A Brief History of Franchising - American Franchise Attorney | Washington D.C., U.S.
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Inless than companies had employed franchising in their marketing operations.
Bymore than companies had franchise operations involving an estimatedfranchised outlets. The estimated 27, new franchise units that opened in represented the addition of one new franchise unit every twenty minutes throughout the year. The same survey found that franchised businesses in accounted for 7.
Business format franchising accounted for 4. The quick service restaurants hired more people than any other business format segment, and automotive and truck dealers employed more workers and had the greatest payroll of any other product distribution franchise.
Jobs and payrolls in franchised businesses were greatest in California, Texas, Florida, and Illinois in Relative to the size of the statewide economy, franchising had the greatest impact on jobs and payrolls in Nevada, Arizona, New Mexico, Florida, and Mississippi. Studies indicate that a new franchise business opens approximately every five to eight minutes of each business day, and that franchises are, on average, more profitable than company owned locations.
This holds especially true for franchisors in the fast food industry. Never completing high school, Kroc espoused a conservative, anti-regulatory philosophy, and fought for a modification of the minimum wage law to allow entrepreneurs to employ teenage and student workers. What Kroc found was a specialized labor system that produced quality sandwiches at an affordable price. Along with his associate, Harry Sonnenborn, Kroc purchased the land to build franchise locations, and then rented the real estate to franchisees on long-term leases.
This action increased access to capital funds. InKroc assumed the title of Senior Chairman. InSanders took to the road and convinced restaurateurs in Kentucky, Ohio, and Indiana to pay him a five cent royalty for using his proprietary recipe.
Obviously, if the would-be franchisee has certain skills or interests, these are likely to guide this choice. Even if a potential franchisee knows which type of business to enter, the selection of a franchisor may pose a challenge.
The person who wants to open a fast-food franchise has to decide what type of food it will serve: Other matters to consider include fees required, royalties, governmental regulations, and whether the particular business is part of a growing industry.
Such choices are closely tied in to public policy and governmental regulation today. Many of the businesses in both categories are subject to extensive government regulations today, which can increase both the franchisors' and franchisees' responsibilities and financial investments. For example, franchisors in personal services, such as water conditioning and pest control experts, have to be aware of Environmental Protection Agency EPA regulations governing the use of pesticides and toxic products and the added costs associated with them.
The same holds true for automotive retail franchises. Questions must be answered regarding where and when used batteries, replaced oil, rusted mufflers, etc. These are generally matters to be resolved by the franchisor, but franchisees must be aware of current and impending local and state laws before opening their operations.
Governmental involvement in franchising is not new. For instance, California enacted the first pre-sale franchise disclosure law in The law addressed two broad areas: Several other states passed similar laws shortly afterward. Since many companies operated in several states, it was inevitable that the federal government would involve itself in franchise regulation.
That became the FTC's role. The agency requires every franchisor to provide each potential franchisee with a detailed disclosure document which protects everyone involved in a possible agreement and this requirement is known as the Franchise Trade Rule.
The required document contains 20 different categories of information about the franchise and must be given to prospective franchisees at least ten days prior to signing a franchise contract. Included is information about required fees, basic investment, bankruptcy, and the franchisor's litigation history. There are also inclusions concerning how long the franchise will be in effect, the franchisor's financial statement, and earnings claims if they are available.
The financial disclosure laws had a major impact on franchising. The laws made it clear that franchisors were in business not only to make a profit, but to supply their clients with services and products that made their ownership easier.
The laws corrected any imbalance in franchise agreements that were tipped in the franchisors' favor. Under the laws, franchisors had to reveal all the information potential franchisees needed to make a decision on whether or not to open an outlet.
The companies had to reveal how long they had been in business, the number of unit failures, lawsuits in which they were involved, either currently or in the past, and supporting information to back up any claims they made about their operations. This protection stands potential franchisees in good stead and reduces the potential for fraud on the part of franchisors.
It is imperative to note that the financial disclosure laws do not protect potential franchisees completely. For instance, the FTC does not certify any information provided; instead, the individual must verify information provided by franchisors. Since Congress authorized the FTC to regulate franchising, franchisees can submit complaints to the agency.
The break-up: What happens when franchises go wrong - SmartCompany
Although the FTC has the ultimate authority to regulate franchising, the states may impose their own requirements as long as they are stricter than the federal requirements.
The key is that laws exist to protect people interested in franchises, which is a far cry from the early days of franchising when caveat emptor—let the buyer beware—was the watch word for franchisees. Because there was a great deal of risk involved in dealing with franchisors in those days, there was considerable controversy over the benefits of franchising. Much of that controversy remains, although it has changed in focus somewhat.
One argument is that franchise employees receive low wages. This is partly because the majority of the workers are part-time employees who don't receive any benefits.
Because of the low wages and lack of benefits, franchise owners have a hard time attracting and retaining quality workers. One of the solutions to this problem would be union organization. However, labor unions in general have lost their power in recent years, so they are more reluctant than ever to organize franchise workers in deference to focusing on unionizing larger and more stable employers.
Without union representation, workers may not organize and wages may remain low. A second criticism is that chains detract from the aesthetics of a community. They may locate in residential neighborhoods and erect huge unsightly signs.
Some communities have eliminated these problems through strict zoning laws and other legislation. Often, these laws are "grandfathered," which means existing businesses are unaffected. So, if urban blight is to be eliminated, it will not happen for years to come. Opponents of franchises also cite the distribution of franchise revenues. Much of the money franchisees take in goes to the franchisor. Thus, it is removed from the local economy.
A locally owned firm's revenues would stay in the community. But, since chains drive out local owners, much of a community's revenues are lost.
The break-up: What happens when franchises go wrong
Certainly, there are arguments that support the existence of franchises, too. Regardless of the controversy, franchising has had a major impact on the American economy, and is impacting foreign countries as well. Not only has it encompassed virtually every aspect of American business, but it has spread abroad. Canada in particular has proven lucrative for American franchisors.
In fact, it has the second highest number of franchise outlets in the world. That is due primarily to the common language and similar culture the two countries share. Canada is by no means the only target of U. American companies are expanding their operations into countries as diverse as the Dominican Republic, Saudi Arabia, and Japan.
Ironically, Japan, even thought it is culturally dissimilar from the United States, represents a prolific market for American franchisors. Currently, franchises account for only about 4 percent of all retail sales in Japan. However, some American franchisors such as 7-Eleven, Inc. In fact, a Japanese company, Ito-Yokado Ltd.
Certainly, not every American franchisor can function well there.
For example, Gymboree, which franchises developmental programs for preschoolers and their parents, had to turn down Japanese investors due to a lack of space in which to erect equipment. Another problem American franchisors faced in Japan was the working conditions. The concept of part-time work puzzled the Japanese. They are accustomed to lifelong, full-time employment for which workers receive adequate wages. So, when Kentucky Fried Chicken entered the Japanese market, it had to change its wage policy and upgrade working conditions.
Otherwise, the company would not have survived. Other companies have faced similar problems in Japan and elsewhere, but they have overcome them, survived, and grown. Occasional setbacks aside, American franchisors are moving ahead aggressively to gain a toehold in other countries.
Century 21, for example, has established franchises in Canada, France, Japan, and the United Kingdom. There is apparently no geographical limit to where franchisors can—or will—go. Department of Commerce predicts that slower population growth, population shifts to new metropolitan areas, and the introduction of new technology will create new opportunities for franchises. Mergers and acquisitions will increase as larger franchisors take over smaller ones.
Schools and universities are adding franchising studies to their business curricula. These factors, combined with the low rate of franchise failure, stability in the industry, and a considerable return on everybody's investment, have made franchising a major force in the American economy to this point. Some of the emerging franchise businesses expected to drive the growth of franchising tend to offer customers added convenience such as to-the-door services offering everything from dry cleaning and pet care to window coverings and furniture repair, according to Nation's Business.
In addition, Nation's Business reported that other franchise trends of the future will include education and training businesses, second-hand merchandise stores, office support services, and health service providers. Sharp ] Dicke, Thomas S. But the group has also been plagued by allegations of exploitation and underpayment of workers in media investigations.
According to the Franchise Council of Australiafranchises like these employee a lot of people. Approximately 79, operating franchises in Australia employdirect employees. Is the franchise model itself bad? A study from the US actually found that franchise businesses have better rates of compliance with industrial relations law than comparable independent small businesses.
Other research from France shows franchisees benefit from marketing, research and development and training offered by company owned stores. Researchers Lorelle Frazer and Maurice Roussety argue that: Franchisees have skin in the game and are motivated by the bottom line of their stores. But a group of researchers have pointed out that this support differs between large and small franchises. They say, as franchises mature, franchisor control over key processes in outlets tends to increase.