HISTORY OF FRANCHISING Late 1800s
 significant change occurred because of the
THE ORIGINS OF FRANCHISING
The Middle Ages (400 A.D – 1500 A.D)
 it was an accepted practice for local government
to offer important persons, even high church
officials, a license granting them the right to
maintain civic order and to make special tax
assessment
 Courts or Lords could also grant rights to operate
ferries, hold markets, and perform the business
activities today carried out by professionals.
 The licensee (or franchisee) would pay the
licensor (franchisor) a specific fund from tax
revenues collected or assessments made and in
return receive military or forms protection.
The Colonial Period
 Franchise Kings: local sovereign/lord would
authorize individuals to hold markets, run local
ferries, hold fairs, or to even hunt on his land
This concept extended to the Kings, who would
grant a franchise for different types of business
activities.
The 1840s
 there was a beer brewer in Germany who granted
certain rights to several local taverns to sell their
beer
The 1880s
The modern franchise business model can be

traced back to Mr. Isaac Merrit Singer, an
entrepreneur of the highest order
Isaac Singer - founder of I.M. Singer & Company.
He was the first person to patent a practical,
widely-used sewing machine.
Middle 19th Century
 franchising system was introduced when the
Singer Sewer Machine Company formed a
franchised in 1851
industrial revolution
 Automotive manufacturers became aggressive in
their efforts to sell and distribute their products.
(1898) William E. Metzger of Detroit became the first
official franchisee of the general motors corporation
(GMC)
Henry Ford followed the examples of General Motors
and, after establishing a mass production system for
the model T, he looked for an efficient mechanism for
the distribution of the product. His search ended in
franchising.
FRANCHISING IN BRAZIL
 practiced since 1960 by some national
companies, but only in the last 10 years has there
been an acceleration of the system development
 According to research made in the USA by Arthur
Andersen, Brazil is the third place on the world
ranking of the operating franchisees.
The development stage of franchising in Brazil can
be arranged in three different categories:
Product and Trade Name Franchises - 1st generation
 considered the most primitive which can be
resumed in the license for the product sold and
trade use (Coca-Cola, Shell, Eso etc.)
Exclusive Distribution and Reselling Franchises - 2nd
generation
 franchise that guarantees territorial limits to the
trading where the franchisor uses the franchising
exclusively to trade his products. (Volkswagen,
Ford, Toyota, Mitsubishi, etc.)
Business Format Franchises- 3rd generation
 represents the best level of professionals. Besides
the brand and exclusive products, the franchisee
receives the complete system to operate the
business.
 THE FRANCHISE SCENE IN AUSTRIA
Franchising in Austria started with international
franchise systems since the 1970’s started with
international franchise systems since the 1970’s
TYPES OF FRANCHISING
PRODUCT TRADE NAME FRANCHISING
 evolved from suppliers or manufacturers creating
sales contracts with dealers to buy or sell their
products or product lines
 the dealer (franchisee) requires the trade name,
trademark, and/or product from the supplier or
manufacturer. The franchisee identifies with the
supplier though the product line
 consists primarily of distribution by a single supplier
of manufactured products to dealers who, in turn,
resell this to the end consumer
BUSINESS FORMAT FRANCHISING
 very popular method of franchising and most
widely used across the spectrum of industries.
 the franchisor permits the franchisee to use the
franchisor’s products and services, trade name,
trademark, and most importantly, the prescribed
business format
 The franchisor also provides on case to case basis
financial, legal and other technical support to the
franchisees.
 allows an individual without prior experience an
opportunity to be completely trained and
informed about how to operate a new and
different business
Three Modern Franchise Leaders
Issac Singer
 were able to find an easier way for consumers to
buy their product.
 Singer Sewing Machine
Henry Ford
 played a part in the actual design of the franchise
model
 created a franchise (dealer) network all across the
country
Ray Kroc
 contributions to franchising have to do with
uniformity and cleanliness.
 “The two most important requirements for major
success are: first, being in the right place at the
right time, and second, doing something about it
The Business of Franchising
A franchise is the agreement or license between two
legally independent parties which gives:
 a person or group of people (franchisee) the right
to market a product or service using the
trademark or trade name of another business
(franchisor)
 the franchisee the right to market a product or
service using the operating methods of the
franchisor
 the franchisee the obligation to pay the franchisor
fees for these rights
 the franchisor the obligation to provide rights and
support to franchisees
COMMON FRANCHISE TERMS
FRANCHISING
 method of business expansion characterized by a
trademark license, payment of fees, and
significant assistance and/or control
business format franchise
 this type of franchise includes not only a product,
service and trademark, but also the complete
method to conduct the business itself, such as the
marketing plan and operations manuals
disclosure statement
 also known as the UFOC, or Uniform Franchise
Offering Circular, the disclosure document
provides information about the franchisor and
franchise system
franchise
 a license that describes the relationship between
the franchisor and franchisee including use of
trademarks, fees, support and control
franchise agreement
 the legal, written contract between the franchisor
and franchisee which tells each party what each
is supposed to do
franchisee
 the person or company that gets the right from the
franchisor to do business under the franchisor’s
trademark or trade name
franchisor
 the person or company that grants the franchisee
the right to do business under their trademark or
trade name
product distribution franchise
 a franchise where the franchisee simply sells the
franchisor’s products without using the franchisor’s
method of conducting business
royalty
 the regular payment made by the franchisee to
the franchisor, usually based on a percentage of
the franchisee’s gross sales
trademark
 the franchisor’s identifying marks, brand name
and logo that are licensed to the franchisee
UFOC
 the Uniform Franchise Offering Circular, UFOC, is
one format for the disclosure document which
provides information about the franchisor and
franchise system to the prospective franchisee
METHOD OF DISTRIBUTION
 Franchising is primarily a method of distribution of
goods or services. Franchising is simply a business
technique, a means of distributing or providing
goods or services to the consumer.
 Four Primary Modes:
Business Format franchises for products
o Franchisor does not actually produce a
product
Business Format franchises for services
o Franchisor does not itself actually
produce or provide a service for resale.
Product franchises
o Franchisor manufactures and distributes a
tangible product offered through
franchised retail dealership
Affiliation franchises
o Uniquely American Phenomenon.
Franchisor recruits into a franchise system
a successful independent retail operator.
METHOD OF EXPANSION
 Method of expanding an existing business.
 A business seeking ways to expand the scale of
activity in which it is engaged.
 an alternative means of capital formation
 A business seeking to expand the scale of its
operations needs growth capital
 Using franchising, the business in effect
appropriates to its enterprise the capital, as well as
the managerial talent and effort of the franchisee.
 The franchisee makes significant capital
contribution to the strengthening and expansion
 of both the scale and the goodwill associated
with the franchisor’s business enterprise and
brand.
Franchising thought of as an alternative to these more
traditional ways of raising capital:
 Traditional ways of raising capital include: venture
capital lenders, bank and commercial financing,
public or private placement of securities through
investment banking channels.
 A business seeking to expand into foreign markets
that are geographically or culturally remote from
the franchisor.
 Finally, its inherent capital and managerial
leverage, attractive as means of expanding a
business more rapidly
 Rapid growth is a goal often cited by firms that
elect to expand using franchising.
Franchising as a catalyst to the achievement of
other business goals
 Franchising sometimes is attractive to a business
not as primary business goal, but as a means to
other ends, in this mode franchising can be a
catalyst to the achievement of other more
primary business goals.
 A company may find that for technological,
regulatory, or other business reasons, it is desirable
for the manufacturer to attain a much higher level
of presence of involvement in retail operations
involving its products or services than might
otherwise be the case.
 The business, nevertheless, cannot always afford
or even desire to vertically integrate its distribution
program by owning the retail level of operation.
Franchising an attractive compromise
 For such companies, franchising can be an
attractive compromise.
 Franchising provides many of the advantages of
equity ownership of a retail operation but avoids
much of the capital cost and managerial
responsibility that can be burdensome to
companies lacking unlimited capital.
Franchising as middle ground
 franchising offers an attractive middle ground
between merely selling the products to distributors
or wholesalers for unconstrained, unsupervised
redistribution, or a vertically integrated,
“company owned” retailer network.
MULTIPLE FORMS OF FRANCHISING
 Traditional single-unit retail franchises
 Multiple-unit franchises
 Franchises with or without growth options or rights
of first refusal
 Trade area franchises
 Mobile and home delivery franchises
 One or more tiered sub franchising arrangements
 Hybrid ownership arrangements
 Joint ventures and other shared equity business
arrangements
INVESTMENT OPPORTUNITY
 Shortcut to new business opportunity;
 Dream of autonomy and financial
independence associated with owning and
operating one’s own business provides a
motivating goal;
 Potential to reduce the risk of business failure and
loss of investment;
 Shortcut entry into an unfamiliar line of business;
 Provides faster and easier brand of recognition
Negotiating a franchise
 Most franchise contract are negotiable to one
extent or another.
 Franchises offered by smaller or start-up
franchisors are usually susceptible to some degree
of negotiation to accommodate the franchise
offering to the needs and market circumstances
of the prospective investor.
“Business Opportunities” Laws
 Business Opportunity is a business investment
program in which the seller of the opportunity
offers to provide goods or services to the buyer to
enable the buyer to start the business, and the
seller assures the buyer that the business
opportunity is essentially free of risk based on a
variety of features.
 almost always include trademarks, copyright and
often include trade secrets
 industrial designs and patents - depending on the
nature of the business
Kinds of businesses are not considered “replicable”
and do not lend themselves to the franchise model:

 Business Opportunity regulation was an

outgrowth of a number of fraudulent “business  Creative business: Creative businesses require
scams” such as “work-at home” schemes and particular skills whether of an artistic or creative
other dubious arrangements promoted to naïve nature which cannot be easily taught so they are
and unsophisticated consumer investors. not replicable

 The law now sweeps in much broader array of  Technical business: Technical businesses are
business and distribution programs. unlikely to be franchised because in the great
majority of franchises a relatively short period of
 Today many legitimate businesses use structured induction training is provided by the franchisor.
business arrangements that are classified as
“business opportunities” under one or more
states’ laws.

HOW TO RECOGNIZE A FRANCHISE

 Receiving Pre-Sale Disclosure

 Protecting a Business Relationship
 Escaping a Business Relationship
 Avoiding the Creation of Inadvertent Franchises

Four essential elements:

The “grant” element

The “trademark” element

The “community interest” element

The “franchise fee” element

IP Issues in Franchising

 franchisor will license to the franchisee the

intellectual property rights and know-how
associated with that business as well as provide
initial and ongoing training and support;

 the intellectual property rights that are licensed in

a franchising arrangement