property (brand name, recipe), whereas the franchisor selling

the franchisee the right to exploit the whole business idea, including “trademarks, logo and

distinctive signs, intellectual property, technical know-how and processes”.10 It is, therefore, more

reasonable to attribute franchising to a special form of licensing “in which the franchisor not only

sells an independent franchisee the use of the intangible property…, but also operationally assists

the business on a continuing basis…”.11

In the by-law practice of the International Franchise Association the term ‘franchise

operation’ is used in the broad sense and refers to “contractual relationship between the

franchisor and franchisee in which the franchisor offers or is obligated to maintain a continuing

interest in the business of the franchisee in such areas as know-how and training; wherein the

franchisee operates under a common trade name, formal and or procedure owned or controlled

by the franchisor, and in which the franchisee has or will make a substantial capital investment in

his business from his own resources”.12

The abovementioned definition tends to be the classical formulation of franchising and,

therefore, was embodied, with some amendments, in the charters by several franchising

institutes (for example, the British Franchise Association). In spite of such comprehensiveness,

the definition still originates some questions. For instance, the crucial point for franchising

that “the franchisee has the right to own the business for which he is paying”13 is actually

missing (or just implied) here referring to the franchisee “making an investment in his own

business”.

Let me take one more example of franchising definition. “Franchising is a system for

the sale of products and services based on vertical co-operation between legally

independent enterprises on the basis of a long-term contract which sets out the

obligations of the parties”14 - that is the formulation from the German Franchising

9 Collin P.H., in Dictionary of Business, fourth edition (2006), p. 169. 10 Ramberg J. :“Guide to Export-Import Basics”, (2008), p. 143. 11 Daniels John D., Radebaugh Lee H.: “International business. Environments and operations”, Prentice Hall, 9th edition (2001), p. 492. 12 Mendelsohn M.: “The guide to franchising”, Oxford: Pergamon Press, (1979), p. 5. 13 See Mendelsohn M., p. 8. 14 Kusak B., Zimova M.: “Legal aspects of franchising in Czech Republic”, in Czech Franchise Association, (2008), p.77.


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Association. Probably, it will be much better understandable by those who already have been

skilled in this form of business conduct, not for the beginners who seek an underlying

understanding. But my concern in present work is to make it easier to understand the basics of

franchising concept for the starters in this field before dealing with such a business on practice.

Summarizing and simplifying all definitions, that were analyzed above, I came to the

following statement: Franchising is a mode of doing business by which the owner of already

successful product or service (the Franchisor) enters into a continuing contractual

relationship with independent entrepreneur(s) (the Franchisee), to whom the Franchisor

grants the right of using the complex of intangible assets (know how, trade marks, intellectual

property, other business secrets), as well as the whole (or part of) business concept, in

exchange for a fee. To franchise internationally, both parties should run their businesses in

different countries, across national borders.

The core undertakings of the parties should be underlined here: whereas the franchisor

provides a licensed privilege to the franchisee to do business and offers assistance in

organizing, training, merchandising, marketing and managing, the franchisee, who is

operating under the franchisor's trade name and usually with the franchisor's guidance, invests

a certain amount in setting up and conducting business and adheres to the franchisor quality

standards.15 From the legal point of view, the permanent franchisor’s control over the way in

which the franchisee operates the business should be significantly stressed out. It helps to

achieve strict uniformity between outlets and thereby prevent and even strengthen the

goodwill and reputation associated with the franchisor’s business name.

It can be concluded here that, to a large extent, the relationship between a Franchisor and

a Franchisee is in the nature of a partnership: both parties, involved in agreement, have the

mutual interest in franchising deal which is “the combination of the franchisor’s reputation

and expertise with the franchisee’s capital” (Ramberg J, 2008, p. 143). That is the ideal

variant where “the franchise agreement must be conceived as a document enabling the

prosperity to both parties - win-win situation”.16 However, in practice franchising contract can

be complex and in some jurisdictions is subject to local laws for the protection of franchisees.

Such a complexity is frequently resulted in numerous discrepancies between the real

outcomes and the ones that were expected; the most popular cases will be discussed in the

next Chapter.

15 Ramberg J. :“Guide to Export-Import Basics”, (2008), p. 143. 16 Každa A.: “Franchise agreement”, in Czech Franchise Association, (2008), p.77.


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1.2 Franchise Contract – general provisions

“Forewarned is forearmed”

As a matter of fact, there is commonly no direct legislative provisions specifically

regulating franchising in most of Europe; let is take an example of the Czech Republic, where

is “still an absence of consistent judicature relating to the franchising area”.17 Some other

European countries, such as Germany, have definite legal practice in this field as the courts

have already faced with the settlement of the franchising disputes.18 But, in general, European

laws do not contain any obvious treatments that would somehow prohibit the franchising as

such or imply the restrictions on the concept implementation. The lack of special franchising

legislation could be substituted for the relevant legal regulations, such as the Commercial

Code, anti-trust law (e.g. the Act on Protection of Economic Competition). These normative

acts regulate the contractual relationship and other franchisor-franchisee relations such as, for

instance, deals between individual franchisees (Kusak B., Zimova M., 2008).

Franchising continues to be a highly regulated industry as promoting the healthy

growth of the economy. The most important here is to scrutiny carefully a franchise contract -

legal arrangement binding on both parties - which is, probably, the most critical element of any

franchise purchase. That is verity’s moment, as soon as the franchisor has to present his promises

to the franchisee in written form. It, hereby, makes sense for the buyer of franchise to consult

with a competent lawyer regarding the contract’s meaning and effect on the following

partnership.19 In spite of the assumption that most franchises are build up by proven business

concept, the amount of the legal disputes arising from the franchise agreement’ provisions is

growing rapidly; the court verdicts pronounced in important cases under definite jurisdiction

provide invaluable lessons to prospective franchisors and franchisees.

So, the franchise agreement governs the legal relationship between the franchisee and the

company, and contains more on responsibilities of both parties, as well as details about other

fees, terms and conditions including important provisions for future actions if the relationship

does not work out.

17 Kusak B., Zimova M.: “Legal aspects of franchising in Czech Republic”, in Czech Franchise Association, (2008), p.78. 18 For example, “under German judicature, a franchisee is entitled to indemnification to the same extant as a business representative…he has to be actually incorporated into the business system and its relationship with the franchisor must not be merely a relationship between a seller and a purchaser.” See Kusak B., Zimova M., p.78. 19 Mendelsohn M.: “The guide to franchising”, Oxford: Pergamon Press, (1979), p. 78.


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In addition to the structure of the franchise contract, it should be noted that general

franchise transaction involves two stages: the first stage exists prior to the opening of the business

and the second one appears after the business is open. 20

Sometimes franchise companies have two contracts, one for each stage respectively: a

purchase agreement, detailing the terms of initial purchase, and license (franchise) contract,

describing the terms and conditions of the franchise relationship on a go-forward basis.

In franchising practice, there is a tendency to present the franchisee just one document to be

signed - franchise contract - where all features as are relevant to the transaction should be

found. Nonetheless, the separate purchase agreement could exist, and the basic three aspects

may be included there (Mendelsohn M., 1979): the franchise package; the price; the services

provided by the franchisor.

The franchise package represents a complex of the equipment and inventory that will be

sold together with the business concept itself, comprising mainly “the policies governing

procurement, sale and organization, an entitlement to use registered rights…”.21 All items that

are included into franchise package, as well as ones that the franchisee has been agreed to

expect in the future, will be enumerated in a so-called ‘equipment list’.

As for the price, it should be specified in a certain sum of money, and the manner of

payment must be also defined. This may be cash in full on signature, that is rare, or a deposit

form of payment following on delivery of the equipment. In this case the contract may be

conditional upon ‘satisfactory finance’ being obtained. As far as the franchisor has the right to

withdraw from the transaction, for instance, when training shows the franchisee to be

unsuitable for the particular type of business, it is for the franchisee’s benefit to provide the

contract with conditions the deposit should be returnable to him.22

Finally, the services to the franchisee, such as training and ongoing support in organizing,

merchandising, marketing and managing the business project, should be also underlined in

the contract.

An absence of applicable court rulings in countries, where franchising has quite modest

tradition (Czech Republic, for instance), makes local entrepreneurs as being at a considerable

disadvantage since they can not rely on practice that was proven in the franchising area.23 All

that can help them in such a situation are ‘franchising manuals’ - recommendations that were

20 Mendelsohn M.: “The guide to franchising”, Oxford: Pergamon Press, (1979), p. 81. 21 Kusak B., Zimova M.: “Legal aspects of franchising in Czech Republic”, in Czech Franchise Association, (2008), p.77. 22 See Mendelsohn M., p. 82. 23 Kusak B., Zimova M.: “Legal aspects of franchising in Czech Republic”, in Czech Franchise Association, (2008), p.78.


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provided by the international franchise organizations in order to guideline the participants of

franchising relationship in conducting business. So, to implement the business concept the

entrepreneurs can apply the Franchising Code of Ethics, which gives recommendations

regarding the content and certain typical requisites of franchising agreement. As it was

mentioned above, the Code of Ethics has been composed by the International Franchise

Association as a framework for its members. Nevertheless, separate franchising organizations

frequently implement this framework into the local versions of the Franchising Ethics Code,

which correspond to the specific legislation and business climate of each individual country.

One more valuable document, that should be attentively studying before the contracts with a

franchisor will be signed, is the Uniform Franchise Offering Circular Franchise Disclosure

Document (the UFOC/FDD). This disclosure instrument provides prospective franchise

investors with information about a prospective franchise: company history, background

information, risk factors and financial statements are just a few of the items that should be

covered. Because the format is standardized, it makes for easy side-by-side comparisons

between companies to achieve greater uniformity of franchise systems.24

There is no binding standard format for a Franchise Agreement, just recommendations,

because the terms, conditions and operations vary from franchise to franchise and industry to

industry. However, while every franchise agreement will differ - depending on whether refers

to retail establishment, a home business, or a mobile operation, and also what product or

service is offered - each agreement has similar elements. The Model of International

Franchising Contract (2000), which was drafted by the International Chamber of Commerce,

provides key elements the parties should kept in mind while negotiating the franchise

agreement. The elements listed there are “know-how; franchising trade name, trade marks and

patents; products and territory; payment of fees and royalties; term and renewal of the

contract.”25

In a very general way, franchise agreements’ provisions could be divided into sections26:

- the rights granted to the franchisee;

- the obligations undertaken by the franchisor;

- the obligations imposed by the franchisee;

- the trading restrictions imposed upon the franchisee; 24 Debolt Don J., Shay Matthew R.: “Franchise Rule Comment”, in International Franchise Association webportal, http://www.franchise.org/industrysecondary.aspx?id=31150. 25 Ramberg J. :“Guide to Export-Import Basics”, (2008), p. 145-146. 26 Mendelsohn M.: “The guide to franchising”, Oxford: Pergamon Press, (1979), p. 83.


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- assignment/death of franchisee;

- termination provisions.

After the detailed overview of what should make up the structure of the franchise

agreement as it is recommended by several institutions and associations worldwide, I sorted

out the core provisions which should be certainly covered by the contract. Let is discuss

briefly each of them.

Franchisor’s assistance in business operation: each franchisor has its own training

program for franchisees and their staff, which could be done whether at the franchisee's

location or at the corporate headquarters. The additional ongoing support, including

administrative, technical, marketing assistance, should be provided the franchisee as well.

Trademark, patent and signage use: the provision represents the way how the

franchisee can exploit the franchisor's intangible assets; detailed explanation of which brands,

trademarks and patents the franchisee is entitled to use, as well as any restrictions of same.

Assigned territory: the identification of the exact territory, ranging from a single

store location to a wide geographic area, where the franchisee is legally allowed to run

business. It should be also defined whether or not the franchisee has exclusive rights, as “the

granting of an exclusive territory will enable the franchisee, an independent business operator,

to prosper”.27 The territorial exclusivity limits the franchisor’s possibility to operate itself or

to license any third person to run the business within definite territory.

Franchise fee, royalty and anticipated investments: the franchisee is required to pay

an initial franchise fee, granting them the right to use the franchisor's trademark and operating

system, plus an ongoing royalty mainly as a percentage from monthly sales. That is why the

fee costs and other start-up expenses should be clear defined in the contract to make the

business doors open.

Operating protocol: this contract section details the franchisee’s methods of

operating outlets, for instance how to run the day-to-day business, what equipment and

software can be used, how to hire and dismiss employees, etc.

Advertising: the type and nature of an advertising campaign that is planned to be done

on the behalf of the franchisee, plus attendant costs (as a part of the royalty or franchise fees

mentioned above), as well as any limitations to the type of ads, should be noticed.

27 Ramberg J. :“Guide to Export-Import Basics”, (2008), p. 146.


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Resale rights: the special provision enables the franchisee to sell the franchise to any

potential buyer who has expressed interest in the deal. It is up to the franchisor to provide the

contract with the first refusal clauses - the right to have the first option to buy back the

franchise at a fair price and either sell it themselves to a new franchisee or turn it into a

company-owned location.

Duration, renewal and termination of the franchise agreement: provisions deal

with the length of the arrangement, as well as the conditions, on which the franchise could be

renewed, prolonged or terminated, e.g. for violations of the contract. It is quite frequently for

the franchisors to have an Arbitration clause included that requires the disputes between

parties to be heard first by a neutral third party. As for the contract duration period, the parties

should carefully consider if it is concluded for definite or indefinite period, taking in account

the franchisee’s investments: the capital invested should be reasonably recovered by the time

cited in the contract (Ramberg J., 2008).

All considerations, which were mentioned above, tend to help both sides, mainly the franchisee, with the understanding of successful contract requirements and its influence on the following business partnership right after an agreement was signed. Nonetheless, sometimes the contracting parties could stipulate that an agreement will be concluded on a future contract. It may happen if not all the necessary details have been considered yet (the business location, for example).28 In those cases all the essential information must be provided by the franchisor prior to conclusion the franchise contract. So, the franchisee should be informed about the franchisor itself and his activity, what does he offer the franchisee (services provided, industrial property rights, support), requirements and fee costs, etc. This rule have been adopted in some European legislations (e.g. in Germany), but still there are countries (e.g. Czech Republic), where “entrepreneurs are only required to conduct themselves in accordance with the principle of good faith, which is derived from good morals and the principle of fair business practice”(Kusak B., Zimova M., 2008, p. 80).

Business expansion is quite risky choice for the franchisor, so the overall purpose of the

franchise agreement, apart from protecting the intellectual property, is to transfer all possible

risks of business growth and profitability onto the franchisee. That is why you as a franchisee,

negotiating the franchise agreement, should be sure that the mutual risk share is fair and

proportionate. Otherwise, you could be driven into debt while helping to build the franchisor's

profits, for instance, having to pay a fixed monthly franchise fee, regardless of whether your

franchise is profitable or not. This is common franchising practice and it is done to completely 28 Kusak B., Zimova M.: “Legal aspects of franchising in Czech Republic”, in Czech Franchise Association, (2008), p.80.


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protect the franchisor from the success or failure of the franchise. And it becomes perfectly

legal, though completely unreasonable, if you sign the franchise agreement with this

arrangement specified. Summarizing all mentioned above, since franchise contracts will be of

decisive importance for the franchisor-franchise relationship, nothing should be left to trust.

1.3 Types of the Franchises

International franchising gives franchisors an excellent possibility to grow rapidly in

foreign markets with minimum capital investments. However, this “form of shared investment

in the expansion and replication of successful business systems”29 may not be suitable for all

businesses. Franchising is extensively used in retailing, multiple chains of catering outlets,

and, therefore, mainly associated in people’s mind with “fast-food” and coffee chains

(McDonald’s, KFC, Segafredo Espresso) or popular cosmetic lines (Yves Rocher, L’Occitane

en Provence). It is widely represented and, probably, even works best in services industries

such as numerous restaurant and hotel chains all over the world (Holiday Inn, Radisson,

Marriott, etc.). In spite of such involvement with the customers’ provision, the franchise

industry is also involved in supply of goods and services to other businesses. The examples

here could be different franchise associations - the members of the International Franchise

Association (the British Franchise Association, the Czech Franchise Association, etc.) - which

are required to comply with IFA’s Code in their franchise relationships.

Whether buying a franchise or looking to franchise for an existing business, there are

numerous issues to consider. One of the core issue affecting prospective franchisees and

franchisors is the type of franchising which is relevant to individual circumstances. Now,

being familiar with what franchising means and what is the structure of the franchise

agreement, let is continue with the principal types of franchise businesses. There are three

distinct franchising formats: (1) product franchise, (2) business format franchise and (3)

manufacturing franchise.

Product (or trademark) franchise is a favourable way for the supplier (the

manufacturer) to control the process of how a retailer (the franchisee) gets their product out

there. In this relationship, the manufacturer allows the franchisee to distribute the product and 29 Ramberg J. :“Guide to Export-Import Basics”, (2008), p. 143.


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permits the retail’s owner to use that brand name and trademark to further promotion and built

the trust of the consumers. The franchisee identifies here with the supplier through the product

line. As a result, the manufacturer gets the income from the purchase and the franchise fee,

and the retailer gets the benefit of the brand and experience of the franchisor. This franchising

model has been applied extensively in the auto and gasoline service station industries; now it

links mostly to a food service oriented business.30 Steve Rosen, chief executive officer of

FranNet, the franchising consulting portal, has commented on the product franchises: “A lot

of product businesses are fad-based. It goes in cycles. People love coffee or ice cream or high-

fat or low-fat stuff; they love or hate donuts. You've got to take that into account.”

Business format franchise “covers a complete system of doing business, including

service concept and operations, in addition to trademark and logo rights”.31 The business

format provides the franchisee a proven business concept using a recognized product and

brand, which are very well known and, thus, automatically treated as respectful. This

opportunity is reasonably popular, because an individual is allowed, without prior experience,

to be completely trained and informed about how to run a new business. The franchisee is

provided with the necessary knowledge concerning different business activities such as

marketing, promotion, site selection, price suggestions, management, operations, training,

financing, accounting systems, legal support, etc. Most well known fast food franchises, as

well as jewelers or other “ubiquitous High Street names” are of this type.32

In manufacturing (or production) franchise model, which is also fairly common, the

certain group or an organization has the right to produce a certain product, “with the ability to

use that name and trademark for marketing and promotion benefits”.33 The franchisee is

permitted to manufacture the products under license and sell them under the originator's

trademark and name. The company owning the product gets the franchise fee and takes the

benefits from the national advertising of the goods it manufactures. Examples here include the

food and beverage industry.

The new franchising techniques, which are recently appearing, allow independently

operated businesses to be able to convert to the form of an existing franchise business system.

30 Swanson B.: “The three types of franchises”, in Ezine Articles, http://ezinearticles.com/?The-Three-Types-of-Franchises&id=3436345. 31 Ramberg J. :“Guide to Export-Import Basics”, (2008), p. 144. 32 Daud N., “Different types of franchise businesses”, in Ezine Articles, http://ezinearticles.com/?expert=Nazir_Daud. 33 See Swanson B.: “The three types of franchises”.


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As an example here could be the Business franchise venture, when the product is purchased

and distributed from the franchise owner who provides a client base for the franchisee to

maintain. Let is imagine, for instance, vending machines: the franchisee purchases the

machines, then distributes and services them, sharing the profit from business operating.34

Now it is time to represent one more classification of the franchising systems. Though

further variations are possible, most international franchise systems draw from the following

common methods of franchising. Unit (direct) franchise is more suitable for the domestic

markets as providing the maximum franchisor’s control over the individual outlets. The

franchisor enters into agreement directly with each franchisee, who would then operate the

business in a particular location or area, but the trademarks themselves and promotion activity

are usually remained in the owner’s hands.35 The frequent result is a franchisor with a number

of franchisees owning and operating individual stores in different locations. However, it

would be very costly to supervise an international network from a single headquarters

(Ramberg, J. 2008). In international context, therefore, the direct franchising is reasonable

only if both target and home markets are similar enough in economical, geographical, cultural

sense. In case of area (territorial) franchise, the franchisee is only allowed to operate under

the trade mark or brand name in one designated geographical area, such as the province of

New South Wales as compared to the whole of Australia. There are two alternatives how to

cover multiple outlets in a definite area: a franchise development agreement, when the

franchisee (or developer) operates a number of units in certain geographical area within the

agreed time limits, or a master franchise agreement.36 It is very common practice for the

franchisor to penetrate the foreign markets by setting up a master franchise, which gives the

franchisee the possibility to operate in the whole country with outlets opened on its own or

through the sub-franchises appointed by him.37 This method is defined as sub-franchising (or

master franchising) and involves the sub-franchisees who is paying royalties to the master

franchisee. In spite of getting a definite percentage from the franchisee’s profit, the franchisor

should expects here the decreased control over sub-franchisees as a result of the increased

decentralization. For instance, McDonald’s runs its Japanese operations this way (Daniels

John D., Radebaugh Lee H., 2001).

34 See Daud N. 35 Ramberg J. :“Guide to Export-Import Basics”, (2008), p. 144. 36 See Ramberg J., p.144. 37 Daniels John D., Radebaugh Lee H.: “International business. Environments and operations”, Prentice Hall, 9th edition (2001), p. 493.


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It should be mentioned that the international franchising could also takes the other legal forms

to work successfully. An overseas subsidiary is one variant to expand the business, when “the

franchisor retains direct control over the foreign franchisees, but still benefits from local

know-how”.38 Another option is to set up a joint venture, which could be running by both the

franchisor and the local company.

As was illustrated above, there is considerable variety in the methods of franchise

agreements available to franchisors and prospective franchisees. Both parties should consider

what method is most appropriate for their individual circumstances. For instance, costing

would differ for each type of franchises and could be also affected by the potential market

size and share in the targeted country. It is, thus, quite a complex process to choose the

relevant option as each one bears a set of advantages and disadvantages. Acquiring

knowledge of consumer behaviour patterns, local market conditions and regulations,

developing a suitable franchise concept as well as paying attention to various details in the

franchise agreements are just some of the more critical matters that the franchisor should take

into account.

Resuming the first Chapter of the Thesis, I would like to conclude, that in order to

create a very successful franchise opportunity it is essential to get the right product and the

right business model in the right area. “The potential of the franchising is very real”39,

especially when it comes to expanding the business overseas. However, and it will be

discussed particularly in the next Chapter, franchising is not just about gathering the ‘harvest’

from the ‘fruitful’ business field; there are also potential pitfalls and risks involved. This can

be avoided, or at least minimized, if the necessary preparatory work is done before the

venturing into a franchise agreement with a foreign partner.

38 See Ramberg J., p. 145. 39 Purvin R.L.: “The franchise fraud. How to protect yourself before and after you invest ”, (1994), p.20.


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Chapter Two: Franchising in Action

It is quite frequently last times, not so far from the beginning of the financial crisis,

that daily newspapers as well as national media are bombarded with bad economic news,

leading easily to the conclusion that in today's economy people would be crazy to consider

buying a franchise. However, it should be mentioned that many extremely successful business

were born during an economic downturn and the kinds of specific franchise models actually

tend to prosper in a recession.40 It is not by chance that during the period of economic

recession the demand for franchising often increases; the reason is that after the economic

downturn, many of the unemployed individuals and those impacted by corporate downsizing

are looking desperately for self-employment, including franchise opportunities. Others, at the

same time, do not pursue the dream of becoming an entrepreneur for many legitimate reasons:

either “the personal desires and dreams don't include being in business for yourself”41 or the

dream of going into business is breaking due to the lack the necessary skills, capital, or the

courage to risk their savings.

When it is still deeply in mind to start up your own business, you are faced with the

decision of whether to go it alone or to buy a franchise, which is looked pretty appealing.

Both options offer their own distinct advantages and drawbacks.

Franchising offers more opportunities over other types of new business: there are a

number of benefits to entering into a franchising agreement with an existing business as

opposed to going it alone and establishing your own brand. Buying a franchise investors find

that the business has already been ‘created’, while when starting a new business much of the

work usually required. So, it is very costly and difficult for an entrepreneur to establish its

brand name from the scratch: this needs years of brand equity building for the customers.

“Starting a business under an already successful banner can provide an edge in the

marketplace. This can be a critical asset, especially in the fragile stage of developing a new

business.”42 Moreover, franchises tend to be secure with relatively low failure rates. As IFA

surveys show, “92 per cent of franchise businesses in the US are still operating after 5 years

40 Barber C : “Five reasons why now is the best time to buy a franchise”, in Ezine Articles, http://ezinearticles.com/?5-Reasons-Why-Now-is-the-Best-Time-to-Buy-a-Franchise&id=3096337. 41 Schooley D.: “Franchise Opportunities - Fears That Drown Dreams”, http://ezinearticles.com/?Franchise-Opportunities---Fears-That-Drowm-Dreams---Installment-1&id=3467469. 42 Swanson B.: “Franchising - Why Make the Big Decision?”, in Ezine Articles, http://ezinearticles.com/?Franchising---Why-Make-the-Big-Decision?&id=3441751.


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compared to an 80 per cent national small business failure rate”.43 But this data are old

enough, and could be perceived as general suggestion. The real picture shows some different

measures. That is why it is in a vital importance to weight up proc and cons for the net benefit

to be derived and then ask yourself if it is still worth to franchise your business or not.

2.1 Franchising Benefits and Opportunities

For many business people, whether skilful or not, the benefits of the franchise

ownership far outweigh the associated risks. So what makes franchising so appealing, and is it

the right decision to invest into franchise?44

The principal advantages of running business trough franchise will be examined in this

section from different points of interests:

from contractual parties’ points of view - Franchisor and Franchisee;

from macroeconomic policy;

from consumers’ position.

Let is have a first look at some of the more obvious benefits for the direct participants

going into a franchise agreement. Franchising works mainly as a concept of business

expansion through opening additional branches by partnering with other investors. This

concept involves a symbiotic relationship between the contractual parties, which is beneficial

for both the franchiser and the franchisee. The franchisor gives basic know-how, supply

chain, brand name, and ongoing support for the franchisee. And it really makes sense for the

franchisor, who is signing up new contractors, collecting substantial fees from the potential

franchise buyers and, therefore, provides himself with a solid and predictable income. By

opting for a franchise, the franchisee could save the costs associated with the advertising of

the business; for the franchisor, the most important considerations are the expansion of his

business, extra profit and brand recognition.

The potential of franchising is obvious for everyone: it has a unique possibility for

rapid capital development and business expansion for franchisors, and, at the same time, the

potential to achieve reduced risk in business ownership for the franchisees. The relationship

43 Chapman J.A.: “Five Franchise Myths - What You Must Know Before Starting a Franchise”, http://ezinearticles.com/?Five-Franchise-Myths---What-You-Must-Know-Before-Starting-a-Franchise&id=3566781. 44 Dormal D.: “Four reasons why franchising is your best option”, submitted 2009-11-20, http://www.article-bank.com/Art/28248/24/4-Reasons-Why-Franchising-Is-Your-Best-Option.htm.


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enriches both parties “by creating market penetration and sales volume through joint efforts to

market the franchised ‘brand’”.45 The mutual efforts of the franchisor and franchisee,

together with a strong trademark and quality products, can lead to establishing a truly

impressive profit centre. So the case here is a win-win situation, and, probably, that is why

the franchising business model has such a vast popularity in today's world. Could you

somehow imagine that almost every shop today you are buying from is part of a franchise

system? For instance, “there are 550,000 franchised outlets in the United States of America,

and this accounts for more than $1 trillion in sales per year”.46 Another example is Scotland,

where franchising is becoming increasingly popular these days. The Scottish market is

recognized as “one of the most vibrant in the UK” as making a substantial economic

contribution: there are about 2500 franchise units recently, employing 35,000 people with an

annual turnover of £800 million. According to the British Franchising Association (BFA), “90

per cent of all franchisees, including the newest start ups, are in profit, suggesting that

franchising can be significantly more successful than many other start-up businesses”.47

The first-priority question the franchisor should ask himself is why he would want to

franchise the business. Let is consider primarily the franchise benefits from the franchisor’s

point of view.

Financial resources as personal investment from the franchisee who provides the

required capital for each new location. The franchisor does not need any additional injection

of capital in order to obtain a rapid expansion or growth rate: each outlet from the franchise

chain is capitalized from the franchisee’s pocket, while the franchisor tends to get a return

from the shared profit.48 Moreover, “banks and other financial institutions may be more

receptive to a person who comes to them with a proven business idea such as a well-respected

franchise, as opposed to an unproven idea of their own”.49

Franchising expansion rate is much more rapid that in case of ‘natural’ growth of a

new established business. That is a result of ‘domino’ principle or economies of scale, when

the success of one location is spreading to the rest of the franchise network with an ability to

control and dictate the operating system. Really, while entering the new or distinct markets

45 Purvin R.L.: “The franchise fraud. How to protect yourself before and after you invest ”, (1994), p.44. 46 Winslow L.: “Franchising and Ongoing Support Considered”, in Ezine Articles, http://ezinearticles.com/?Franchising-and-Ongoing-Support-Considered&id=3306802. 47 Hawkins G.F.: “Is Small Business Franchising the Way Forward For Scotland?”, http://ezinearticles.com/?Is-Small-Business-Franchising-the-Way-Forward-For-Scotland?&id=3446858. 48 Holohan B.: “How to franchise your business”, in Summary prepared for the Irish Franchise Association, www.holohanlaw.com. 49 Nagy A.: “Three Reasons a Franchise Business May Be Right For You”, in Enzine Articles, http://ezinearticles.com/?Tree-Reasons-a-Franchise-Business-May-Be-Right-For-You&id=2527882.


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the control over the business is not lost, and the franchisor still has a power over the

franchisee’s operating work, though it is not about minute by minute supervision.50

Unprecedented franchisee’s incentive to minimize costs and maximize sales is much

higher than any manager in sales outlet has. Let is make a comparison: poor performance

leads to job loss in case of a unit manager, while to the franchisee it means the losses of the

entire franchise together with capital investment.51 So the franchisee is rather motivated than

is committed to prosper actively. It is thus obvious that well-motivated franchisee is for the

direct interest of the franchisor.

Smaller central management system, which contains just a few highly skilled experts

from the different business fields. Thanks to reduced structure, the company “can earn a

reasonable profit without becoming involved in high capital risk in the day-to-day

details and problems that arise in the management of small retail outlets”.52 As a

result, the franchisor faces with less staff problems because it is the franchisee’s responsibility

to supervise the staff issues in each individual outlet.

Wider distribution outlets, that is secure and directly ‘tied’ for the franchisor’s

products and services. This is particularly the case of so-called ‘wimpy franchise’, where each

franchisee has to buy his ‘wimpy’ as well as certain other items from his franchisor. “No other

product that could be obtained anywhere on the market can be described as a Wimpy. Any

attempt to do so would be an infringement of the franchisor’s trade mark and a breach of the

franchise agreement.”53

The potential benefits and opportunities of franchising should be underlined here also

from the franchisee's point of view. The following advantages would influence him in

making the decision of whether or not to run business in franchising manner and, finally, in

choosing of certain franchisor to cooperate.

The proven business concept reduces the risks, saves the investments, and makes it

easier to attract new customers. When investing in a franchise, the franchisee receives a well-

tasted model and training from the owner. Purchasing a franchise means purchasing more

than just a name; it is about an entire means of doing business. The benefit of an established

name, reputation and goodwill allows the franchisee to start quickly. Launching with a 50 Pirtle L.: “Seven reasons to franchise your business”, http://ezinearticles.com/?7-Reasons-to-Franchise-Your-Business&id=2782147. 51 Siebert M.: “The quality-control myth”, in Entrepreneur’s StartUps, (2009), http://www.entrepreneur.com/franchises/ franchisingyourbusinesscolumnistmarksiebert/article202330.html. 52 Mendelsohn M.: “The guide to franchising”, Oxford: Pergamon Press, (1979), p. 22. 53 See Mendelsohn M., p. 22.


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business method that has already proved its consistency, the franchisee can focus on the

improvements. Furthermore, it is a marketing rule that people deal with the products and

services that they are familiar with. “When you own a franchise, people know who you are

and what you're selling and are much more inclined to use your business than an unknown

independent.”54

The chances of success become much higher as soon as the franchisee will be supported

by the franchisor, who has already incurred most of the risk. The right to use the franchisor's

patents, trade marks, trade names, service marks, trade secrets, know-how, secret processes

etc. - that is what the investor is really paying for.55 By the way, it should be mentioned that

any business is risky, and there is no exception for the franchise business. That is why the

franchisee has to work hard to be successful, because the great rewards will never be

promised for little efforts.56

Support network: built-up support system, mentoring, training and knowledge. When

purchasing a franchise, one of the things franchisee buys is the experience of the franchisor.

The lack of basic knowledge or practical experience can be overcome by the franchisor’s

training program. The franchisee has the sense of security then and is strongly motivated to

become the owner of a business, which has the franchisor’s backup and support. While the

franchisee remains an independent entrepreneur within the Franchise Network, building the

business on the proved experience and success could maximizes the value of their

investment.57

In general, an individual franchise package should include assistance in one of the

following activities (Mendelsohn M., 1979, p. 19):

site selection;

preparation of plans for remodeling of the premises, including layout, and

advice in relation to obtain town planning or building regulation approvals;

obtaining finance for the franchise business;

the training of staff;

purchase of equipment and stock;

general business management, which is getting the business open and running

it smoothly.

54 Swanson B.: “Examining the Realities of Franchise Ownership”, in Enzine Articles, http://ezinearticles.com/?Examining-the-Realities-of-Franchise-Ownership&id=3436638. 55 Bach C.: “Ten reasons to purchase a franchise”, in Entrepreneur’s StartUps, (2009), http://www.entrepreneur.com/magazine/ entrepreneursstartupsmagazine/2009/october/203504.html. 56 Mendelsohn M.: “The guide to franchising”, Oxford: Pergamon Press, (1979), p. 19. 57 See Mendelsohn M., p. 18.


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For sure, in practice this list can be shortened or extended, depending on certain terms of

the franchise contract. Sometimes the researching and developing programmes could be

added to the franchise package as providing the improvement of the product or services and

keeping the business updated. But, anyway, when buying a franchise, the franchisee is getting

involved into a wide network of support for business activity. It looks like the co-operation

between two separate business units: because of the support of the established big business

(the franchisor’s company), there is a high probability that the small business (the individual

franchise owner) will run well. As a matter of the fact, the franchisor wants his business to

succeed which means greater profits from royalties, as well as the greater attractiveness of the

recognized brand for new potential franchisees. “As such, any franchisor with an eye on

success will do everything in its power to provide you with the tools necessary to make your

business grow and flourish.”58

Brand recognition is a strong foundation for the any business idea, because that is

what consumers really look for. For companies like Avon and many others, the name backing

or brand awareness is of the crucial importance: customers know the names, trust them and

respond in favourable manner to the suppliers. “Your franchise comes with a certain

guarantee that you have an existing customer base, already familiar with and receptive to your

business before you ever even open your doors for the first time.”59

The benefit of an advertising, promotional and other marketing activities, which are

handled by the business owner. Most of franchisors have national or, at least, regional

advertising and marketing campaigns to support their franchises. And usually the franchisee

does not bear the direct expense of buying the advertisement time on TV, printing up the

individual flyers for newspapers, etc. Probably, all these costs were already included as part of

the franchise fee.60 Thus the franchisee has an opportunity of being promoted in nationwide

level by the franchisor and provided with materials for local marketing campaigns.

As soon as the newly franchised business concept becomes an element of the total

franchise network, the franchise owner (franchisee) is provided by the franchisor with “the

bulk of the purchasing and negotiating capacity”, also with the support of so-called ‘trouble

shooters’ who will assist in case of some operational problems occur.61 Moreover, a kind of

58 Swanson B.: “Franchise appeal - four reasons why franchising works”, in Enzine Articles, http://ezinearticles.com/?Franchise-Appel---Four-Reasons-Why-Franchising-Works&id=3301714. 59 See Swanson B.: “Franchise appeal - four reasons why franchising works”. 60 Devine J.: “Advantages of franchises”, http://ezinearticles.com/?Advantages-of-Franchises&id=3215866. 61 See Mendelsohn M., p. 19.


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financial assistance or in-house lending can be available from larger franchise companies that

form together the whole franchising chain.

Finally, the franchisee is benefited from the possibility to make the orders for the

products or materials directly from the franchisor as producer, that would be cheaper than

dealing with external manufactures.

The most obvious and crucial benefits and opportunities were mentioned so far. Now it is

visible that the maximum amount of market information and experience which has been

accumulated by the franchisor could be available to the potential franchise owners.

Franchising is quite beneficial also from the social and macroeconomic points as

being a supportive and evolving tool for many of small and medium businesses.62 The

increasing capital flow into the franchising sector can have a very positive impact on the pace

of the world economy. Consumers may enjoy the better quality of the goods that were

recognized as proven brand. They also can appreciate the higher level of services as the result

of the tough quality control which is necessary for running the franchise business

successfully. Furthermore, the continually expansion within the franchising network leads to

faster and easier access to the goods and services for the customers.

Franchising can be viewed as a real worthwhile investment, especially in the current

economic climate. For instance, interest rates and the buy-in prices became lower in times of

economic downturn. “Investing in a business in a down economy is like buying a BMW for

the price of a Ford,” says Harry Mathur, interim managing director of Northwestern Mutual in

Lombard, Illinois. “During a recession, cash is limited even among the best businesses, and

franchisors that want to build capital to grow or simply to stay afloat are actually discounting

their franchise fees, knowing that when the market turns they will flourish”.63

Moreover, the creation of new franchise establishments (ventures, corporations) is

resulted in increasing employment and acceleration of the economy’s restructuring: human

and business factors as know-how, jobs, capital are used much more effective.

One more effect of the franchise system expansion is the maintenance and support of the

middle-sized enterprises as important levers, which balance the economy and, thus, accelerate

the factors for the economic growth. Trade expansion becomes cheaper, the preferential

position on the marketplace makes trade barriers more transparent. In such favourable

conditions even inexperienced small-sized entrepreneurs are getting the possibility to start-up

the new business and participate on huge markets under the strong name and image of the

62 Tamchyna J.: “Stručně o franchizingu”, (2005), p.5; http://www.ifranchising.cz/pdf/strucne-o-franchisingu.pdf. 63 See Bach C.: “Ten reasons to purchase a franchise”, in Entrepreneur’s StartUps, (2009).


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franchisor. It is even more important today, when the small- or middle-level entrepreneurships

are not able to compete with the huge foreign conglomerates (Tamchyna J., 2005, p.6).

2.2 Weaknesses and Risks of Franchising

Franchise frequently seems as a lucrative investment. Subway, McDonald's, Starbucks

Coffee, all successful brand names we are familiar with, are some of the most popular and

well known franchises examples. But what about the other thousands, not so popular, cases?

Unfortunately, not all franchises can be successful and they do come with risks often higher,

especially in regards to capital invested. Franchisee’s success is far from guaranteed:

entrepreneurs choosing the franchising way to open a small business have different

complaints because they are ultimately bound to a long term deal with their franchiser.64 No

business relationship is without conflicts. Franchisee-franchisor’s disputes mainly arise from

“allegedly noncompliant, improper, or inaccurate disclosures made by the franchisor before a

franchise agreement is executed... from real or perceived “encroachment” or failure of the

franchisor to support a franchisee... and from termination of a franchise by the franchisor”.65

The purpose of this subchapter is to highlight the particular disadvantages of the

franchising for both franchisor and franchisee, and demonstrate the negative franchise effect

on economy in general. The most typical reasons for the contractual complaints also can be

found below.

An economic influence on franchising industry could be represented not only by the

positive effects which were specified above. Franchise companies continue to deal with the

challenges posed by the new economy. From the one hand, franchisors provide consumers

with the optimum choice of good and services for the lower prices. This business concept is

truly more efficient and more competitive, but it is hard for the non-franchise businesses to

compete with them. So, the downside here is the limited competition which is dictated by the

franchise monopolists.

64 Haiber R.: “Franchise Owners' Biggest Complaints With Their Franchisers”, http://ezinearticles.com/?Franchise-Owners-Biggest-Complaints-With-Their-Franchisers&id=3487057. 65 Einbinder & Dunn, LLP webportal ,“Common franchise disputes”, http://www.ed-lawfirm.com/franchise-disputes.php.


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In times of the economy recession, when lots of individuals loss their job, franchising

ensures a logical 'job replacement'. Job loss can be viewed as an opportunity to move into

ones own business as far as so many industry segments now available in franchise form.

“Small businesses offer the best opportunity to promote a strong economic recovery by

sustaining and creating jobs, but more needs to be done to promote capital access to create

new businesses and to keep existing businesses growing”, the International Franchise

Association says. It is for fair, that small businesses are struggling to access the capital needed

to stay open, pay debts, maintain payroll and expand operations. The situation is worse for

the ‘first time’ entrepreneurs who is just starting with personal business. If to talk by numbers,

the International Franchise Association released recently that “a shortfall of $3.4 billion in

lending to franchise businesses in 2010 will result in 134,000 jobs not created and 13.9 billion

in economic output lost”. 66

One more obstacle to franchise successfully is the bureaucratic tendency within the

franchising system. The more scaled the franchise project is, the wider then the operation

network, which means the co-operation of plenty of institutions and individuals within one

franchise chain. In practice, a franchising business proves a lot of bureaucracy. Not just

because of all the administration procedures involved, but because of a certain hierarchy of

partners and functions which are decentralized, especially in case of sub-franchising. The

bureaucratic tendency appears clearly in certain kinds of franchise industries. For instance, in

construction franchise, where labourers are obviously involved in a dangerous occupation, the

higher insurance costs and strict health and safety regulations are required.

It is time then to move to the main heroes of any franchise story, franchisor and

franchisee, and follow the drawbacks they are mainly faced with. The most typical and crucial

reasons for the franchisor’s failure can be composed from the triangle: concept, capital,

management. Let is consider each of them.

No concept is beyond failure. Franchising always starts with the concept. As far as the

competition among franchisors is huge, each of them wants to be the first on the market and,

therefore, has to offer something unique for the consumers. In such a situation, the franchisor

should, at least, keep the confidence that a properly trained and supported franchisee will

achieve such a rate of return that is corresponding to the risk. It should be taken into account,

66 International Franchise Organization: “Lending Shortfall Predicted to Slow Job Creation in 2010”, in Frachising world, (2009), http://www.franchise.org/franchise-news-detail.aspx?id=49356.


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that any market changes over time, and the relevance of a concept within a certain market area

could be also modified. How to avoid such problems? While planning the development of

corporate locations franchisors, probably, have to carefully evaluate their risk exposure and

focus mainly on unit-level profitability, because only the concept, which works for everyone-

from the consumer to the franchisee, will prosper.67

Start-up capital is the other crucial point. New franchisors face with significant legal

and development costs associated with the realization of their franchise ideas. The initial

working capital, such as for the personnel and franchise marketing, should be financed by the

franchisor from the very beginning. Moreover, some budget could be required to get the local

permissions to run franchise outlets. It happens quite often, that local officials and even city

councils are “somewhat hostile towards franchising companies” who wish to consolidate its

positions on a definite territory. “They don't want to see all the brand names and plastic signs,

they want to keep their community quaint, and they like to see local small businesses people

who support the community rather than franchised outlets.”68

Next and, probably, the most significant reason for the lots of franchise failures is

poor management. Lack of vision systems, standards, motivating, communication,

measurement, accountability and enforcement will destroy any business, “no matter how good

the concept and no matter how well capitalized the company”.69 So, any deviation from the

quality standards could affect the franchisor's brand as well as the consumer’s confidence to

definite goods or services. It should, thus, become a key focus for both franchisor and

franchisee to maintain an appropriate quality of what is franchised. Unfortunately, but fact,

that most people associate franchising mainly with fast food industry. This leads to confusion

when the ultimate quality of the product (which can be judged as low) with the quality of the

operation. “The fact of the matter is, McDonald's is among the world's most quality-oriented

brands, but the value proposition and the price point aren't appropriate for steak and lobster.

Quality is not about what's on the menu; it's about consistency of the operation.”70

67 Siebert M.: “Why Do Franchisors Fail? Keeping your concept, capital and management in check will keep your new franchise from going bankrupt”, (August 26, 2008), http://www.entreprenuer.com/franchises/franchisingyourbusinesscolumnistmarksiebert/article196676.html. 68 Winslow L.: “Anti-Franchise Sentiment Often Misguided”, in Enzine Articles, http://ezinearticles.com/?Anti-Franchise-Sentiment-Often-Misquided&id=3345570. 69 See Siebert M.: “Why Do Franchisors Fail? Keeping your concept, capital and management in check will keep your new franchise from going bankrupt”. 70 Siebert M.: “The Quality-Control Myth. Use motivated and committed management to maintain the value of your franchise system”, (June 18, 2009), http://www.entreprenuer.com/franchises/franchisingyourbusinesscolumnistmarksiebert/article202330.html.


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Quality control is, in fact, the commitment that should be naturally followed, and for the

franchisor it comes at a price. Therefore, it is quite difficult, but necessary for the successful

franchisor, to force franchisees to keep all the operational standards (for instance, style and

decor of the premises) in accordance with the franchise contract and in a manner relevant to

the brand image of the Franchisor. To overcome such a difficulties franchisor can be assisted

by so-called trouble shooters, who were already mentioned. They are targeting to help with

identifying problems, keeping franchisees on their toes, but doing it in a constructive way.

Franchisee as a future competitor. Franchisor should be aware of the possibility to

compete with his franchisee, when the real partner may become a competitor in the future. If

the franchisee tends to be successful in running franchise, and feels himself much more

independent than before, he might expect to earn more. Being already trained and experienced

enough, the franchisee is able to set up a rival franchise network. To protect the franchisor in

this case the franchise agreement should specify certain restrictions on future competition.

However, the protection may not be guaranteed in a full manner. For instance, “Irish

competition law is so strict that one can in reality only limit a Franchisee to a non competition

clause for a period of up to only one year after the Franchise has come to an end”.71 So, after a

one year of a franchise been expired, accordingly to Irish law provisions, the franchisee can

freely establish a competing business chain. Simply said, the franchisor never knows if he is

bringing up his future rival or faithful partner.

The lack of trust and incompatibility between the contractual parties is, probably, the most

appropriate reason for the franchisor’s failure.72 But what are the cardinal drawbacks the

potential franchisee may face with? Let is go through them.

Lack of autonomy and imposition of control are ones of the biggest drawbacks as the

franchisee will never have ultimate control over the business, but, instead, need to comply

with to their rules, regulations and requirements stated by the larger franchise company. In

this situation the franchisee may not be provided with the total freedom as an entrepreneur

may: “variables such as wages, hours of operation, suppliers are restricted to the freedoms the

company system allows”.73 The liability to stay within franchise guidelines is going to limit

greatly the franchisee’s flexibility in the day-to-day business operations. It is all about the 71 See Holohan B.: “How to franchise your business”. 72 Mendelsohn M.: “The guide to franchising”, Oxford: Pergamon Press, (1979), p. 23. 73 Mossop M.: “The 5 Major Myths of Franchising”, in Enzine Articles, http://ezinearticles.com/?The-5-Major-Myths-of-Franchising&id=3039643.


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disability to follow own business plan, but the obligation to follow a business plan the

franchisor has already set up. Playing a franchise game the franchisee must abide by the

company’s rules.74

From the franchisor’s standpoint, such a control is necessary to regulate the products’

quality and to ensure brand uniformity across the entire range of their franchising territory.

Therefore, the franchisor requires that standards are maintained so that the maximum benefit

is derived by the franchisee and indirectly by the whole franchising Network from the

franchisee's business activity. This does not mean, for sure, that the franchisee has no ability to

make any personal contribution to franchise at all.75 But for the franchisee, who is paying for the

right to be a business owner, it has even less legal ‘independence’ than most employees have.

“Franchisor standard operating procedures manuals usually dictate every minute detail of the

business operations - from the size and colour of the signs to the method of wiping the tables

or the proper way to wear a uniform.”76 Anyway, by signing a contract, franchisee

automatically agrees in advance that the franchisor is any time free to modify unilaterally the

system operations. Moreover, the franchise agreement could limit the franchisee’s right to sale

or transfer of the business. This seems as a clear restriction on the Franchisee's ability to deal

with his own business and sell it when and to whom he wants.77

In the meantime, properly structured franchise organization should provide all business

partners with the regular and active collaborations. Franchisees tend to be the equal partners

with the company. So, logically, if the franchise owners have to invest on various policies

such as marketing spend, new products or expansion into new markets, they should be able

then to influence on important decisions regarding the future direction of the central company.

High start-up costs, required to buy and then run the franchise, represent, probably,

the most troublesome point for the franchisee. Franchise price includes often a high upfront

fee for the right to use just the Franchisor's trademark and name, and also royalties that must

be paid out of franchisee’s gross income for the entire time of running a franchise (as the

percentage of the gross revenue; the nation average is around 7 per cent, though the

74 Swanson B.: “The downside of Franchising”, in Enzine Articles, http://ezinearticles.com/?The-Downside-of-Franchising&id=3056809. 75 Mendelsohn M.: “The guide to franchising”, Oxford: Pergamon Press, (1979), p. 20. 76 Purvin R.L.: “The franchise fraud. How to protect yourself before and after you invest ”, (1994), p.8. 77 “Some states impose a defined “good cause” substantive standard that a franchisor must meet before it may lawfully deny a transfer request. Other jurisdictions provide that a franchisee may transfer the franchised business and franchise agreement provided that the transferee satisfies the reasonable current qualifications of the franchisor for new franchisees”. See Einbinder & Dunn, LLP webportal ,“Common franchise disputes”.


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percentage charged varies from franchisor to franchisor).78 So it is required to give a certain

amount of sales to the franchisor every month, does not matter if the month will end up with a

very small amount of profit. The franchisee also has to pay some ongoing fees such as those

for marketing or advertising. And finally, franchisee can discover that the advertising fee goes

for the promoting the brand or for an attraction of new franchisees, but not to advertising his

business, that is completely unpleasant to realize.

As a rule, all possible fees should be outlined initially in franchise contract. The additional

royalties could cover advertising, services and support, marketing, inventory and other

equipment that the franchisee needs. Some forms of the franchise agreements include the

advertising fund as a separate fee, which is paid on a quarterly basis, and “go towards nation

wide or regional marketing, promotion and ads for every one under the umbrella of that

particular franchise”.79 In practice, most franchisors want these money as fast as possible, in

good times or in bed. Moreover, they have the right for some portion from the franchise

revenue. To be more precise, it is frequently stated in the franchise agreements that the

franchisors have right to draft funds from franchisee’s bank account.80

So, to put it mildly, buying a franchise is not cheap. Investing in a brand-name franchise is

going to set the investor back somewhere in the hundreds of thousands of dollars: investing in

a potentially lucrative business quite a massive sum of money in something with such an

uncertain future. Even royalties for use of an ordinary trademark and ongoing fees can be still

a significant sum of money, which is sometimes nonrefundable, especially in the critical first

year of developing a new business. But, as the royalty fees are paid as a percentage of

revenue, it is in the best motivation for the franchisor to make its franchisees as profitable as

possible.

Anticipating competition by the franchisor - one of the most common complaints

from the franchise owners. It is quite naturally for small businesses to compete with each

others. But it becomes risky for the franchisee, if the franchisor is sharing the territory with

multiple chains inadmissibly close to franchisee’s ones and, thus, represents the real

competition.81 For instance, “ice cream franchise might sell its products to a supermarket,

78 Yerxa V.G.: “What is a disadvantage of a Franchise? Franchises vs home-based businesses”, http://ezinearticles.com/? What-is-a-Disadvantage-of-a-Franchise?-Franchise-Versus-Home-Based-Businesses&id=3494036. 79 Swanson B.: “Understanding franchising fees”, in Enzine Articles, http://ezinearticles.com/?Understanding-Franchising-Fees&id=3436585. 80 Stacey D.: “Franchising May Not Be the Wave of the Future”, http://ezinearticles.com/?Franchising-May-Not-Be-the-Wave-of-the-Future&id=3791137. 81 See Haiber R.: “Franchise Owners' Biggest Complaints With Their Franchisers”.


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causing competition for its franchisee(s) in the neighbourhood that the franchisee did not

anticipate. Or, with the advent of the Internet and ‘e-tail’, a franchisor might sell the franchise

product online”.82 This situation could be legally regarded as breach by the franchisor of “an

implied covenant of good faith and fair dealing”, if an agreement does not contain the

franchisor’s right to sell franchise products in either manner. Indeed, it is reasonably useful to

balance all the possibilities and restrictions for the specific franchise territory before signing

any franchise document.

Outlets cannibalization is one more challenge that should logically follow unexpected

franchisor’s competition. Usually the franchise chain operates within a specific geographical

territory and each outlet can be quite different to another. As a result, the types of business

and the demographics of a particular area may not have the same advantages to all

franchisees.

From the one hand, the franchisor needs market domination, and, thus, territories need to

be close together. But being placed too close to others, the franchised outlets then will

cannibalize sales off each other - in that case no one wins. From the other hand, if a franchisor

grants exclusive territories too far apart, there will be gaps with no service and customers

would have to travel too far for a brand name to buy from a franchisee. 83 So, looking at the

exclusive franchise territories, the market mix, demographic segment, the population density

and the competition should be taken into consideration.

In the Franchise Disclosure Documents the phrase “in your protected franchise territory”

or something similar, can be usually found along with a stipulation of the granted franchise

for ‘X’ amount of dollars. In reality, the exclusive franchise territories sometimes are limited

by the door of the outlets. It can cut franchisee’s sales when the franchisor starts selling

products with the same brand name, let is say, in a shopping centre with a grocery store that

sells the same products next door. Such a franchisor’s behaviour should be regarded as

violating the franchise agreement.84 Unfortunately, cannibalizing tends to be a common

practice in modern franchising, resulting in numerous litigations. But similar, any independent

entrepreneur can set up a business that competes with the franchise outlet across the street.

And, after all, no franchisor can protect his franchisees from such competitors, otherwise this

would be considered as predatory competition, that is in violation of antitrust laws.

82 See Einbinder & Dunn, LLP webportal ,“Common franchise disputes”. 83 Winslow L.: “How does a franchisor pick the territories?”, in Enzine Articles, http://ezinearticles.com/?How-Does-a-Franchisor-Pick-the-Territories&id=2161742. 84 Winslow L.: “How protected is my franchise territory if i buy a franchised business?”, in Enzine Articles, http://ezinearticles.com/?How-Protected-is-My-Franchise-Territory-If-I-Buy-a-Franchised-Business&id=3299727.


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Anticipated changes in franchisor’s policy may influence on franchisee’s profitability;

such franchisors’ unilateral modifications as re-branding or renovating the products can lead

to franchisee’s losses. For example, if the franchisor decides to exclude the certain goods or

services from the chain, it will negatively affect on the franchisee's profit which will decrease.

Certainly, the franchisor could also make some policy’s mistakes, as for deciding to innovate

in business which would be unsuccessful. All these circumstances could be resulted in the

financial detriment of the Franchisee. Moreover, “the good name of the Franchise business or

its brand image may become disreputable for reasons beyond the control of the Franchisee”

(Mendelsohn M., 1979, p. 21).

Difficulties may appear as well in the quality of the franchisor who may not be able to

maintain ongoing services or, in fact, may not be providing them at all. It is quite risky, that

there are plenty of franchisors who have never developed a proven success formula. “Too

frequently, companies launch into franchising without adequate preparation or an established

track record. Often franchising is used as a growth method instead of planned growth.”85

Finally, the franchisee can bear the risk of domino (coattail) effects. It happens quite

commonly in franchising, especially with some smaller franchises. Domino effect

automatically leads to the same consequences for the whole franchise network. So, if a

number of some outlets fail, the effect can break the rest of franchises as well.86

It seems, from the very first view, that all the franchisee need to do is follow the fran-

chisors guidelines to avoid the trial-and-error mistakes, faced by most inexperienced business

people, so to overcome all the operational and marketing drawbacks. And while many

believes that the franchise business tends to be stable and profitable, it must be always

considered, that there are still lots of fraudulent franchise companies which are not

professionals at all. However, even dealing with the ‘honest’ franchisors, an investor can not

be completely insured against all the franchising risks.

It is a wrong assumption that the purchase of a franchise and payment of all necessary fees

will guarantee a full protection to the franchisee. The Franchise agreement is designed mainly

to protect the franchisor. Therefore, you, as a franchisee, must be aware of all rights and

85 Purvin R.L.: “The franchise fraud. How to protect yourself before and after you invest ”, (1994), p.9. 86 Vower D.: “The advantages and disadvantages of owning a franchise”, http://ezinearticles.com/? The-Advantages-and-Disadvantages-of-Owning-a-Franchise&id=3902838.


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limitations which are fixed in the contract you sign. Make sure then, that the given payment

terms are accurate and that there are no additional costs which are not listed. The contractual

issues like duration of the agreement, as well as its termination conditions, must be considered

too. And if the franchisee decides suddenly not to deal with a franchise anymore, but the

contract was already signed, he has to complete all undertakings before leaving the business.

Not without a reason, the American courts have agreed that “there is no fiduciary liability of a

franchisor to its franchisees, and stated the franchise agreement as ‘arm's length’ for business

transactions”.87

The breach of the franchise agreement by violation of the contractual commitments

could have trouble consequences, such as losing the business and all assets invested, for both

parties. Various misunderstandings and violations could take, finally, quite serious forms of

numerous court litigations. To be more precise, let is have a look at the most popular

complaints from both sides’ perspectives.

After a heap of materials regarding different franchising suits was examined, I came to the

conclusion that the most common reasons for the franchise disputes cad by generalized into

two principal groups: so-called ‘earnings’ claims and ‘quality’ claims. Indeed, the group titles,

done by myself, are not so accurate, but this is my personal attempt of classification.

First of all, ‘earnings claims’, which could be represented by both contractual parties.

This mostly refers to the information given to a prospective franchisee by the franchisor or its

agent from which “a specific level or range of actual or potential sales, costs, income, or profit

from franchised or non-franchised units” may be easily clarified.88 Such information can be

submitted either as actual financial statement or as the project of the future performance of the

certain franchising units. Furthermore, under some national legislation, franchisor is required

to represent all the costs the potential franchisee will need to start-up a franchise. That is other

particular claim named as misleading initial investment costs.89

Franchisee may claim also against an advertising fund manipulation, which constitutes a

breach of the franchise agreement. It should be proved then, that advertising funds were used

by the franchisor not for the intended purpose, but instead for general corporate needs.

87 See Purvin R.L.: “The franchise fraud. How to protect yourself before and after you invest ”, (1994), p.7. 88 For instance, “in New York an earnings claim is any information that a franchisor seeks to impart to a franchisee that states, suggests, or implies what sales, income, or profits a franchisee can derive from the operation of a franchised business”. See Einbinder & Dunn, LLP webportal ,“Common franchise disputes”. 89 See Einbinder & Dunn, LLP webportal.


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As for the franchisor’s ‘earnings’ claims, he might seek judicial intervention if:

franchisee fails to pay royalty, advertising, and/or marketing fees;

franchisee does not disclose his true gross income in order to minimize the franchise

fees’ amount based on a percentage from the sales, etc.

‘Quality claims’ express another, the wider, category of contractual complaints, mainly

associated with operational and supporting activity, as well as duration and termination issues.

So, the franchisor, for example, might sue franchisees who do not follow the system

standards. Moreover, franchisor could complain against a terminated franchisee that continues

to use a franchisor’s trademarks or brand name. It is about unfair competition or even

trademark infringement, which leads to the consumer’s confusion as well as damages the

reputation of the franchise company. To avoid this, franchisor should enforce his intellectual

property rights by the court decision.

Franchisee’s ‘quality claims’ involve usually the franchisor’s failure to complete the

promised training or support, encroachment90, and, finally, unexpected competition, which

was particularly explained above.

To crown it all, let is move to the last, but not the least, from the legal point, contractual

statement - arbitrary franchise termination or non-renewal. When the franchise agreement

expires and it does need to be renewed, usually this situation is governed by state law.

Generally, franchise length covers the period of about 10-20 years, and the risk, that franchise

agreement will not be renewed, always exists. If franchisee fails to pay the required fees, or

can not meet the standards of operation, the franchisor is eligible to cancel the agreement.

“Relationship statutes forbid termination or non-renewal of a franchise except for ‘good

cause’ (sometimes termed ‘reasonable cause’ or ‘just cause’), often defined as the failure by

the franchisee to comply with any lawful provision of the subject franchise agreement after

being given the opportunity to cure that failure.”91 Nonetheless, state laws typically determine

a minimum advance notification of franchise termination or non-renewal, which allows a

franchisee to correct defaults on time and thereby avoid termination.

Many of the advantages and disadvantages have been touched upon in the previous two

subchapters. And the actual list is not exhaustive. My intention here was simply to highlight

90 “Encroachment is the term for the practice of a franchisor’s selling franchises to other franchisees too close to the units of an existing franchisee”. See Einbinder & Dunn, LLP webportal. 91 See Einbinder & Dunn, LLP webportal ,“Common franchise disputes”.


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the most typical opportunities and risks of the franchise model of doing business so, that

readers might make a more balanced, informed and intelligent decision concerning their likely

entrepreneurship.

As far as it was mentioned, there are plenty of upsides and downsides that international

franchising can offer. The truth is that for various franchises and various types of industries,

that could be franchised today, each one is going to be quite different. For sure, there are

some key factors that go into being a successful franchise owner. But, again, the success

depends mainly on the franchise itself, the contract content, and what rules and stipulations it

may provide in fact.92

Practically, modern franchise contracts often exceed 50 pages of minute details

supplemented by volumes of operating manuals that bring into effect complete control over

the franchise relationship.93 So to speak, there is a lot of paperwork to fill out, which could be

found in franchising. It is, therefore, vital that each potential franchise player, either

franchisor or franchisee, could weigh up all possible Pros and Cons and consider all the

contractual insights before venturing to enter into a small business franchise.

2.3 Some steps before making a franchise decision

Franchising a business internationally seems to be a proven way to rapid expansion.

But, meanwhile, handling a franchise, especially in today’s challenging economy, does not

grant automatically the ticket to success. So, the current data from the International Franchise

Association shows, that “of the 105 companies that started selling franchises in 2008, more

than 40 had not reported the sale of their first unit by the end of 2009”.94

Frankly speaking, it is a quite discourage task to purchase a franchise, because the buyer

should consider then numerous issues, such as industry perspectives, brand awareness,

competitors, location, finance, etc. Personal experience, skills and lifestyle must be

considered as well. There is also lots of legal paperwork to study to verify that the ongoing

business is in compliance with federal and state laws regulating the franchise industry.

92 Swanson B.: “The franchise advantages and disadvantages”, in Enzine Articles, http://ezinearticles.com/?Franchise-101---The-Franchise-Advantages-and-Disadvantages&id=3436634. 93 See Purvin R.L., p.7. 94 Tice C.: “Franchise Your Business in 7 Steps. A guide for becoming a successful new franchisor”, (February 12, 2010), http://www.entrepreneur.com/franchises/franchisezone/howto/article204998.html.


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Take this process easier, the present subchapter will guide the reader to the important steps

before making a faithful decision to become a probable franchisee.

From the very beginning, the decision to deal with a franchise business should be based on

several basic understandings:

understanding of the advantages and disadvantages of franchising in general;

understanding of the target market;

understanding and evaluation of a particular franchise.

As far as all the possible Pros and Cons of franchising were analyzed in details in the

previous two subchapters, let is continue with the others necessary areas to be discussed.

And the first point here is the SWAT (Strengths, Weaknesses, Opportunities and Threats)

analysis as a marketing tool, which can help greatly in choosing a niche in particular sector

for the potential franchise. “To ensure the long term success of your new franchise it’s a good

idea to get into the habit of performing a SWOT analysis as this can help you focus on a

specific goals or issues your franchise faces”.95

No business can exist in isolation. That is why every potential franchise owner must

become aware of the business competition, business threats and risks an enterprise is likely to

face. Setting up a new franchise means to have a look carefully at a number of factors. Not

only marketing, but generally a business and planning tool, the SWOT analysis classifies the

internal aspects of the company as strengths and weaknesses, and the external situation factors

as opportunities and threats. Such a wide-range outlook, including a new market research,

evaluation of a new business competition in selected sector, allows the investor to put any

new business threat into the franchise context. So, by means of SWAT analysis various

situations arising in franchising entrepreneurship could be explored.

Below is just an overview of how the SWOT analysis can be used in order to evaluate the

individual potential of becoming a franchisee.

95 Business Franchise portal: “SWAT Analysis for your franchise”, http://www.abusinessfranchise.co.uk/swot-analysis-for-your-franchise.html.


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While a new franchise businesses may have multiple strengths, try to focus just on the

key factors that you believe will make your franchise a success. The most important here is

the market research within the business competition, so imagine the franchise’s actual

strengths in the context of the wider market sector proper to your franchise.96

Look carefully then at the weaknesses a particular franchise may have. There is no

business that is completely perfect. But, considering the weaknesses, you can manage any

trouble situations the proposed franchise could face with.

Analyzing the core opportunities of a certain franchised business could bring the huge

dividends in the future as you will have a clear guideline to the market your franchise is going

to enter. Market research will display if the perceived opportunities are real or not.

No business is ensured from threats, which can take various forms: business, political,

social, legal risks, etc. Probably, you should pay attention mainly to the business threats,

especially during the initial stages of business planning.

Any well-formed franchise selection starts with the personal audit. Making the general

research at first, the potential investor may use whatever tools (Internet, magazines, etc.) to

find about the industry he is interested in to franchise. The selected industry has to meet the

franchisee’s personal needs. There are approximately 85 different industries using franchising

96 See Business Franchise portal: “SWAT Analysis for your franchise”.


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today. To begin with an industry’s selection and examining each of them, the franchisee

should take into account not only the franchised competition within the certain industrial area,

but the established company owned chain operations as well.97

In case of deficit of experience with a franchising, the potential investor has first of all to

investigate entirely the market conditions in order to understand the marketplace, in which

his business will be competing. There are certain factors that make an importance here.98

For instance, “it does matter how strong a brand is”, especially if the target community will

not support the business. Moreover, the investor should consider the community scale, as well

as the degree of competition that the new business will face with. It is very useful also to

understand the community in terms of demand, because not all franchises do well in all

geographical areas, and the wrong location may even bring the business to failure.

Once the list of the appropriate industries was created, it is time then to begin with an

analyzing of the companies within those industries. It is obvious, that before investing into a

franchise operation, the deep research inside a specific company is required. Usually, the

basic information about the company and its franchise opportunities can be found on the

franchisor’s web pages. Contact every franchisor, you are interested in, for any additional

information available. Your interest should not be limited to how much Return on Investment

could be possible under the best circumstances. Compare the companies’ services, as well as

their fees. For example, if the franchise fees are high but royalty fees low, this franchisor,

probably, is more interested in selling their franchises than having continual revenue to

provide you with services.99

A complete franchisor’s research should involve also an investigation of the company's track

record, both with franchise owners and in the market. Take a look, for instance, at how the

brand growth over its history. If the brand still offers exactly the same products and services

as it did initially, then it is a risk of loosing its competitiveness in the marketplace.100

So, to summarize all the information the potential franchisee must consider during the

research, the issues of the primary interest should include the following: “profitability and

return on investment; proven product and service; operating systems; training; marketing;

expansion plans (whether the franchisor more interested in worldwide expansion or individual 97 Seid M.H.: “Franchise or business opportunity? Making your choice”, (posted 2008), Franchise update network, http://www.franchising.com/articles/48/ 98 Sinsara K.: “Being smart about franchising”, in Enzine Articles (2009), http://www.ezine-articles.co.uk/Art/150703/9/Being-Smart-About-Franchising.html 99 See Seid M.H.: “Franchise or business opportunity? Making your choice”. 100 See Sinsara K.: “Being smart about franchising”.


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franchisee success); field services; research and development; franchisee relations; franchise

system goals and ability to support the goals; and of course the financial health of the

franchisor”.101

By the way, all the answers will be obtained either from the personal meetings with the

franchisor or contact with their franchisees. The best way is to meet with the franchisor

personally, because the franchisee then has a possibility to get a copy of the franchise

disclosure documents - valuable material for each franchise relationship. It is an obligation by

the franchisor, mandated by most of franchise laws, to provide the other party with all the

essential documents before signing the franchise contract.

The franchise disclosure document (or Uniform Franchise Offering Circulars - UFOC) is of a

crucial importance as it provides the franchisee with a wealth of information including “the

experience of the franchisor and its staff in the business being franchised; the system's

litigation and bankruptcy history; the cost of opening a franchise, as well as the initial and

continual fees; an explanation of the relationship and responsibilities of the franchisor and

franchisee together with financial information on the franchisor; the number of franchises

opened, closed and most importantly, a list of existing franchisees”.102 Therefore, it is in

franchisee’s interest to obtain legal advice on these documents, as the specialist could find

some specific financial or contractual insights that have not been considered.103 So, ask the

attorney or accountant for advice on franchising, because such a unique area with a

complicated legal regulation requires the participation of a well- practiced lawyers.

It could be, possibly, seemed that the obvious franchisee’s choice has to be done in

favour of well-established company with a large chain of franchisees. But do not forget that

the older systems are less flexible; so, the new opportunities to enter the market with

innovations may not be possible for such systems, as it is possible for newly-established

franchises.

Keep in mind also that most franchise agreements are typically concluded for 5-10 years.

During this period the other market entrants and competitors will appear. So, ask yourself in

10 years, if this will be still the kind of business where people do need a product?

101See Seid M.H.: “Franchise or business opportunity? Making your choice”. 102 See Seid M.H. 103Swanson B. : “Straight Talk About Franchises”, in Enzine Articles, http://ezinearticles.com/?Franchise-101---Straight-Talk-About-Franchises&id=3436690.


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In conclusion of this Chapter, it should be noted again, that any prosperous business is

based on trust and co-operation between the both parties - Franchisor and the Franchisee. In

spite of many franchises fail, a lot are still successful. Franchising success formula contains

the following elements: Successful Franchisees + Successful Clients = Successful Franchise

Opportunity. This equation is simply proved by time.

So, should the franchising be considered as business option for a company? The answers

may vary depending on each company's objectives, values, financial resources. Companies

that decide to grow by expansion retain the total ownership getting revenues increased. On the

other hand, those companies have to give up some level of control and flexibility.

And, what about the franchising from franchisee’s perspective? Comprehensive research

helps them create a broader view, which can project likely outcomes and trends in the future.

These projections are the basis for making an intelligent decision about investing in a

franchise. Therefore, the wise franchisees critically examine the franchise possibilities in the

certain marketplace before making such a profound strategic decision.104 Frankly speaking, it

is really unwise to buy a franchise of something that is ‘in vogue’ today, but might be ‘out of

favour’ tomorrow. So, please, keep in mind, that all the prospective investors should deeply

investigate any franchised industry, obtain all the corresponding disclosure documents

available, and seek expert consultation before making any investment decisions.

I strongly believe that all, which were mentioned above, will provide the reader with an

understanding of franchising and give him a step by step approach to select the right

franchise. The next Chapter, which is more practical, will evaluate industry categories, the

recession-resistant segments and identify individual franchise companies.

104 Siebert M.: “Why Do Franchisors Fail? Keeping your concept, capital and management in check will keep your new franchise from going bankrupt”, (2008), http://www.entrepreneur.com/franchises/franchisingyourbusinesscolumnistmarksiebert/article196676.html.


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Chapter Three: Franchise Overview

In spite of troubling economic times reflecting on the world employment rate, bank’s

credit availability and general market situation, or maybe because of it, franchising is still

booming today, with numerous of people looking daily into franchise opportunities. Everyone

is acquainted with the great and successful franchises names, but is hardly recognizing that

almost every store they purchase from these days is part of a franchising chain. The statistics

shows that roughly three thousands various franchise brands operate in more than two

hundreds different lines of business.105 Let is consider Scotland, for instance, where

franchising is becoming increasingly popular. The Scottish market is recognized as one

making a substantial and growing contribution to the UK economy. “There are now

approximately 2500 franchise units north of the border, employing 35,000 people and turning

over £800 million annually.” 106 Moreover, as the British Franchising Association estimates,

90 per cent of all franchisees, including the newest start ups, are in profit, that proves the

franchising success is stronger than many other start-up businesses have.

As a matter of fact, there is very little that cannot be franchised. Why? Because of any

business, being run under management, is possible to being franchised. However, this does not

mean that any such business will franchise successfully. That is why the process of searching

for relevant industry and company, which is the next stage after making a decision to

franchise, should be of crucial importance. Evaluate industry categories first, review a master

list of franchise opportunities (which can be found, for instance, in Entrepreneur Franchise

500 published each January) and evaluate each individual industry group. Focus on the

recession-resistant segments, that will continue to do well regardless of the state of economy

(for example, damage restoration, fast food, senior care or hair cutting). Identify then the

individual franchise companies and select the ones that will have territories available in your

desired area and that seem most attractive to the potential business. 107

105 Instant Tax Services: Blog – Fast Cash Chat, (October, 15,2010), http://www.instanttaxservice.com/blog/category/franchising/. 106 Hawkins G.F.: “Is Small Business Franchising the Way Forward For Scotland?”, http://ezinearticles.com/?Is-Small-Business-Franchising-the-Way-Forward-For-Scotland?&id=3446858.

107 Elgin J.: “10 Steps to Buying the Right Franchise”, (2008), http://www.entrepreneur.com/franchises/buyingafranchisecoachjeffelgin/article198992.html.


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It is time then to look at the various categories of franchised industries in a little more details,

taking into account the official statistics and ratings.

3.1 General Statistics

The right selection the foreign partner is essential for international franchising. It is

very important decision to join forces with a right company or individual as establishing the

ground for the brand expansion and for a sustainable franchise business relationship in any

particular international market. It could be very promising, but challenging task to expand.

That is why before starting an expansion process, a strategic plan of what industries are going

to be franchised must be created. A person concerned should consult, probably, with

international franchise experts and lawyers, or seek an advice of the best-known franchising

organizations, such as International Franchise Association which is offering various options to

promote (trade missions, international expos, etc.).

The International Franchise Association (IFA), founded in 1960, is the world’s oldest and

largest organization representing franchised small-businesses in almost 80 diverse industries.

As being a world’s premier association, it protects, reinforces and promotes franchising as a

responsible method of doing business.108 Its Code of Ethics works as a framework for the

implementation of best practices in the relationships of IFA members - “more than 1,300

franchise systems, 10,000 franchisees and more than 500 firms that supply goods and services

to the industry”.109

The IFA promotes mostly the interests of the U.S. franchise industry, which is

contributing considerably to the economic situation worldwide. To show this impact, the IFA

Educational Foundation, an informative and researching centre of the association, released the

second annual Franchise Business Economic Outlook 2010, prepared by

PricewaterhouseCoopers (PwC)110 especially for the International Franchise Association. This

document forms the basis for the IFA awareness campaign and projects key national-level

economic measurements of business format franchises. The report presents the forecast from

the establishment, employment and economic output points for 10 business lines, excepting

108 International Franchise Association Membership Handbook, (2007), p.4, http://www.franchise.org/uploadedFiles/Franchise_Industry/Member_Portal/Members_Content_and_Downloads/Membership%20Handbook%20web.pdf. 109 Wikipedia, http://en.wikipedia.org/wiki/International_Franchise_Association. 110 "PricewaterhouseCoopers" (PwC), one of the largest professional services and auditing firm, refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), http:// www.pwc.com.


43

some kinds of distribution franchises (automotive and truck dealers, gasoline service

stations, beverage bottling). Perhaps, the major part of this subchapter is resourced from the

analytical estimations, numbers and statistics of Franchise Business Economic Outlook 2010.

Here are 10 business lines in which franchising is prevailed, according to PwC

economic outlook111 (for the detailed composition of each line see Annex 1):

Automotive Commercial and Residential Services Quick Service Restaurants Table/Full Service Restaurants Retail Food Lodging Real Estate Retail Products and Services Business Services Personal Services

For each of these business lines, the projections include forecasts for 2010 and estimates over

2007-2009 period for such franchise indicators as establishments, employment and output.

Let is consider the definitions before moving to statistics itself. An establishment is a

single physical location at which business is conducted or services are performed, owned by

the franchisor or the franchisee. The word ‘employment’ is used in terms of positions filled by

part-time and full-time employees or by self-employed individuals. Output is the gross value

of goods and services produced. For most industries, output is measured by receipts or

revenues from goods and services sold. The wholesale and retail industries’ output, however,

is particularly measured by the difference (margin) between receipts or revenues and the cost

of goods sold.112

It should be specified that the current PwC's franchise analysis was grounded on the following

sources:

(1) the latest macroeconomic and industry forecast prepared by Inforum113;

111 PricewaterhouseCoopers: "2010 Franchise Business Economic Outlook", (December 21, 2009), p.1, http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/2010%20Franchise%20Business%20Outlook%20Report_Final%202009.12.21.pdf.

112 See PricewaterhouseCoopers: "2010 Franchise Business Economic Outlook", (December 21, 2009), p.1. 113 “Inforum, established in 1967, is an economic education and research organization that specializes in the development and use of Interindustry-Macroeconomic (IM) models that combine input-output structure with econometric equations in a dynamic and detailed framework.”, see http://www.franchise.org.


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(2) franchise establishment data provided by FRANdata114; and (3) PwC's analysis of

historical relationships between franchised businesses and the rest of the U.S. economy.

The franchising activity prognoses based on previous PwC researches that measure the

economic impact of franchising in the United States115.

Generally, as PwC reports, franchising activities are about to expand gradually in the

current year. To be more precise, the moderate growth in the number of establishments,

employment, and output for business format franchises is forecasted in 2010, that is opposing

to recession-induced drop experienced in 2009. After improving by more than 40 per cent

between 2001 and 2008, the number of franchise establishments has declined by 0.1 per cent

over the period 2008-2009 (see Table 1 below). PwC estimates that the amount of business

format franchise establishments grew to 883,984 units in 2008 before declining to 883,292

units in 2009. And, following this 0.1 per cent decline in 2009, PwC assesses then the

expanding of the number of business format franchises from 883,292 in 2009 to 901,093 in

2010 (that is the increase of 2.0 per cent or 17,800 units). It is quite expected situation in a

current macroeconomic environment where the economic recovery is slowly going on. As for

the employment factor of franchise businesses, it is estimated to have peaked in 2008 at 9.9

million. In 2009, however, employment rate experienced a significant fall (4.1 per cent), that

meant a reduction of 409,000 job places. In 2010, PwC forecasts that franchise employment

will grow modestly (0.4 per cent), increasing the total number of jobs by 36,000; nevertheless,

employment rate is going to remain below the 2008 level. The Table shows also an economic

output indicator generated by business format franchises. It grew by 5.9 per cent in 2008

before an estimated decline of 0.7 per cent to $844.7 billion in 2009.

Currently, PwC forecasts franchising output will grow by 2.8 per cent ($23.6 billion) in 2010.

114 “FRANdata, founded in 1989, is the U.S. research and information services firm specializing in franchising industry data: database of the companies that franchise, the brands they manage, and the franchisees who invest in those brands. The information is derived from the Franchise Disclosure Documents (FDDs), http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/2010%20Franchise%20Business%20Outlook%20Report_Final%202009.12.21.pdf. 115 PricewaterhouseCoopers LLP, Economic Impact of Franchised Businesses (February 24, 2004) and Economic Impact of Franchised Businesses, Volume II: Results for 2005 (January 29, 2008).


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Table 1: Franchise Business Economic Outlook, 2007-2010116

Estimates Forecast Annual percent change

2007 2008 2009 2010 2008-2009 2009-2010 Establishments (units) Employment (Thousands) Output (Billions of dollars)

847,244 9,859

$802.9

883,984 9,931

$850.4

883,29299,522

$844.7

901,093 9,558

$868.3

-0.1% -4.1% -0.7%

2.0% 0.4% 2.8%

Source: PricewaterhouseCoopers.

In spite of the U.S. economy started to overcome the crisis, franchised small businesses

still continue to compete strongly because of the low consumer confidence, high

unemployment rates and tight credit markets. “We are pleased that the 2010 outlook for

franchise businesses is projected to be more positive than 2009, but access to credit remains a

major hurdle to increase jobs and economic output at the levels we have seen during past

recoveries,” said International Franchise Association President and CEO Matthew Shay. “An

expected $3.4 billion shortfall in lending to franchise businesses in 2010 will result in 134,000

jobs not created and $13.9 billion in economic output lost.” 117 It should be underlined that the

economic recovery will have different effects on growth in the number of establishments,

employment, and output within different business sectors (see Table 2).

Table 2: Franchise Business Economic Outlook by Business Line, 2010118

Establishments Employment

(Thousands) Output

(Billions of dollars)

Percent Percent Percent change change change

Business Lines Amount over Amount over Amount over prior prior prior year year year Automotive 38,340 1.8% 182 0.4% $36.4 2.2% Commercial and Residential Services

57,007 0.3% 230 -0.9% $38.2 1.5% Quick Service Restaurants 192,827 3.1% 3,343 0.8% $203.6 3.2% Table/Full Service Restaurants 48,609 2.1% 1,066 0.4% $64.0 2.3%

116 See PricewaterhouseCoopers: "2010 Franchise Business Economic Outlook", (December 21, 2009), p. 2.

117 IndUS Business Journal: “IFA report suggests recovery is on way in 2010”, (issue date: March, 2010), http://www.indusbusinessjournal.com/ME2/dirmod.asp?sid=4CEC54B78BA54A11B360971278D9B043&nm=Archive&type=Publishing&mod=Publications%3A%3AArticle&mid=8F3A7027421841978F18BE895F87F791&tier=4&id=4E068781F6E64FDE9F911B8E33994A25. 118 See PricewaterhouseCoopers: "2010 Franchise Business Economic Outlook", (December 21, 2009), p. E-2.


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Retail Food 70,722 2.4% 853 0.7% $67.5 2.3% Lodging 31,827 -0.8% 627 -2.4% $62.7 1.8% Real Estate 41,630 3.0% 160 1.3% $22.8 1.4% Retail Products and Services 88,312 2.3% 577 0.6% $50.5 2.5% Business Services 231,669 1.7% 1,420 0.1% $189.6 2.6% Personal Services 100,151 1.8% 1,101 0.7% $132.8 4.4%

Total 901,093 2.0% 9,558 0.4% $868.3 2.8% Numbers may not add up to totals because of rounding. Source: PricewaterhouseCoopers.

Establishments by business line: 2007-2010

Let is examine now the Table 3, which represent below the projected franchise establishment

units for the 10 franchise lines over the period of 2007-2010. 119

As PwC estimates, nine of the 10 franchise business industries experienced growth in

establishments between 2007 and 2008, with only Real Estate declining. In the beginning of

2009, however, PwC considers an overall reduce in the establishments’ quantity, with positive

growth and largest gains for only Quick Service Restaurants, Table/Full Service Restaurants,

Real Estate, and Personal Services. For 2010, the number of establishments is going to

increase in all franchise business lines, as PwC forecasts. Lodging is the only sector expected

to experience a decline (-0.8 per cent). The largest percentage growing here is projected in

Quick Service Restaurants (3.1), Real Estate (3.0), and Retail Food (2.4). Totally, in 2010 the

number of establishments is projected to rise by 2.0 per cent.

Table 3: Franchise Establishments by Business Lines, 2007-2010


Business Lines 2007 2008 2009 2010 2008-2009 2009-2010

Automotive 35,695 38,074 37,646 38,340 -1.1% 1.8% Commercial and Residential Services 60,270 61,950 56,836 57,007 -8.3% 0.3% Quick Service Restaurants 177,498 183,135 187,068 192,827 2.1% 3.1% Table/Full Service Restaurants 45,836 47,013 47,592 48,609 1.2% 2.1% Retail Food 65,377 70,011 69,093 70,722 -1.3% 2.4% Lodging 31,003 33,133 32,076 31,827 -3.2% -0.8% Real Estate 40,577 39,933 40,426 41,630 1.2% 3.0% Retail Products and Services 82,105 87,133 86,315 88,312 -0.9% 2.3% Business Services 219,636 228,761 227,813 231,669 -0.4% 1.7% Personal Services 89,247 94,840 98,427 100,151 3.8% 1.8%

Total 847,244 883,984 883,292 901,093 -0.1% 2.0%

Source: PricewaterhouseCoopers.



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Employment by business line: 2007-2010

Table 4 shows the projected franchise employment indicator for all 10 franchise industries

during 2007-2010 period.120 PwC assesses that in 2008 six of the 10 franchise business lines

faced with the employment’s growth. Later, though, the recession caused a reduction in

employment in 2009 for all business format franchises, particularly in Commercial and

Residential Services with the largest drop estimated.

As it can be seen from the Table, that most business lines are planned to experience the

modest growth in employment rate in 2010, with the largest increase expected in Real Estate

franchises (1.3 per cent). An exception is created by franchises in Commercial and Residential

Services and Lodging, which could be suffered from the further declines in employment of

0.9 and 2.4 per cent respectively. Overall, PwC's analysis indicates a reduction in franchising

employment in definite industries of 4.1 per cent in 2009, followed by an increase of 0.4 per

cent in 2010.

Table 4: Franchise Employment by Business Lines, 2007-2010 (Thousands)


Business Lines 2007 2008 2009 2010 2008-2009 2009-2010

Automotive 192 193 181 182 -6.3% 0.4% Commercial and Residential Services

313 296 232 230 -21.6% -0.9% Quick Service Restaurants 3,397 3,382 3,316 3,343 -2.0% 0.8% Table/Full Service Restaurants 1,102 1,090 1,061 1,066 -2.7% 0.4% Retail Food 888 904 847 853 -6.3% 0.7% Lodging 668 699 643 627 -8.1% -2.4% Real Estate 164 164 158 160 -3.9% 1.3% Retail Products and Services 602 611 573 577 -6.1% 0.6% Business Services 1,479 1,495 1,419 1,420 -5.1% 0.1% Personal Services 1,055 1,097 1,093 1,101 -0.4% 0.7% Total 9,859 9,931 9,522 9,558 -4.1% 0.4% Source: PricewaterhouseCoopers.

Output by business line: 2007-2010

The economic output indicator for all franchise lines determined since 2007 till present time

could be found in Table 5 below. PwC's found that nine out of 10 business lines faced with



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output growth in 2008. The only exception is Real Estate, which experienced output decline of

1.8 per cent. In contrast, all but three business lines experienced reductions in output in 2009,

with the largest percentage decreases in output occurring in Commercial and Residential

Services, Lodging, and Real Estate. As it forecasted for the year 2010, PwC projects growth

in output for all business format lines. Personal Services (4.4), Quick Service Restaurants (3.2)

and Businesses Services (2.6) will see the largest percentage increases. The smallest growth in

output is expected in Real Estate (1.4 per cent). In total, annual franchising output figures are

going to increase by 2.8 per cent in 2010, following a decline in 2009.121

For the more detailed information regarding market share distribution by industry see the

Annex 2. Moreover, the following table in the Annex 3 offers a breakdown of the average

initial franchise investments per industry which is estimated.

Table 5: Franchise Output by Business Lines, 2007-2010 (Billions of dollars)


Business Lines 2007 2008 2009 2010 2008-2009 2009-2010 Automotive $33.3 $35.8 $35.7 $36.4 -0.3% 2.2% Commercial and Residential Services

$41.5 $42.6 $37.6 $38.2 -11.6% 1.5% Quick Service Restaurants $181.7 $191.7 $197.3 $203.6 2.9% 3.2% Table/Full Service Restaurants $58.9 $61.8 $62.6 $64.0 1.2% 2.3% Retail Food $61.7 $66.2 $66.0 $67.5 -0.2% 2.3% Lodging $61.4 $65.7 $61.6 $62.7 -6.3% 1.8% Real Estate $23.5 $23.1 $22.5 $22.8 -2.2% 1.4% Retail Products and Services $46.4 $49.4 $49.3 $50.5 -0.2% 2.5% Business Services $175.7 $187.3 $184.9 $189.6 -1.3% 2.6% Personal Services $118.7 $126.9 $127.2 $132.8 0.3% 4.4%

Total $802.9 $850.4 $844.7 $868.3 -0.7% 2.8% Source: PricewaterhouseCoopers.

To conclude this subchapter, let is consider one more statistics. The Franchise Business

Economic Outlook reports’ overall forecast aligns with the results of a new Franchise

Business Leader Survey conducted by the IFA in November 2009. Franchise business

leaders are more optimistic about the U.S economy performance in 2010, than they were a

year ago: more than half (51.3 per cent) of survey respondents say the U.S. economy will be

better in 2010, compared to only one quarter (24.6 per cent) of respondents from 2008.122

121 See PricewaterhouseCoopers: "2010 Franchise Business Economic Outlook", (December 21, 2009), p. 4. 122 See IndUS Business Journal: “IFA report suggests recovery is on way in 2010”, (issue date: March, 2010).


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As we can see from the Graph 1 (Annex 4), Franchise business leaders have a less optimistic

view on their ability to develop new units in 2010 than they were a year ago “due to ongoing

challenges in accessing credit for new franchise prospects and for existing franchisee

expansion”.123 Really, just some 78 per cent of surveyed expect currently increases in

Franchise units, compared with 86 per cent of respondents a year ago. Moreover, concerning

the employment measures, as Graph 2 shows (Annex 4), half of the franchise business leaders

surveyed expect employment levels to stay about the same, while the rest say they plan to

increase employment.

3.2 Franchise Ratings To franchise internationally, the potential franchisor or franchisee must be aware of

various franchises worldwide, and the list of national or regional franchise companies is not

enough then. But does it really possible to study every franchise opportunity by the individual

compiling and verifying information on thousands franchises all over the world? And how

much time should it take?

It was mentioned previously, that the basic information about the company and its

franchise opportunities is grounded on each franchising company’s web pages. To have a

fairly comprehensive overview on franchising in the world or even in specific continent, the

narrow-specified franchise portals could be reasonably explored.

One of such particular portal, presented as a dedicated resource with a wide list of

businesses and franchise opportunities for sale, is Franchise Direct. It seems to be number one

‘franchise directory’ in the world. Let is consider how this franchise directory can be useful.

Franchise Direct is ranking annually the best franchises in the globe context. And the most

significant merit of the portal is, certainly, the creation of the Top 100 Global Franchises as a

research tool in franchise systems’ benchmarking (see Annex 5). In order to produce the Top

Global Franchises’ list, plenty of companies on the same objective values, regardless of their

size or country of origin, have been analyzed. The only requirement for the company to be

appropriate for ranking is that each franchise must be actively franchising.124

123 See IndUS Business Journal: “IFA report suggests recovery is on way in 2010”, (issue date: March, 2010). 124 Franchise Direct portal: “Research methodology”, http://www.franchisedirect.com/top100globalfranchises/methodology/158/768/.


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The top franchises have been selected from thousands of companies that have invested in

international expansion strategies, and various factors had been taken into account while

rating, as following:125

numbers of units the Franchise system has (see Annex 6);

sales revenue for the system;

stability and growth;

number of years in operation;

market expansion – international unit numbers (see Annex 7).

The grading is also grounded on the implementation of:

best practice in the areas of franchisee support and training;

environmental policy and local and national projects engaged in by the franchises;

social responsibility.

So, the best internationally performed franchises create this exclusive Top list. In this way,

the Top 100 Global Franchises is likely to be a ‘blueprint’ for experienced franchisors that are

looking further to expand beyond internal borders. The franchises’ precise description of the

first 10 companies, in accordance with the factors mentioned, is enclosed in Annex 8.

Because of Franchise Direct provides the Top 100 ranking with companies worldwide,

non-U.S. franchises are also presented there, though the majority is still of American origin. A

list of the non-US Franchises in the Top 100 rating can be found in the Annex 9.

For instance, Top 100 Global Franchises 2009 contained 15 non-U.S. companies. In 2010,

two new non-U.S. companies have been added: Yogen Früz, a Canadian frozen yogurt retail

franchise (has ranked number 15), and TeaGschwendner, popular German tea retailer which is

currently belonging to the leading global specialty retail tea chains.126

An expansion rate into foreign markets represents a crucial indicator for ranking. As it

was mentioned above, market expansion is one of the factors influencing the successful

franchise performance. To expand internationally, the franchisor has to run business

successfully, which is well-established in the domestic market. Franchise companies must

also generate enough cash flows to support their business operations internationally from their 125 Franchise Direct portal: “The Top 100 global franchises”, http://www.franchisedirect.com/top100globalfranchises. 126 Franchise Direct portal: “Expansion into foreign markets”, http://www.franchisedirect.com/top100globalfranchises/expansionintoforeignmarkets/158/886/.


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home offices. If to consider just the costs, it may make financial sense to establish a regional

office abroad. For instance, “there can be up to a 13 hour difference between the U.S. and

Asia. This means that something as simple as making a telephone call between the offices can

be difficult. Also, due to language barriers, a franchise company may have to have manuals,

advertising, websites and training materials translated into the local language”.127

In fact, each franchise which appears in The Top 100 Global Franchises has international

expansion, investing time and resources to be adapted to the cultural differences in new

markets. Globalization and the melting of trade barriers make franchises achieve better

economies of scale, and, therefore, grow and develop internationally.128 The vast distribution

of the Top 100 global franchises is clearly imaged in the Annexes 10 and 11.

To continue with expansion issues, it should be also noted, that recently the franchising

opportunities of developed countries tend to be somehow diminished. Therefore, international

franchisors are starting to seek development opportunities in emerging markets, containing

almost eighty percent of the world's population. China and India, as the largest emerging

market places, are considered to be among the most attractive locations for expansion. As the

U.S. Department of Commerce estimated, “over 75 per cent of the expected growth in the

world's trade over the next two decades will come from developing countries, particularly big

emerging markets, which account for over half the world's population, but only 25 per cent of

its gross domestic product.”129 While evaluating the economic potential in emerging markets,

the most common economic factors such as the GDP per capita, the population level and the

growth rate of the economy should be taken into consideration. Moreover, it is quite

complicated task to enter emerging markets due to strong rules and regulations concerning the

business ownership there and the operational process in general. And, probably, the best way

to overcome such barriers is to franchise business operation in these marketplaces. It is not by

chance then, that “franchising is the ideal route for many US and UK companies who want to

test the water without expending large sums of capital. This gives them a chance to dip their

toes in the water without risking large sums of capital.”130

127 See Franchise Direct portal: “Expansion into foreign markets”. 128 See Franchise Direct portal: “The Top 100 global franchises”, http://www.franchisedirect.com/top100globalfranchises/. 129 Alon I.: “Economic potential of international franchising in emerging markets”, http://www.franchise-chat.com/resources/franchising_in_emerging_markets.htm. 130 Daud N.: “Franchise your business to enter an emering market”, in Ezine Articles, http://ezinearticles.com/?Franchise-Your-Business-to-Enter-an-Emerging-Market&id=536583.


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Nowadays, lots of franchisors are focusing their expansion plans on China - the country

with a GDP of $7.8 trillion and the growing real rate of 9.8 per cent per year131. An increased

prosperity, emerging middle class, and a franchise market that is expected to grow at US $100

per annum for the next few years132, all these trends make China a prime target for franchises

seeking global expansion of their brands. Coming back to Franchise Direct’s ranking, all of

the Top 10 has successfully expanded to China with some 40 per cent of the remaining Top

100 Global Franchises.133

Let is consider, for example, Yum! Brands, Inc. - the world's largest restaurant company

with more than 37,000 restaurants in over 110 countries and more than million associates. It is

not surprising then that Yum! is ranked as number 239 on the Fortune 500 List, with almost

$11 billion revenue in 2009.134 The Yum! system includes five successful brands, all of which

are ranked among Franchise Direct’s Top 100 Global Franchises (see Annex 5): KFC, Pizza

Hut and Taco Bell are placed within the Top 10, while Long John Silver’s and A&W

Restaurants take 20 and 23 places respectively. The Yum! operates within three divisions: the

U.S. division, International (Yum! Restaurants International) and China division (includes

China, Thailand and KFC Taiwan). Comparing to others, China is the first-priority market for

new company restaurant development worldwide. In 2009, operating profit for the China

division of Yum! brand was $602 million and the company is running there about 3,000

restaurants.135

So, it goes without any doubts, that in the near future the emerging markets are forecasted

to compete with the western powers in terms of buying power and economic strength. As a

result, the companies, franchised in the ‘developing world’, will appear in global ratings even

more often. By this reason, with the fast growing economies and developing franchising

perspectives emerging markets have, they can not be ignored by international franchise

companies.

131 International Franchise Association: "Insider", Volume 14, Issue no. 25, (Dec 7,2009). 132 Franchising & Licensing Association (Singapore), franchiselicenseasia.com. 133 Franchise Direct portal: “Spotlight – Emerging markets”, http://www.franchisedirect.com/top100globalfranchises/spotlight/158/875/. 134 Yum Company’s portal: “About Yum!Brands”, http://www.yum.com/company/ourbrands.asp. 135 See Franchise Direct portal: “Spotlight – Emerging markets”.


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3.3 Franchise Categories and Subcategories

Before to start negotiation with a particular franchise company, investor have to

evaluate different industry categories in order to choose relevant business industry for

franchising. According to PwC economic outlook 2010, as it was mentioned above, there are

10 business lines in which franchising is prevailed. But the PwC’s Report doesn’t cover all

business industries available for franchising. Therefore, the supplemented composition of

business lines you will find in Annex 12. .This list of franchise categories was compiled from

several sources, mainly from the franchising portals like Franchise Direct136, but still it does not

represent an exhaustive catalogue.

The following material covers just some of the enumerated lines and sub-lines of business

format franchises, which are mostly worth to be explained in details, from my point of view.

Automotive Franchises

Main category Category

Automotive

Appearance Services, Brake Repair, Car Washes, Miscellaneous Auto Products, Miscellaneous Auto Services, Mobile Auto Services, Oil-Change Services, Rentals & Sales, Repair Services, Transmission Repair, Tune-Up Services, Vinyl Repair, Windshield Repair

Trends and Facts.

Automotive industry comes with different forms of franchises: motor vehicle parts and supply

stores, automotive equipment rental and leasing, tire dealers and automotive repair and

maintenance franchises. This sector generates around $25 billion in sales annually and

employs over 175,000 people in 35,600 franchise establishments.137

Automotive franchise industry consists of aftermarket franchises, car rental and sales

franchises. The products and services, used for vehicles after the original sale (for instance,

accessories, lubricants, replacement parts), create an aftermarket. Following the numbers of

136 Franchise Direct portal: “Browse franchise by industry”, http://www.franchisedirect.com/. 137 PricewaterhouseCoopers: “Executive Summary & Highlights – Economic Impact of Franchised Businesses”, Volume 2, (March, 2008), p.11, http://www.franchise.org/uploadedFiles/Franchisors/Other_Content/economic_impact_documents/DirectImpact.pdf.


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the Automotive Aftermarket Industry Association (AAIA), this sub-sector is valued at $283

billion of the sales volume and contains about 4.5 million people employed. 138

Over the period 2006-2009, the sales volume in this industry has dropped nearly at 40 per

cent, that was caused by the continuing usage of old cars. People have no enough money and

so they keep using their cars longer and more often use repair services.

Moreover, only in the USA automotive sector employs about 2.6 per cent of all

employees, that is some 3.7 million jobs in numbers. Continuing with the analysis of the US

market there are about 130.000 companies focused mainly on auto services and car repairs.

The most prominent examples of such franchises are Express Oil Change, Rent a Wreck and

Midas Muffler, Maaco and AAMCO Transmissions.139

Because of fragmentation, auto industry does not typically contain any businesses with

dominant position: numbers say that about 50 large companies serve nearly 10 per cent of the

market share.140 In fact, the automotive sector includes more individual franchise companies

than any other franchising segment except food.

What are the main threats for franchising in automotive area? First of all, it is quite usual

for gas stations or supermarkets to compete with auto services franchises by offering to clients

the products or services being traditional for automotive industry. The other factors which

influence the profitability of auto market are location, marketing, and brand recognition. For

instance, by the extending of a repair shop’s locations, the franchisor can increase the profit.

Because of the franchises in automotive sector vary greatly, the fees keep large differences

as well. An average franchise fee for a single unit franchise is about $25.000. And the higher

the franchise fee, the higher the level of franchisor’s support or possible financial returns from

a quality business model. The size of territory within a given franchise system may also affect

the franchise fee amount.141 Annex 13 represents an overview of the estimated initial

investment necessary to open a single auto franchise unit. It also includes the ongoing sales

royalties that are payable to the franchisor. All the data is taken from the Uniform Franchise

Offering Circulars (UFOC) or Franchise Disclosure Documents (FDD) of these franchisors.

138 Aftermarket: "About AAIA" in aftermarket.org, http://www.aftermarket.org/AbouttheAftermarket/AboutAAIA.aspx. 139 Franchise Direct portal: “Automotive franchise opportunities”, http://www.franchisedirect.com/automotivefranchises/7. 140 See Franchise Direct portal: “Automotive franchise opportunities”. 141 Franchise Direct portal: “Auto franchise fees and costs”, http://www.franchisedirect.com/automotivefranchises/autofranchisefeesandcostsbusinessreportiii/7/250.


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For the typical ongoing fees and payments, see Table 6 below. The table shows that the

average royalty charged by auto franchises is about 5 per cent of total sales ranging from 2 to

30 per cent plus ads fee of about 2 per cent of gross sales. Some franchisors can charge a

fixed fee monthly.

Table 6: Typical ongoing fees and payments

Royalty (% gross sales) 5% Advertising fund (% gross sales) 2% Additional training Ranges from $100- $600 per day plus expenses Transfer fee $5,500 Renewal fees $2,500 -$5,000 (some franchises do not charge renewal fees) Late charge 1.5% per month Interest 1.5% per month

Source: Franchisedirect.com

It should be also noted, that typically the franchise period in automotive industry lasts 5-10

years. Renewal fee is charged by many franchisors in case of the franchise license’s

prolongation. This fee ranges between $2,500 -$5,000 or 10-50 per cent of the initial license

fee. If the franchisee decides to sell the franchise, he must pay a transfer fee ($5,500 in

average) in order to compensate money invested in the training and developing a new

franchisee.142

Business Services Franchises

Main category Category

Business Services

Accounting & Tax Services, Advertising Services, Business Brokerage, Business Financial Services, Business Support Centers, Business Training, Consulting Services, Management Training Programs, Miscellaneous Business Services, Shipping Services, Signs, Staffing Services

Trends and Facts.

In order for one business to run effectively, it requires definite necessary services which can

be provided by the other business structures. That is why companies rely on business service

franchises whether they need expertise on advertising, tech support, financial services,

business management facilities, or consulting services. Moreover, the business support is

142 Franchise Direct portal: "Table 3: Typical ongoing fees and payments", http://www.franchisedirect.com/automotivefranchises/autofranchisefeesandcostsbusinessreportiii/7/250.


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required also in providing accountancy advice, creating signage for retail locations,

conducting employee training, cleaning the commercial facilities, creating cost-effective

telecommunications packages - let is say all that is crucial to the day-to-day business activity.

That is why business-to-business franchises (B2B) appear as a respond to the huge

demand for their services in the commercial client market. Let is take as an example the

United Kingdom, where the number of businesses has increased greatly with nearly 2.16

million businesses registered, mostly as corporate establishments, sole proprietors,

partnerships and non-profit organizations.143

In this sense, business-to-business services are highly profitable type of business opportunity:

they still experience a stable growth as lots of corporations and individuals are taking up the

various kinds of support every day. So, many professionals today prefer the B2B franchises.

However, the practice shows that ninety percent of the current franchise options have

business-to-consumer direction (when business is sold directly to a consumer, mainly like

retail). Really, B2C franchise concept is more popular due to low entry barriers and relatively

simplicity to operate. But it is also more ‘generic’, that is leading to higher risks.

B2B franchise industry provides the potential franchisee with a wide spectrum of options as

following144:

Commercial Cleaning Franchises provide businesses with cleaning services for their

commercial facilities - different buildings, retail establishments, schools etc.

Business Consulting Franchises support other business growth, cut irrelevant costs

and generally improve the performance of the company, enhancing therefore franchise

brand recognition.

Business Training Franchises implement a system of training for companies’

employees in sales and management, IT and other business skills.

Telecommunications Franchises supply the clients with telecommunications package

including phone and Internet capabilities.

Marketing Franchises act as the experts in building of the marketing campaign.

Recruitment Franchises match companies with the best potential candidates for

temporary and permanent staff, create a large client base.

143 Franchise Direct portal: “Trends and facts about B2B franchises”, http://www.franchisedirect.co.uk/b2bfranchises/172. 144 Franchise Direct portal: “Great ways to own a B2B franchise”, http://www.franchisedirect.co.uk/b2bfranchises/tipsforowningabusinesstobusinessfranchise/172/111.


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Accountancy & Financial Franchises assist in tax preparation, accountancy, financial

advice and loan businesses for corporate and individual financial issues.

Safety & Security Franchises can provide the right package for any commercial

facility in order to let business owners keep calmness.

Computer/IT Franchises secure the clients with an on-site help.

Print & Sign Franchises provides the corporations with signage that can best represent

its business, especially in case of retail locations.

Courier Franchises are designed to meet companies’ mailing needs by providing fast

delivery.

Nonetheless, there are also plenty of other variants for B2B franchises that are

available, but these are the most profitable and suitable forms of B2B franchising for sale.

Food Franchises

Trends and Facts.

The number of food franchises is proportional to the number of meal’s types. The investments

here vary from extremely high amount for full-service restaurants to quite law costs for

vending machines. There are numerous kinds of food franchises that specialize in pizza,

coffee, candy, ice cream, sandwiches, barbeque, burgers, smoothies, etc. But what is really

associated in our minds with food sector is restaurant business.

Main category Category Subcategory

Food Food/Quick Service

Bagels, Bakeries, Breads, Candy, Chicken, Chinese Fast Food, Cinnamon Rolls, Coffee, Cookies, Donuts, Fast-Food Fish Restaurants, Frozen Yogurt, Hamburgers, Hot Dogs, Ice Cream, Italian Fast Food, Japanese Fast Food, Juice Bars, Mexican Fast Food, Miscellaneous Fast Food, Muffins, Pizza, Pretzels, Salads, Sandwiches, Sandwiches-Micellaneous, Sandwiches-Submarine, Shaved Ice

Food Food/Full-Service Restaurants

Barbecue Restaurants, Burger Restaurants, Family Restaurants, Mexican Restaurants, Miscellaneous Full-Service, Seafood Restaurants, Steakhouses

Food Food/Retail Food Sales

Candy, Convenience Stores, Food Design, Food Gifts, Ham Stores, Miscellaneous Retail Food Sales, Vitamin Stores


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Restaurant Franchises

This industry has risky but well-paid reputation. Some analysts claim a dubious 90 per

cent failure in the first year. But if a restaurant is based on proven franchise system, it might

have a higher success rate than any independent entrepreneur - about 62 per cent over four

years.145 For instance, the National Restaurant Association shows the statistics in the USA:

restaurant profits reached $566 billion in 2009 together with the number of restaurants

reached 945,000 across the world. These numbers prove the fact, that the restaurant

franchising is one of the fastest-growing American industries and the nation’s largest

employer after the US government. Moreover, the U.S. restaurant revenue rate increased by

2.9 per cent in 2008 and make up 4 per cent of the gross national product.146

And some more statistical data. The Restaurants & Institutions Company (R&I)147, a

leading information source for the entire food service industry, in its New American Diner

Study 2008 discovered that eating out continues to be a crucial part of American’s everyday

life. Numbers say that people buy a meal or snack when they are not at home about 4 times

every week. And nearly 31 per cent of them (one third of respondents) confirm that during the

working days they always make use of restaurant or fast food provider148.

Really, during the times of bad economic environment the snack segment makes has the

biggest growth, so the sales volume of chains selling ice cream, smoothies, doughnuts and

coffee is constantly increasing. With the slowing economy, gas and electricity prices rising,

people have less money to spend on restaurants. That is why, instead of building new units,

many well established franchises previously specialized in particular food segments, which

are expanding their menus and adding breakfast, lunch and dinner specialties as well as free

Wi-Fi and high-definition television to attract clients.

By the way, what factors are the most influential for consumers to choose some

restaurants or fast foods? As Chain Leader Magazine, an American publisher, indicated from

the survey results of one market research company (Technomic Inc., Chicago), 65 per cent of

respondents choose the food taste and freshness as the most important criteria for selecting the

145 Franchise Direct portal: “Food franchise opportunities”, http://www.franchisedirect.com/foodfranchises/14. 146 Franchise direct portal: “Restaurant franchise opportunities”, http://www.franchisedirect.com/restaurantfranchises/81.

147 “R&I is trade publication and web site owned by Reed Business Information serving the information needs of foodservice professionals at chains, independent restaurants, hotels and institutions”, see Reed Business Information: “About Us”, http://www.reedbusinessinformation.com/index.asp?layout=inside&articleId=CA317441.

148 Direct Franchises portal : “Restaurant franchises”, http://www.franchisedirect.com/restaurantfranchises/trendsandfactsaboutrestaurantfranchises/81/88.


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place where to eat out.149 It is not surprising then, that plenty of today’s customers look for

‘environmentally friendly’ establishments in order to find healthier eating options. So,

according to Franchise Direct portal’s data, “the sale of organic foods generated $33 billion in

revenue in 2008, and dropped off slightly in 2009 with the global recession.”150

Full Service Restaurants. The term ‘full service restaurant’ is defined in business

dictionary as the place that is offering “the fine dining with a wide selection of foods and

beverages, and table service. It may also have attached coffee shop, specialized (for instance,

ethnic) and fast food restaurants.”151 Such places represent anything from a casual family-

style fast-food to an elegant restaurant, where food is served directly to the customers’ table.

The possibility for a takeout, delivery or present live entertainment can also be provided by

full-service establishments.

The full-service sector contains such categories as Barbecue, Burger, Family, Mexican,

Italian, Seafood restaurants, as well as Steakhouses and Pubs. The famous web-portal

Entrepreneur has ranked the 80 Top restaurants in this category, and the list of first 10 Top

can be found in Annex 14.

The market volume for this industry is represented by almost 250,000 restaurants

including franchised establishments: national and local restaurant chains, fast food outlets,

sandwich stores, other franchised businesses chains and independent operators are competing

with each other. Moreover, according to the Consumer Expenditure Survey152, released by the

Bureau of Labor Statistics of the U.S. Department of Labor, “an average annual expenditures

per consumer on food purchased away from the home was $2,698 in 2009”.

As it was projected by aforementioned National Restaurant Associations in 2009

Restaurant Industry forecast, the total sales in this category reached the amount of $182.9

billion in 2009, up 1 per cent from previous year. Because of drop in consumer confidence

during recession period, 2009 was a challenging time for full-service franchising sector: total

revenue amount is similar to the 2008 gain of 1.1 per cent, but remains below the average

annual increase of 4.8 per cent gained over the period 2002-2007.153

149 See Direct Franchises portal : “Restaurant franchises”. 150 See Franchise Direct portal: “Food franchise opportunities”, http://www.franchisedirect.com/foodfranchises/14. 151 BusineesDictionary.com, http://www.businessdictionary.com/definition/full-service-restaurant.html. 152 Bureau of Labor statistics: “Consumer expenditure survey”, http://www.bls.gov/cex/. 153 Franchise Direct portal: “Full-service restaurant franchise industry report”, http://www.franchisedirect.com/foodfranchises/fullservicerestaurantfranchisestudy/14/261.


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Comparing to other food franchises, the full-service restaurants require a greater personal

and financial resources. As a rule, the type of franchise and the brand will determine the

initial financial investment. The table in the Annex 15 provides an overview of the estimated

initial outlays to open the restaurant franchises listed. The initial franchise fee as well the

ongoing sales royalties are included. To present these costs in more detail, the table also refers

to the profiles of each franchisor which were extracted from the Franchise Disclosure

Documents.

Fast Food restaurant is a quick-service establishment where food is packaged for

immediate consumption.154 It also is known as a quick service restaurant (QSR), where

customers are usually looking for value in return for their money.

The USA is the leader in the global fast food market, with market’s total value of about 53

per cent. The U.S. fast food industry includes 300,000 restaurants and franchises, and is

predicted to reach a sales volume of about $163.8 billion for 2009, that exceeds the gain in

2008.155 Moreover, as the Datamonitor’s report states, “the fast food market reached a volume

of 36.6 billion sales transactions in 2008. The number of sales transactions has grown at a

stable rate of 1.6 per cent for 2007 and 2008 but is however predicted to slow marginally in

the coming year due to a lack of consumer spending.”156

Among the most respectful fast food franchises are McDonalds, Burger King, Pizza Hut,

KFC. McDonalds still keeps the dominant position in the market, with outstanding volume of

sales of $30,025 million recorded in 2009. It is quite reasonable then, that McDonalds

Company is ranked at the head of Top 100 Global Franchises list (see Annex 5). Burger King

is another fast food giant with the volume generated of about $9,500 million.157

Generally speaking, fast food industry is very fragmented, similar to the automotive sector

which was described before. The Annex 16 will provide the reader with the estimated initial

investment outlook which is necessary to open one of 22 fast food franchises which are listed.

154 Franchise Direct: “Fast food franchise industry information”, http://www.franchisedirect.com/foodfranchises/fastfoodfranchiseindustrystudy/14/262. 155 National Restaurant Association: "2009 Restaurant Industry Forecast", http://www.restaurant.org/research/forecast.cfm. 156 Datamonitor, report “United States - Fast Food”, (published August 2009). 157 Franchise Direct: “US fast food franchise industry report”, http://www.franchisedirect.com/foodfranchises/fastfoodfranchiseindustrystudy/14/262.


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Take-out and Delivery Franchise is a type of business where food can either be taken ‘to

go’ by the consumer or delivered to the destination point. In such franchises a dining service

area, as well as full menu and ‘take away’ services can be founded. As the National

Restaurant Association states, this sector accounts for about 6 to 12 per cent of restaurant

franchising total sales. Moreover, the food take-out franchises have lower start up costs: the

average initial investments vary approximately from $155,600 to $453,600 in numbers.158

Obviously, the demand for take-out meals is increasing nowadays. In this sense, it’s very

effective way to increase sales. Consumers are saving money by ordering food to their homes.

In accordance with the market research firm NPD Group’s 2009 study A Look into the Future

of Eating, the number of restaurant meals eating at home will grow by 20 per cent in the next

10 years.159 The NPD Group, Inc. (formerly National Purchase Diary), the leading North

American market research company,160 provides in its report a ten-year forecast of eating

trends based on generational influences, population, etc. The results of NPD’s research are

displayed in Table 6 below.

Table 6:

Top Food Trends Eating Behaviors Expected to Grow More Important

During the Next Decade

Organic 41%

Restaurant meals eaten in-home 20%

Light/lite/diet/low calorie labels 18%

Salty/savory snack foods 16%

Easy meals, e.g. fruit, snacks as meals, yogurt, bars, etc. 16%

Appetizers eaten as in-home main meals 16%

Leftovers as end dish foods 15%

Fresh as end dish foods 14%

Source: The NPD Group, A Look into The Future of Eating, National Eating Trends®

The key to such a statistics, probably, is the number of home leisure activities that has been

increased. And that is the reason of the growth in the take-out franchise sector, especially in

158 Franchise Direct portal: “Food take out and delivery franchise industry report”, http://www.franchisedirect.com/foodfranchises/takeoutanddeliveryfranchiseindustrystudy/14/263. 159 NPD Group’s report: “"Better for You" Foods to Grow Significantly Over the Next Decade” (2009), http://www.npd.com/press/releases/press_090707a.html. 160 NPD Group: "About NPD", http://npd.com/corpServlet?nextpage=profile_s.html.


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pizza home delivery franchises. The pizza’s market is very competitive and demanded. And it

is even more advanced in the USA, where about 60 per cent of all pizzerias are franchised and

some 93 per cent of consumers buy at least a pizza per month.161 A list of Top 10 Pizza

Franchise Chains you’ll find in the Annex 17.

Let is move to an example of a take-out industry’s rising success. One of the leading

delivery and take-out franchises is Domino’s Pizza, Inc., an international pizza delivery

corporation headquartered in Michigan, United States.162 It serves their clients throughout the

world with a network of 9.000 franchised and company-owned stores. The huge generated

revenue of $1.32 billion in 2009 (that is 76.6 per cent versus the year 2008) is likely caused

by international store expansion, the growth of sector’s popularity, high operating margins.163

For franchises specifically focused on offering the take-out or delivery services (Domino’s

example), an accelerating consumer demand creates a favourable business climate for a long-

term period. The numbers clearly shows that ‘take-out and delivery’ industry tends to be a

prosperous for the franchised restaurant market, which is expected to grow constantly in 2010.

To complete the food franchises category, let is take a brief review of the Food Retail

sector. Food retail business includes different types of store outlets such as candy shops,

bakeries, organic and health food stores, etc. This special market is quite dynamic and highly

competitive, despite the retail performance decline over previous years. For instance, in the

USA, “it includes nearly 20,000 businesses, accounting for revenue of $20 billion

annually.”164

The Food Marketing Institute in its ‘State of Food Retailing 2009’ report demonstrates the

significant extension of the retail-food chain all over the world. Responding to the consumer

demand and strong competition, retail-food stores reduce the food costs, and diversify the

product assortment. “These new measures are reflected in strong sales increases, with overall

hourly sales for retail stores increasing to $145.51 in 2008. This shows a remarkable increase

from $138.90 in 2007 and $133.31 in 2006.”165

161 Franchise Direct portal: “2010 Food franchise industry report”, http://www.franchisedirect.com/foodfranchises/2010foodfranchiseindustryreport/14/267. 162 Domino's Pizza: "About Domino's", http://www.dominosbiz.com/Biz-Public-EN/Site+Content/Secondary/About+Dominos/. 163See Franchise Direct portal: “Food take out and delivery franchise industry report”. 164 First Research Inc., Specialty Food Stores Industry Profile, http://www.firstresearch.com/Industry-Research/Specialty-Food-Stores.html. 165 Food Marketing Institute (FMI): "State of Food Retailing 2009", http://www.fmi.org/news_releases/index.cfm?fuseaction=mediatext&id=1065.


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As the CEO and president of the Food Marketing Institute (FMI), Leslie G. Sarasin, noted

“the industry (Retail-Food) showed its resilience in the most challenging economy in modern

history. Retailers aggressively discounted products and increased their lines of private brands

to help American families lower their grocery bills. At the same time, they continued to

control costs by improving efficiency and productivity, a hallmark of this industry.” 166

It should be finally noted that, in spite of current economic situation, which is non-stable,

the Retail-Food market remains to be quite elastic. For franchisor this means the great

opportunity to increase his market presence and expand the franchise chain with a moderate

amount to invest. An appropriate information on the initial costs to franchise in retail food

sector is introduced in the Annex 18.

Vending Franchise Opportunities.

The last, but not the least, franchise category I am going to touch with in this Thesis,

refers to the vending machines industry. And it really becomes a quite tangible part of

people’s everyday lives: drinks, snacks, beverages, coffee, lottery tickets and many other

kinds of personal goods are dispensed to consumers by coin-operated machine immediately at

the push of a button. They might be found in subways, public buildings, retail stores, gas

stations, hospitals and even at courthouses - so to speak, any place where person can appear is

a good location for vending machines.

Trends and Facts.

The vending industry has a stable growth during the last century. A franchise in the vending

business represents a unique opportunity for investors as it does not require set up costs and

ongoing business overheads, or any advertising and marketing budget. The owner of the

vending machine pays a ‘rental fee’ for the place and also pays for other expenses concerning

maintaining of a normal work of this machine.167 And location here is of crucial importance:

the right product should be available at the right place.

166 Franchise Direct portal: “Retail food franchise industry report”, http://www.franchisedirect.com/foodfranchises/retailfoodfranchiseindustryreport/14/264. 167 Franchise Direct portal: “Vending franchise opportunities”, http://www.franchisedirect.com/vendingfranchiseopportunities/121.


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Let is consider some statistical numbers. The “Vending Times”168, one of the most

popular trade magazines for the U.S. vending industry, reported the permanent increase of

vending sales in the USA during the early beginning of the 2000s, with a strong growth rate

of about 43 per cent.169 And what is the situation in European market? In the United

Kingdom, for instance, vending machines industry forms a lucrative business sector. It was

calculated that the sales volume of the UK vending market for 2008 reached the amount over

£3.6 billion, with the most purchasable items such as cold and hot drinks and snacking stuff.

“This trend is predicted to continue as the market evolves with new products and innovative

vending equipment that gives consumers more convenient access to low price point impulse

purchase products.”170 It is quite interesting to know, that the British consumers spend over

£1.5 billion on use of nearly 510,000 refreshment vending machines today, purchasing

millions cups of coffee and tea from the automates daily.171

The last tendency in vending industry is the diversification of merchandises that are offered.

With people getting more information about junk food, the automates offer a kind of healthy

drinks and snacks. Today we can buy also DVD, books, mobile phones and other electronic

gadgets via vending machines, placed in high traffic areas like airport terminals and shopping

malls. For instance, in Japan, the country with a high population density and low rates of

vandalism, there seem to be no limits to what is sold by vending machines: even bottles of

wine and underwear can be purchased by such way.172

As a matter of fact, vending franchises keep the place of a pretty profitable low cost

business ventures available. The reason is the set of advantages vending business has. These

are low capital investments, including overheads and start-up costs; availability for 24 hours a

day, that makes the vending operations very flexible and simple to run; instant cash flow.

Moreover, unlike other businesses, this sector remains stable even in crisis times as vending

machine operators are not much affected by economic downturns. “The vending trade is

consistently brisk due to the low cost impulse buy nature of most vended products,

168 “The ‘Vending Times’ magazine attempts to cover the entire vending industry, addressing the business, legal, legislative and regulatory concerns of companies providing industrial, institutional and public vending, refreshment, feeding and recreational services”; Vending Times: "About Vending Times", http://www.vendingtimes.com/ME2/dirsect.asp?sid=F096C4D0B94F4982B253C12BCA5B4C15&nm=About+VT. 169 See Franchise Direct portal: “Vending franchise opportunities”. 170 The Vending Revolution: “Franchise Opportunities Defying the Credit Crunch”, http://www.vendingrevolution.com/. 171 Franchise Direct portal: “Vending franchise and business opportunities in the UK ”, http://www.franchisedirect.co.uk/vendingfranchises/209. 172 ArtRM.com: “Japanese vending machines”, http://www.artrm.com/retail/vending-machine.


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particularly comfort eating treats which consumers purchase regardless of a faltering

economy.”173

Undoubtedly, the refreshment vending machine business tends to be a kind of a market

that consumers always have an appreciation for, as they need snacks and drinks to survive

during the day. And it can not be influenced by the trouble economic situation worldwide.

To resume the last Chapter, I would like to point out the following. Franchising

remains a time-tested concept of business conduct in more than 80 industries available. And

this number is continually growing. The four industrial categories which were examined

above - automotive, business services, food and vending operations - represent the most

popular types of franchised business today. In fact, they have been not so much affected by

the recent events in a world economy, and sometimes even proved the tendency to grow

during the recession. But, of course, the economic impact is equally important for the

franchise business as well as for non-franchised operations. The case is the level of risk

avoidance for each individual sector, so it is better to franchise in the recession-resistant

segments.

Today the franchising services face with a great demand, because the consumers are

franchised focused. The brand identification together with successful business concept and

proven marketing and distribution system - all this has an influence on the franchise owner’s

benefits. In short, franchising is a ‘strategic alliance’ between the business owner and the set

of support and operational guidance provided by an established corporate office.174

Every potential investor has the possibility to achieve a considerable return on his

franchising investment. And if the person is financially able to franchise some business, all

that he needs is to evaluate numerous industry categories available, choose the right segment,

and take a final decision regarding an individual franchise company. Certainly, an invaluable

contribution here is given by the companies with their publicly introduced experience in

international franchising.

173 See The Vending Revolution: “Franchise Opportunities Defying the Credit Crunch”. 174 Instant Tax service: “Diversify your investments: Franchise!”, (May, 2009), http://www.instanttaxservice.com/blog/2009/05/.


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Conclusion

The present Master Thesis describes the concept of international franchising from both

business and legal standpoints. The research was focused on detailed description of related

issues in the three major pillars: franchise contract, franchising perspective through its

strengths and weaknesses, and, finally, the franchise overview with the analysis of the specific

industries.

Following the Thesis structure, I believe that the theoretical part provides the useful

information to start with. I intentionally shortened the overview of numerous definitions of

franchising which can be sometimes seemed confusing. Instead, I tried to create the general

definition summarizing the classical ones to take it easier for understanding. It was not by

chance also that the franchise agreement was touched so deeply. The crucial importance of

this document is recognized on the level of the international organizations. For instance,

International Institute for the Unification of Private Law (UNIDROIT) defines the Franchise

contract “as the vehicle most commonly adopted for international expansion”, considering

such items as “the nature of the relationship between the master franchise agreement and the

sub-franchise agreements; problems associated with the three-tier structure of the relationship

between franchisor, sub-franchisor and sub-franchisees, particularly in relation to termination;

the settlement of disputes; applicable law and jurisdiction; and disclosure”.175

Thanks to the theoretical framework provided in the first charter, the practical meaning of

the franchising was evaluated in the following parts of the thesis. So, the second chapter

represents franchising in action, where both the positive and negative examples of the

franchising diversified influence were included respectively. The possible franchise threats

and weaknesses were examined not only from the franchisor-franchisee’s perspective, but

from the consumer’s point and within the current economic situation.

The final chapter resumes the whole work with the concrete statistical data and ranking

concerning the franchised companies and the particular franchised industries worldwide. As

soon as the company is aimed at the international expansion, it is important to evaluate firstly

the attractiveness of the market in general, then to specify the relevant industry to franchise in,

and, at last, to identify the particular franchise company to deal with.

175 UNIDROIT: “Model franchise disclosure law”, (September, 2002), Explanatory report , p.13, http://www.unidroit.org/english/modellaws/2002franchise/2002modellaw-e.pdf.


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In regards to the main hypothesis, I dare to say that the purpose of this Diploma Thesis

was achieved. The reader can observe a quite ambiguous influence of the franchising on the

business and economic environment. Of course, the penetration of new markets is a difficult

process, and the business expansion bears certain risks. Many companies still feel the deficit

of the abilities to operate globally; the most common barriers are poor marketing

infrastructure, lack of experience, and, surely, various restrictions implied on international

trade operations (tariffs and non-tariffs barriers). The strongest companies try to avoid these

risks switching the business models and the forms of entrepreneurship, though by the cost of

losing control and flexibility. However, the feedback can be rewarding: all the current big

names have grown from the small local enterprises.

A number of people franchise to expand internationally. They sell the rights to their

product for a fee and future profits. Actually, there are lots of successful examples which

speak for themselves: McDonalds, KFC, Holiday Inn, Radisson, IKEA, Yves Rocher,

Segafredo Espresso, and many other names mostly associated with the USA or Western

Europe. In the meantime, there is growing trend for Asian and Eastern companies to expand,

that is quite remarkable for business reality. Not only the extremely big companies, but the

middle-sized ones are expanding globally too and appear in the world’s ratings - among the

Global Fortune 500 or in the list of the Top 100 global franchises.

Mention has already been made of the fact that almost any business could be franchised

today, regardless of how profitable it is. Therefore, franchising has become a lucrative

business system worldwide, and this tendency is strong enough. Today “franchising

symbolizes about only a tenth of the total number of the businesses, yet franchises hold nearly

40 per cent of the market sales”176.

The main conclusion that arises from this thesis is, definitely, that international

franchising is not just “a vehicle for conducting business”177, but a real driver for the

globalisation process with its opportunities and risks. The world economy is constantly

changing, and the international presence is becoming necessary for many businesses to

survive. Looking back at the initial presumption, that international franchising tends to be

rather the great business opportunity, even for small or medium companies, than a risky

176 Cantrell J. : “Facts About Franchise Ownership - Is Franchise Ownership For You?”, http://ezinearticles.com/?Facts-About-Franchise-Ownership---Is-Franchise-Ownership-For-You?&id=3004613. 177 See UNIDROIT: “Model franchise disclosure law”, (September, 2002), Explanatory report , p.10.


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business concern, the Master Thesis with all statistical analysis and results prove its

consistency. As a matter of fact, the unit weight of franchised businesses in international trade

is continually growing. It offers the potential for the economic development to increase,

especially among countries seeking access to know-how. Consequently, international

franchising enables the companies to combine the short-run goals of small business system

with long-run perspectives of the large-scale business formats.

To crown it all, it should be pointed out that franchising itself is not automatically the

key to success. In business, as in life, there are never any guarantees. Starting new business is

always risky and tough process. If the company or individual entrepreneur has the real

potential to run the business, internationally or locally, franchising is probably the great

option to get started. Anyway, no matter what decision an investor go with, he should just

remember: whatever to put into business is what will be got back out of it.

And, finally, I would like to emphasize that the topic of this Thesis is an extremely

complex matter of business. While working on it, i personally realized how strong is the

correlation between the economic and legal environment, from the one hand, and the business

opportunities, from the other. Moreover, it is my great hope that this Diploma Thesis might be

used as specific ‘manual’ for those who is on the way to make a decision to franchise.


69

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List of Tables

Table 1: Franchise Business Economic Outlook, 2007-2010…………………………..45

Table 2: Franchise Business Economic Outlook by Business Line, 2010……………..46

Table 3: Franchise Establishments by Business Lines, 2007-2010……………………46

Table 4: Franchise Employment by Business Lines, 2007-2010……………………....47

Table 5: Franchise Output by Business Lines, 2007-2010…………………………….48

Table 6: Top Food Trends………………………………………………………….......61