FRANCHISING Master of Commerce (M.Com-I) Semester II (2012-13) Submitted by VARSHA CHAWLA SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS BANDRA (W) MUMBAI-50 1 FRANCHISING Master of Commerce (M.Com-I) Semester II (2012-13) Submitted In Partial Fulfillment of the requirements For the Award of Degree of Master of Commerce (Part-I) By VARSHA CHAWLA SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS BANDRA (W) MUMBAI-50 2 SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS BANDRA (W) MUMBAI-50 CERTIFICATE (2012 – 2013) This is to certify that VARSHA CHAWLA of M.com (I) Semester I (2012-13) has successfully completed the project on FRANCHISING under the guidance of Mr. VISHAL TOMAR. Date:- Place:- (Prof. Mrs. Megha Somani) (Dr. Ashok Vanjani) Course Co-ordinator Principal (Prof. Mr. Vishal R Tomar) Project Guide External Examiner 3 DECLARATION Date:- I, Miss. VARSHA CHAWLA, the student of M.Com (I) Semester II (2012-13) hereby declare that I have completed the project on FRANCHISING successfully. The information submitted is true and original to the best of my knowledge. Thank you, Yours faithfully, VARSHA CHAWLA 4 ACKNOWLEDGEMENT At the beginning, I would like to thank Almighty God for his shower of blessing. The desire of completing this dissertation was given a way by my guide Mr. Vishal R Tomar. I am very much thankful to him for the guidance, support and for sparing his precious time from a busy and hectic schedule. I am thankful to Dr. ASHOK VANJANI, Principal of Smt. M.M.K. College. My sincere thanks to Prof. MEGHA SOMANI who always motivated and provided a helping hand for conceiving higher education. I would fail in my duty if I don’t thank my parents who are pillars of my life. Finally, I would express my gratitude to all those persons who directly and indirectly helped me in completing dissertation. 5 VARSHA CHAWLA DECLARATION Date:- I the undersigned Mr. Vishal R Tomar, have guided VARSHA CHAWLA for her project, she has completed the project FRANCHISING successfully. I hereby, declared that information provided in this project is true as per the best of my knowledge. Thank you, 6 Yours faithfully, Mr. Vishal R Tomar. What is a Franchise? Franchise 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. Some of the most popular franchises in the United States include Subway, McDonalds, and 7-Eleven. Franchisee: Definition: A franchisee is an individual who purchases the rights to use a company’s trademarked name and business model to do business. The franchisee purchases a franchise from the franchisor. The franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases the franchisee must pay an ongoing franchise royalty fee to the franchisor. 7 Franchisee is the one who purchases a franchise. The franchisee then runs that location of the purchased business. He or she is responsible for certain decisions, but many other decisions (such as the look, name, and products) are already determined by the franchisor and must be kept the same by the franchisee. The franchisee will pay the franchisor under the terms of the agreement, usually either a flat fee or a percentage of the revenues or profits, from the sales transacted at that location. Franchisor: Definition: The franchisor owns the overall rights and trademarks of the company and allows its franchisees to use these rights and trademarks to do business. The franchisor usually charges the franchisee an upfront franchise fee for the rights to do business under the franchise name. In addition, the franchisor usually collects an ongoing franchise royalty fee from the franchisee. The company that allows an individual (known as the franchisee) to run a location of their business. The franchisor owns the overarching company, trademarks, and products, but gives the right to the franchisee to run the franchise location, in return for an agreed-upon fee. Fast-food companies are often franchised. Franchisors are available in every industry / sector to work with entrepreneurs (the Franchisee) to help them develop successful business opportunities (franchises). The franchisor typically provides marketing, sales assistance and lends corporate credibility. Franchising: Introduction: 8 Franchising is a business model in which many different owners share a single brand name. A parent company allows entrepreneurs to use the company's strategies and trademarks; in exchange, the franchisee pays an initial fee and royalties based on revenues. The parent company also provides the franchisee with support, including advertising and training, as part of the franchising agreement. Franchising is a faster, cheaper form of expansion than adding company-owned stores, because it costs the parent company much less when new stores are owned and operated by a third party. On the flip side, potential for revenue growth is more limited because the parent company will only earn a percentage of the earnings from each new store. 70 different industries use the franchising business model, and according to the International Franchising Association the sector earns more than $1.5 trillion in revenues each year. Franchising is the practice of using another firm's successful business model. The word 'franchise' is of Anglo-French derivation - from franc - meaning free, and is used both as a noun and as a (transitive) verb. For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods that avoids the investments and liability of a chain. The franchisor's success depends on the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business. Essentially, and in terms of distribution, the franchisor is a supplier who allows an operator, or a franchisee, to use the supplier's trademark and distribute the supplier's goods. In return, the operator pays the supplier a fee. Thirty three countries, including the United States, and Australia, have laws that explicitly regulate franchising, with the majority of all other countries having laws which have a direct or indirect impact on franchising. 9 What is Franchising? A continuing relationship in which a franchisor provides a licensed privilege to the franchisee to do business and offers assistance in organizing, training, merchandising, marketing and managing in return for a monetary consideration. Franchising is a form of business by which the owner (franchisor) of a product, service or method obtains distribution through affiliated dealers (franchisees). Arrangement where one party (the franchiser) grants another party (the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications. The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as royalty, and gains (1) immediate name recognition, (2) tried and tested products, (3) standard building design and décor, (4) detailed techniques in running and promoting the business, (5) training of employees, and (6) on going help in promoting and upgrading of the products. The franchiser gains rapid expansion of business and earnings at minimum capital outlay. An individual who purchases and runs a franchise is called a "franchisee." The franchisee purchases a franchise from the "franchisor." The franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases the franchisee must pay an ongoing franchise royalty fee, as well as an up-front, one-time franchise fee to the franchisor. Franchising has become one of the most popular ways of doing business in today's marketplace. In most states you cannot drive three blocks without seeing a nationally recognized franchise company. History of franchising Earliest Franchising: 10 Many believe that Albert Singer, founder of the Singer sewing machine, was the initiator of franchising. He was actually the earliest person recognized by most as being associated with franchising. However, the concept of franchising really began long before. The term 'franchising' derived from ancient French, is defined as holding a particular privilege or right. Back in the middles ages, local leaders would designate privileges to citizens. Some of these rights included conducting fairs, running markets, and operating ferries. The franchising idea then carried forward to the practice of Kings yielding rights to conduct activities such as beer brewing and road building. In addition, the expansion of the church is known as a form of franchising. The Evolution of Franchising During the 1840's, several German ale brewers granted rights to particular taverns to market their ale. This was the beginning of the type of franchising that became familiar to most of us in the twentieth century. Franchising then travelled from European brewers into the United States. Before franchising there was not much in the way of chain operations, which would eventually form the basis of franchising in the U.S. Peddlers in early American history, selling items from town to town, were also considered a form of franchising. Licenses were provided to general stores at military outposts as well. These exclusive territorial rights are described in written literature, however specific names are not. 11 Albert Singer came on the scene in 1851 with the Singer Sewing Machine Company. Singer made use of franchising to distribute his machines over a widespread geographic area. He is the first actual name recognized as an early franchisor. Additionally, Singer was the first to prepare franchise contracts. These documents then became the basis for the modern version of franchise agreements.