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Franchising

noun | fran•chis•ing | ˈfran-ˌchīz-ing

Franchising is the granting of a right by a franchisor to sell its goods or services to an individual or organization, a franchisee, in a particular area. Franchising is the gerund form (verbs used as nouns) just as licensing is the gerund form of the verb license.

Examples:

  • Franchisor attorneys worked tirelessly over the decades on franchising so that franchisors could expand control of a franchised business while more effectively limiting any liability to the franchisor by the franchisee's business activities.
     
  • "We have to protect franchising," said the president of the organization for franchisors. "I can't blame you for your desire to do that but I need to protect my business rights too," replied the franchise owner.

Origin: from Anglo-French of franchir to free, also from franc free (see Merriam Webster)


verb (tr.v. used with object) | fran•chis•ing | ˈfran-ˌchīz-ing

to  grant the right to sell a company's goods or services in a particular area. It is the progressive verb tense of franchise.It is a grant of authority, which is given by a franchisor for monetary gain, whether by giving the franchisor a franchise fee, royalty fees, marketing fees, product mark-ups, and more from a franchisee (a franchised business).

Examples:

  • Having started only two years ago, Heavenly Hotel is franchising its midscale hotel concept like there is no tomorrow. The franchisor looks likely to have one hundred franchises flying its flag by next year.
     
  • Our company president is considering whether to hire a franchise development manager soon so that we can be franchising by next year.

The term franchising is often erroneously used among business journals and trade associations to refer to franchisees, franchisors or both. As defined by the American Heritage Dictionary, franchising is when a party, the franchisor, "grants a franchise" to a franchisee.

Franchisors will naturally and understandably argue that franchising, the development of a franchise network, takes two to tango. In the act of granting a franchise, a buyer must be willing to pay for a grant of a franchise from a franchisor. But that leaves out the point that when the term franchising is used, the franchisor is the prime mover. The franchisor is the entity that sells and grants franchise rights, not the other way around.

Examples of how not to use the word "franchising"

Sometimes newspapers, business journals and trade associations use the term incorrectly.  Here's a few wrong uses of franchising.

"I saw the potential franchising offered and applied for a management position with Domino's [a pizza store in the speaker's neighborhood]." - Indystar

"Franchising now accounts for 5% of Philippine GDP" - Manila Bulletin

It is highly unlikely that selling franchises accounts for 5% of the Philippine GDP. It is doubtful that the author meant that. Franchising also does not refer to the economic output of all franchised units and their vendors.

"Women are likely to look to franchising because of the flexibility and challenges it provides, a new survey has found. According to Mortgage Choice's Best in the Mortgage & Finance Industry report, potential female franchisees see the ability to control their own time and movements as the most important aspect of running their own business." - Broker News

Unfranchising or franchise termination

When a franchisor decides to remove or terminate the franchise license, they are in essence un-franchising.

There are all sorts of reasons to terminate the license.  A franchisee may run a shoddy ship. A franchisor may cold-heartedly calculate that such small mom and pop franchise units are not its future and look for any excuse to terminate the franchise arrangement. But barring legal intervention, again, it is only the franchisor who can grant or ungrant, not the franchisee.

Investment discussion

A company's franchising ability, which is sometimes merged into the word franchisability, is important to investors of franchised stores. Savvy stockholders would want to know the strength of a firm's franchising efforts. Some franchisors are gifted sellers of franchise licenses and can create considerable cash flowing into the firm through the payment of initial fees from lines of franchised store investors. Both stock investors and store unit investors would also need to know why a franchisor operationally would have difficulty retaining franchisees. They might also wonder why franchisors cannot better keep average Joes, or why the franchisor seems to have a propensity to sell franchises to franchise owners who have difficulty profitably operating a franchise.

A franchise buyer would also want to know if the franchisor is making money only on its franchising efforts—a bad sign— and whether the franchisor can profitably operate from profitable franchise stores that pay it royalty.  Investors cannot make an intelligent decision to invest unless he or she has tangible financial evidence of the profitability of not just one store but the vast majority of franchises in a system.

Note: We have a category on Blue MauMau called "franchising". The intent was to discuss franchisor development issues. We tend to use it here to discuss franchisor issues. That category name will be re-thought.

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Are you right for franchising?

Here's another news story that uses the word "franchising" incorrectly.

"Are you right for franchising?"

Such a title would be alright if the reporter were asking if a business had the right stuff to adopt the franchise model in expanding their chain. But alas, the story from sbtv.com is about asking if a franchisee candidate has the right personality to follow a franchisor's system. The topic should be titled:

Are you right for a franchise?

Don Sniegowski's picture

Franchise Industry

I'm considering writing an entry in our Franchipedia on the franchise industry.

There's quite a few who really dislike the term industry being used to describe the 3,500 or so franchisors and their service vendors.They argue that franchisors cannot fit into a single industry since they occupy some 80+ different industries like hotels, fast-food, and even portable potties.

in·dus·try. noun. a distinct group of productive or profit-making enterprises (banking industry). Source: Merriam-Webster Online Dictionary

That argument was used many years ago by a Washington D.C. lobbying group to persuade congressional members that the nation's franchisors could not be regulated. They were not in a single manufacturing or business group because franchise chains were in so many different industries with different needs.

That lobbyist association now acknowledges the reality of a franchise industry.

It has also been argued that since there was no Standard Industry Categorization for franchise or franchising that it technically could not be an industry. The implication was that if the powers that be didn't consider franchising an industry than who are we to question that?

There actually was a SIC code. And now the NAICS that replaced it also has a franchising industry category.

Does anyone remember when the argument first came out that there was no such thing as a franchise industry? Any online sources to document it?

More lessons

When people speak of franchises, they are usually referring to business format franchises. Such a franchise is essentially a business clone.

The franchisor has developed a system for reproducing his business (often right down to the last detail). When you buy a franchise, you rent the franchisor's trademark and method of doing business. The method of doing business involves a standardized approach to delivering a product or service.

In fact, many franchises are offered as turnkey business opportunities; all you, as the franchisee, need to do is walk in and "turn the key" to get the business up and running.

Buying a franchise is a popular choice for starting a business because the assumption is that the franchisor is selling business success; he or she has created a successful business, and therefore, the franchise business you buy will automatically be successful, too.

This is not necessarily so.

Buying a franchise is also popular because most franchisors offer some degree of ongoing marketing and operational support. For example, as a franchisee, your business may benefit from the franchisor's marketing campaigns, or have lower inventory costs because of the franchisor's suppliers.

On the other hand, the degree of ongoing control that some franchisors exert may be excruciating.

Anyone considering buying a franchise needs to carefully investigate all aspects of the franchisor - franchisee relationship, as well as the track record of the particular franchise.

Also Known As: Franchising, turnkey operation.
Common Misspellings: Franchize, Fanchise.

Re: Franchise Industry

Definition

A form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor's trade name and usually with the franchisor's guidance, in exchange for a fee.

Paul Steinberg's picture

Deja vu ("success")

Guest writes: A form of business organization in which a firm which already has a successful product or service (the franchisor) ...

A common misperception, and a dangerous one. There have been franchisors who had no successful product/service, and franchisors who began selling franchises because they couldn't get their own outlet(s) to turn a profit, etc.

People do seem to be a bit more savvy these days on this score (nowadays even the IFA doesn't make claims such as Guest does), but there are still an unfortunate number of prospects out there who assume that a franchised product/service is by definition a successful product/service.

When they discover to the contrary, they post here on the Ranter's Soapbox, and/or cry on Sean and Ryan's shoulders.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Nick Bibby's picture

Most franchise concepts are 'not' good bets

If I bet that 5 of every 10 concepts had a glaring hole in its system, I would win. If I took the bet to at least 6/10 I would still win straight up and down, and i'd make even more money on the increased odds. Why? Because most people would bet against me - and they'd loose. The casinos don't take that bet, but I still get paid to prove that I'm right.

There must be overwhelming reasons to buy a franchise, and those reasons are to be proven in a proper approach to franchise selection (of which due diligence is a mere element). Most concepts are underwhelming.

Nick Bibby is a franchise consultant who works primarily with successful entrepreneurs franchising a business and individuals interested in buying a franchise.

Howard R. Morrill's picture

Nick,

Amen.

About Don Sniegowski

Don Sniegowski's picture

Public Profile

Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.