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Franchising: The Practice of Licensing a Business Model and Brand

• Franchising is a business expansion strategy where a franchisor licenses its know-how, intellectual property, business model, brand, and rights to sell its products/services to a franchisee in exchange for fees and obligations.

• Franchising minimizes the franchisor's capital investment and liability risk compared to expansion through corporate-owned outlets or chain stores.

• Franchising is rarely an equal partnership, and franchisors have substantial legal and economic advantages over franchisees, except for powerful corporate entities with lucrative locations and captive markets.

• 36 countries have laws that explicitly regulate franchising, and franchising is also used as a foreign market entry mode.

• Franchising dates back to the Middle Ages, but it boomed after World War II, and one of the first successful American franchising operations was started by John S. Pemberton, who licensed people to bottle and sell an early version of Coca-Cola.

• The United States is a leader in franchising, with 909,253 established franchised businesses generating $880.9 billion of output and accounting for 8.1 percent of all private, non-farm jobs in 2005.

• Franchise fees are on average 6.7% with an additional average marketing fee of 2%, and franchisors may charge a fee for "disclosure," which is always a "front-end fee."

• Each party to a franchise has several interests to protect, and the franchisor secures protection for the trademark, controls the business concept, and secures know-how, while the franchisee is obligated to carry out the services for which the trademark has been made prominent or famous and must adhere to the franchisor's standards.

• Franchising brings several advantages, including access to a well-known brand and ongoing operational support, but a primary disadvantage is quality control, as the franchisor wants the firm's brand name to convey a message to consumers about the quality and consistency of the firm's product.

• Franchise agreements carry no guarantees or warranties, and the franchisee has little or no recourse to legal intervention in case of a dispute.

• Regulations in Australia require franchisors to provide a disclosure document to prospective franchisees containing information about the franchisor, its directors, and financial statements, among other things.

• Franchisees in Australia have the right to associate with other franchisees and form a franchisee association, and franchisors cannot impose unreasonable restraints on trade.

• Franchisors in Australia must act in good faith, and franchisees have a right to compensation in case of a breach of the franchise agreement by the franchisor.Franchising Regulations Around the World

• Franchising in Australia is regulated by the Franchising Code of Conduct, which requires franchisors to produce a disclosure document and regulates the content of franchise agreements.

• New Zealand has a self-regulatory code of practice for its franchisors, covering contracts, restrictive trade practices, intellectual property, and law of misleading or deceptive conduct.

• Brazil's franchise law defines franchising as a system in which the franchisor licenses the franchisee to use a trademark or patent along with the right to distribute products or services on an exclusive or semi-exclusive basis. The franchise offer circular is mandatory before execution of an agreement, and all sums may not be convertible into foreign currency.

• Canada has mandated better disclosure and fair treatment of franchisees and regulations that ensure their right to form associations and launch collective action.

• China has updated franchise laws that apply to transactions involving a trademark combined with payments and imposes obligations on the franchisor. The disclosure must take place 20 days in advance.

• India is one of the biggest franchising markets due to its large middle-class, and franchise agreements are covered under two standard commercial laws: the Contract Act 1872 and the Specific Relief Act 1963.

• Kazakhstan has a special law on franchising that came into effect in 2002 and has more than 300 franchise systems, including Coca-Cola, Pepsi, Hilton, Marriott, Intercontinental, and Pizza Hut.

• Europe is largely unregulated in terms of franchising, with only six of the 27 member states having a pre-contract disclosure law and only Estonia and Lithuania having franchise laws that impose mandatory terms on franchise agreements.

• France has no government agencies regulating franchises, but the Loi Doubin Law of 1989 was the first European franchise disclosure law.

• Italy's franchise law defines franchise as an arrangement where a franchisee is granted the right to market goods and services under particular trademarks in exchange for a consideration.

• Norway has no specific laws regulating franchising, but the Competition Act section 10 prohibits cooperation that may prevent, limit or diminish the competition.

• Russia's franchise agreements are invalid unless written and registered, and franchisors cannot set standards or limits on the prices of the franchisee's goods.

• Spain's franchising is regulated by the Spanish Retail Trading Act, and franchisors should disclose specific information in writing, including the disclosure of any criminal convictions.

• Turkey's franchising is described as a sui generis contract which bears the characteristics of several explicitly regulated contracts, such as agency and sales contracts.Franchising: Overview and History

• The British Franchise Association (BFA) is the main regulatory body for franchising in the UK.

• The BFA works with franchisors through the application process and recommends changes that will lead to the franchise business meeting BFA standards.

• In 2007, the UK Parliament conducted hearings concerning citizen-initiated petitions for special regulation of franchising by the government due to losses incurred by citizens who had invested in franchises.

• The US saw the rise of franchise-based food service establishments in the 1930s, which accelerated the growth of franchising.

• The Federal Trade Commission has oversight of franchising via the FTC Franchise Rule.

• The FTC requires that the franchisee be furnished with a Franchise Disclosure Document (FDD) by the franchisor at least fourteen days before money changes hands or a franchise agreement is signed.

• States are the primary collectors of data on franchising companies and enforce laws and regulations regarding their presence and their spread in their jurisdictions.

• Social franchising has been picked up by the social enterprise sector, which hopes to simplify and expedite the process of setting up new businesses.

• Third-party logistics has become an increasingly popular franchise opportunity due to the quickly growing transportation industry and low cost franchising.

• Event franchising is the duplication of public events in other geographical areas, retaining the original brand, mission, concept, and format of the event.

• Home-based franchises are becoming popular as they may provide a low barrier for entry into entrepreneurship.

• Experts say that the work is no less hard in home-based franchises.