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UNIVERSITY OF ECONOMICS

PRAGUE

DIPLOMA THESIS

2010

Darya Karpushina

University of Economics, Prague


International Business Central European Business Realities

International Franchising as a Method for Business Expansion

Author: Darya Karpushina


Thesis instructor: Ing. Jaroslav Halk, MBA, Ph.D.
Scholar year: 2009/2010

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Declaration:
I hereby declare that I am the sole author of the thesis entitled International Franchising as
a Method for Business Expansion. I duly marked out all quotations. The used literature and
sources are stated in the attached list of references.

In Prague on .....................

Darya Karpushina

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Acknowledgement
I hereby wish to express my appreciation and gratitude to the instructor of my thesis
Ing. Jaroslav Halk, MBA, Ph.D. for his academic support, useful advices and helpful
comments to the topic
International Franchising as a Method for Business Expansion.
Special thanks go to my parents for providing continuous source of enthusiasm towards
learning.

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International Franchising as a Method for Business Expansion

Content
Introduction ........................................................................................................................ 2

1. Chapter 1: The Essence of Franchising.......................................................................... 5


1.1. Definitions...6
1.2. Franchise Contract general provisions.....9
1.3. Types of the Franchises.14

2. Chapter 2: Franchising in Action................................................................................. 18


2.1. Franchising Benefits and Opportunities........19
2.2. Weaknesses and Risks of Franchising...25
2.3. Some steps before making a franchise decision35

3. Chapter 3: Franchise Overview.................................................................................... 41


3.1. General Statistics...42
3.2. Franchise Ratings..49
3.3. Franchise Categories and Subcategories...53

Conclusion ......................................................................................................................... 66

Bibliography...................................................................................................................... 69

List of Tables.................................................................................................................... 73
Annexes ............................................................................................................................. 74

International Franchising as a Method for Business Expansion

Introduction
The choice of the Thesis topic related to phenomenon of International Franchising,
which is becoming one of the most perspective and fast-developing form of business
conducting. Todays entrepreneur has a plenty of possibilities how to run its business on
national level, but it goes with a plenty of difficulties to operate internationally. A lot of
companies struggle for their brands recognition, for the market share, and such competition
becomes even harder on a worldwide scale due to the protectionist policy of some countries.
The strongest players, that is in minority, take deals effectively in spite of specific tariff and
non-tariff barriers imposed. But the majority suffers the losses. The problem typically lies in
wrong perception of a business they are facing with, and, if it is franchising we are speaking
about, in inadequate evaluation of the opportunities and risks of running a franchise.

The actuality of franchising concept is obvious. Franchising as a legal or business


model, which is not new in a business world, has more and more growing relevance. At the
same time, this topic still causes a kind of suspicion in peoples mind due to the numerous
arguable issues. For instance, franchising is still not legally fixed in most countries
legislation. And that is actually the problem how to deal with it, how to avoid confusion with
the franchise agreement by which both contractual parties must perform their obligations.

The aim of this Master Thesis is the diversified research of the selected theoretical and
practical aspects of international franchising. I tend to believe that the comprehensive analysis
will help the potential entrepreneurs to create a broader view of what does franchising means
in international business format, what are the typical benefits and risks for the intended
partners, which industries can be advised as the most fortunate options to franchise in. All
these issues should project likely outcomes and trends in the future, which are the basis for
making an intelligent decision about investing in a franchise.

The main hypothesis of this Thesis would be the statement that there are numerous
franchising areas of implementation that exist, and its influence, therefore, has the separate
meaning as well. We could determine specifically the many-sided influences through the
analysis of the business potential opportunities and risks while franchise. The key message
will be stressed on the role of the international franchising as one of the principal driver of the
business globalization now-a-days. There is a wide-spread presumption on franchising as only
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International Franchising as a Method for Business Expansion


being suitable for large-scale experienced companies with the time-proved brands. I would try
to prove that an immediate expansion of this form of shared investment should be considered
more as the great business opportunity even for small or medium companies rather then a
risky business concern.

My effort in this Diploma Thesis is concentrated also on the franchising impact on the
business environment. And this impact becomes even more crucial in times of economic
troubles. The research should display the most evident franchising trends. And, if the
contribution of an international franchising concept will be proved mainly as a negative
tendency, it is quite reasonable then to focus on the possible ways how to avoid these negative
consequences.

As far as international franchising represents a quite complex system, there is not


enough space within Thesis frames to introduce all related aspects in detail. Therefore, the
scope will be limited by the most critical issues structured in three main chapters.
The first chapter defines the theoretical background needed for the further analysis. It is
important to include this chapter in order to understand the logic and the features of the
franchising itself. This part provides the reader with the basic definitions, introduces the
concept of international franchising in general and its history of development. The special
attention is given to the franchise contract which has the crucial importance for the franchisorfranchise relationship: typical provisions and the role of an agreement in a business
environment are described. And finally, the chapter is closed with the main types and formats
of franchise system.
Consequently, the second chapter represents franchising in action. Since an international
franchising becomes an urgent and arguable question in a business world, it should be useful
to highlight the arguments and the doubts and then to make a comparison with the real
situation. Therefore, the most obvious trends and features of international franchising through
the analysis of its strong (opportunities) and weak points (risks) will be presented in this part.
It should be done in order to estimate the crucial Pros and Cons for the potential
entrepreneurs who can be easily found among the readers. I would like to stress mostly on the
general franchising model without differentiation between American, European or Asian ones
as, to my opinion, there are no strong differences on them regarding advantages and
disadvantages. In the last subchapter, some recommendations will be given the potential
investor has to take into account before making a franchise decision.
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International Franchising as a Method for Business Expansion


The last chapter is focused on franchises overview. It was written mostly for consulting
purpose as making easier the evaluation of the potential of a specific industry or business
sector that could be franchised. The practical part starts with general statistics and ratings of
the franchises worldwide. All information is updated and can be used for the benchmarking
between top franchising companies. The chapter is ended with the gap analysis of the four
industrial categories - automotive, business services, food and vending franchises - as being,
to my opinion, the most popular options for the international franchising today. Each industry
and subcategory is described through its trends and characteristics such as typical ongoing
fees and payments to run a franchise within the specific business sector. This part is also
accompanied by practical examples and the annexes enclosed.

As for the literature and other sources of the topic presented, there is a broad list to
choose. First of all, there are some classical authors, such as Daniels, J. and Radebaugh, L.
International business : environments and operations, Mendelsohn M.: The guide to
franchising, Ramberg J. :Guide to Export-Import Basics, Purvin R.: The franchise fraud.
How to protect yourself before and after you invest, and many others that has been used as a
theoretical ground. Moreover, particular franchise associations have a specialized magazines,
periodicals and web-pages with numbers of publications and reports which contributed this
Diploma as well.

Finally, the present Master Thesis shall prove the relevance or irrelevance of the
hypothesis statement. The research conclusions will come from the collecting data and
information sources both theoretical and practical oriented.

International Franchising as a Method for Business Expansion

Chapter One: The Essence of Franchising


Franchise business is now-a-days of a significant potential on the markets worldwide.
This process is strongly supported by such factors as the considerable changes in customer
behaviour, the progress in the competitive environment and growing spending power.
The world practice have proved that franchising tends to be one of the most effective way of
business expansion (Ramberg J., 2008), especially when it is going internationally. Its
existence was proved by time on a numerous highly competitive markets demonstrated a quite
clear concept of franchise industry1, but, at the same time, there is still no the single
understanding of this concept in numerous literature sources, mainly regarding the
terminology. That is why I would like to start with some theory: definitions themselves, brief
historical background, as well as the main types and features of franchising will be discussed
in the first Chapter.
The franchise industry has a long history behindFranchising has developed out of
a number of business transactions, methods, and practices that have been common and
popularly known for many years. 2
There is a widespread assumption that the founder of the Singer sewing machine, Albert
Singer, was the initiator of franchising. That is not really true as the concept of franchising
really began long before. The term 'franchising', derived from ancient French, is defined as
holding a particular privilege or right.3 As far back as in the middles ages, the franchising
idea came from the practice of Kings who granted the rights to conduct activities such as beer
brewing and road building. From European brewers franchising then travelled into the United
States, where it was initially taken the form of chain operations.4
The notion of selling off a business in order to expand into new areas usually came from
the lack of investment funds from the business owner. To keep the business alive it was
created the idea of selling franchise abilities to so-called entrepreneurs. Singer, who made use
of franchising to distribute his machines over a widespread geographic area, is the first actual
name recognized as an early franchisor. Moreover, Singer was the first who prepared
franchise contract - the basis for the modern version of franchise agreements.

evera M.: Position of starting, small and medium-sized enterprises on the Czech market, in Czech Franchise
Association, (2008), p.74.
2
Mendelsohn M.: The guide to franchising, Oxford: Pergamon Press, (1979), p. 1.
3
Daszkowski D.: The history of franchising, in About.com Guide,
http://franchises.about.com/od/franchisebasics/a/history.htm.
4
See Daszkowski D.

International Franchising as a Method for Business Expansion


The modern leading form of franchising, known as business format franchising, expanded
rapidly after the World War II. Some of the well-known franchises, including Kentucky Fried
Chicken in 1930, Dunkin Donuts in 1950, Burger King in 1954, and McDonald's in 1955,
were established in the United States as the first retail and restaurant chains.5
In times of the unfortunate events of 1979s, when several companies were under-funded,
poorly managed and, therefore, bankrupted, leaving many franchisees destroyed, the
International Franchise Association (IFA) was founded in order to regulate the franchising
industry. In 1978, the Federal Trade Commission created the Uniform Offering Circular
(updated in 2007 as the Franchise Disclosure Document) requiring franchise companies to
provided detailed information to potential franchisees. Furthermore, IFA has established the
Code of Ethics as a framework for the implementation of best practices in the franchise
relationships of IFA members.6
Thanks to these historical prerequisites, we now have the opportunity to share in the
success of other businesses as well as business owners have the opportunity for the expansion.

1.1

Definitions
The simplest way to understand what a franchise is to imagine the most famous brands:

McDonalds, Holiday Inn, IKEA. Many people from all across the world have dreams of
owning and operating such a successful business models. In business practice, however, the
lack of uniform rules covering franchise agreements is a strong obstacle which negotiating
counterparties faced with. There is presently no legal definition of franchising, which is
defined differently by various franchising associations in individual countries7, that is why it
is necessary at first to achieve the basic theoretical understanding.
To avoid confusion from the very beginning, let is consider franchising concept as a
business format franchise - the name by which it is commonly known. That means the
utilization not merely of goods identified by a trade mark or an invention8, but developing of
the total business concept (so called blue print) of a successful way to conduct a business in
all its aspects.

See Daszkowski D.: The history of franchising, in About.com Guide.


International Franchise Association: IFAs Code of Ethics,
http://www.franchise.org/industrysecondary.aspx?id=3554.
7
Kusak B., Zimova M.: Legal aspects of franchising in Czech Republic, in Czech Franchise Association, (2008), p.77.
8
Mendelsohn M.: The guide to franchising, Oxford: Pergamon Press, (1979), p. 3.
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International Franchising as a Method for Business Expansion


The Business Dictionary defines franchising as the act of selling a license to trade as a
franchise9, using the name of franchising to describe license-type transactions, that is very
simplified way. Both concepts, franchising and licensing, are very similar and closely
intertwined, but the crucial distinction takes place. In licensing the licensee is allowed by the
licensor to use a piece of intellectual property (brand name, recipe), whereas the franchisor selling
the franchisee the right to exploit the whole business idea, including trademarks, logo and
distinctive signs, intellectual property, technical know-how and processes.10 It is, therefore, more
reasonable to attribute franchising to a special form of licensing in which the franchisor not only
sells an independent franchisee the use of the intangible property, but also operationally assists
the business on a continuing basis.11
In the by-law practice of the International Franchise Association the term franchise
operation is used in the broad sense and refers to contractual relationship between the
franchisor and franchisee in which the franchisor offers or is obligated to maintain a continuing
interest in the business of the franchisee in such areas as know-how and training; wherein the
franchisee operates under a common trade name, formal and or procedure owned or controlled
by the franchisor, and in which the franchisee has or will make a substantial capital investment in
his business from his own resources.12
The abovementioned definition tends to be the classical formulation of franchising and,
therefore, was embodied, with some amendments, in the charters by several franchising
institutes (for example, the British Franchise Association). In spite of such comprehensiveness,
the definition still originates some questions. For instance, the crucial point for franchising
that the franchisee has the right to own the business for which he is paying13 is actually
missing (or just implied) here referring to the franchisee making an investment in his own
business.
Let me take one more example of franchising definition. Franchising is a system for
the sale of products and services based on vertical co-operation between legally
independent enterprises on the basis of a long-term contract which sets out the
obligations of the parties 14 - that is the formulation from the German Franchising
9

Collin P.H., in Dictionary of Business, fourth edition (2006), p. 169.


Ramberg J. :Guide to Export-Import Basics, (2008), p. 143.
11
Daniels John D., Radebaugh Lee H.: International business. Environments and operations, Prentice Hall, 9th edition
(2001), p. 492.
12
Mendelsohn M.: The guide to franchising, Oxford: Pergamon Press, (1979), p. 5.
13
See Mendelsohn M., p. 8.
14
Kusak B., Zimova M.: Legal aspects of franchising in Czech Republic, in Czech Franchise Association, (2008), p.77.
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International Franchising as a Method for Business Expansion


Association. Probably, it will be much better understandable by those who already have been
skilled in this form of business conduct, not for the beginners who seek an underlying
understanding. But my concern in present work is to make it easier to understand the basics of
franchising concept for the starters in this field before dealing with such a business on practice.
Summarizing and simplifying all definitions, that were analyzed above, I came to the
following statement: Franchising is a mode of doing business by which the owner of already
successful product or service (the Franchisor) enters into a continuing contractual
relationship with independent entrepreneur(s) (the Franchisee), to whom the Franchisor
grants the right of using the complex of intangible assets (know how, trade marks, intellectual
property, other business secrets), as well as the whole (or part of) business concept, in
exchange for a fee. To franchise internationally, both parties should run their businesses in
different countries, across national borders.
The core undertakings of the parties should be underlined here: whereas the franchisor
provides a licensed privilege to the franchisee to do business and offers assistance in
organizing, training, merchandising, marketing and managing, the franchisee, who is
operating under the franchisor's trade name and usually with the franchisor's guidance, invests
a certain amount in setting up and conducting business and adheres to the franchisor quality
standards.15 From the legal point of view, the permanent franchisors control over the way in
which the franchisee operates the business should be significantly stressed out. It helps to
achieve strict uniformity between outlets and thereby prevent and even strengthen the
goodwill and reputation associated with the franchisors business name.
It can be concluded here that, to a large extent, the relationship between a Franchisor and
a Franchisee is in the nature of a partnership: both parties, involved in agreement, have the
mutual interest in franchising deal which is the combination of the franchisors reputation
and expertise with the franchisees capital (Ramberg J, 2008, p. 143). That is the ideal
variant where the franchise agreement must be conceived as a document enabling the
prosperity to both parties - win-win situation.16 However, in practice franchising contract can
be complex and in some jurisdictions is subject to local laws for the protection of franchisees.
Such a complexity is frequently resulted in numerous discrepancies between the real
outcomes and the ones that were expected; the most popular cases will be discussed in the
next Chapter.
15
16

Ramberg J. :Guide to Export-Import Basics, (2008), p. 143.


Kada A.: Franchise agreement, in Czech Franchise Association, (2008), p.77.

International Franchising as a Method for Business Expansion

1.2

Franchise Contract general provisions


Forewarned is forearmed
As a matter of fact, there is commonly no direct legislative provisions specifically

regulating franchising in most of Europe; let is take an example of the Czech Republic, where
is still an absence of consistent judicature relating to the franchising area. 17 Some other
European countries, such as Germany, have definite legal practice in this field as the courts
have already faced with the settlement of the franchising disputes.18 But, in general, European
laws do not contain any obvious treatments that would somehow prohibit the franchising as
such or imply the restrictions on the concept implementation. The lack of special franchising
legislation could be substituted for the relevant legal regulations, such as the Commercial
Code, anti-trust law (e.g. the Act on Protection of Economic Competition). These normative
acts regulate the contractual relationship and other franchisor-franchisee relations such as, for
instance, deals between individual franchisees (Kusak B., Zimova M., 2008).

Franchising continues to be a highly regulated industry as promoting the healthy


growth of the economy. The most important here is to scrutiny carefully a franchise contract legal arrangement binding on both parties - which is, probably, the most critical element of any
franchise purchase. That is veritys moment, as soon as the franchisor has to present his promises
to the franchisee in written form. It, hereby, makes sense for the buyer of franchise to consult
with a competent lawyer regarding the contracts meaning and effect on the following
partnership.19 In spite of the assumption that most franchises are build up by proven business
concept, the amount of the legal disputes arising from the franchise agreement provisions is
growing rapidly; the court verdicts pronounced in important cases under definite jurisdiction
provide invaluable lessons to prospective franchisors and franchisees.
So, the franchise agreement governs the legal relationship between the franchisee and the
company, and contains more on responsibilities of both parties, as well as details about other
fees, terms and conditions including important provisions for future actions if the relationship
does not work out.

17

Kusak B., Zimova M.: Legal aspects of franchising in Czech Republic, in Czech Franchise Association, (2008), p.78.
For example, under German judicature, a franchisee is entitled to indemnification to the same extant as a business
representativehe has to be actually incorporated into the business system and its relationship with the franchisor must not
be merely a relationship between a seller and a purchaser. See Kusak B., Zimova M., p.78.
19
Mendelsohn M.: The guide to franchising, Oxford: Pergamon Press, (1979), p. 78.
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International Franchising as a Method for Business Expansion


In addition to the structure of the franchise contract, it should be noted that general
franchise transaction involves two stages: the first stage exists prior to the opening of the business
and the second one appears after the business is open. 20
Sometimes franchise companies have two contracts, one for each stage respectively: a
purchase agreement, detailing the terms of initial purchase, and license (franchise) contract,
describing the terms and conditions of the franchise relationship on a go-forward basis.
In franchising practice, there is a tendency to present the franchisee just one document to be
signed - franchise contract - where all features as are relevant to the transaction should be
found. Nonetheless, the separate purchase agreement could exist, and the basic three aspects
may be included there (Mendelsohn M., 1979): the franchise package; the price; the services
provided by the franchisor.
The franchise package represents a complex of the equipment and inventory that will be
sold together with the business concept itself, comprising mainly the policies governing
procurement, sale and organization, an entitlement to use registered rights.21 All items that
are included into franchise package, as well as ones that the franchisee has been agreed to
expect in the future, will be enumerated in a so-called equipment list.
As for the price, it should be specified in a certain sum of money, and the manner of
payment must be also defined. This may be cash in full on signature, that is rare, or a deposit
form of payment following on delivery of the equipment. In this case the contract may be
conditional upon satisfactory finance being obtained. As far as the franchisor has the right to
withdraw from the transaction, for instance, when training shows the franchisee to be
unsuitable for the particular type of business, it is for the franchisees benefit to provide the
contract with conditions the deposit should be returnable to him.22
Finally, the services to the franchisee, such as training and ongoing support in organizing,
merchandising, marketing and managing the business project, should be also underlined in
the contract.
An absence of applicable court rulings in countries, where franchising has quite modest
tradition (Czech Republic, for instance), makes local entrepreneurs as being at a considerable
disadvantage since they can not rely on practice that was proven in the franchising area.23 All
that can help them in such a situation are franchising manuals - recommendations that were

20

Mendelsohn M.: The guide to franchising, Oxford: Pergamon Press, (1979), p. 81.
Kusak B., Zimova M.: Legal aspects of franchising in Czech Republic, in Czech Franchise Association, (2008), p.77.
22
See Mendelsohn M., p. 82.
23
Kusak B., Zimova M.: Legal aspects of franchising in Czech Republic, in Czech Franchise Association, (2008), p.78.
21

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provided by the international franchise organizations in order to guideline the participants of
franchising relationship in conducting business. So, to implement the business concept the
entrepreneurs can apply the Franchising Code of Ethics, which gives recommendations
regarding the content and certain typical requisites of franchising agreement. As it was
mentioned above, the Code of Ethics has been composed by the International Franchise
Association as a framework for its members. Nevertheless, separate franchising organizations
frequently implement this framework into the local versions of the Franchising Ethics Code,
which correspond to the specific legislation and business climate of each individual country.
One more valuable document, that should be attentively studying before the contracts with a
franchisor will be signed, is the Uniform Franchise Offering Circular Franchise Disclosure
Document (the UFOC/FDD). This disclosure instrument provides prospective franchise
investors with information about a prospective franchise: company history, background
information, risk factors and financial statements are just a few of the items that should be
covered. Because the format is standardized, it makes for easy side-by-side comparisons
between companies to achieve greater uniformity of franchise systems.24
There is no binding standard format for a Franchise Agreement, just recommendations,
because the terms, conditions and operations vary from franchise to franchise and industry to
industry. However, while every franchise agreement will differ - depending on whether refers
to retail establishment, a home business, or a mobile operation, and also what product or
service is offered - each agreement has similar elements. The Model of International
Franchising Contract (2000), which was drafted by the International Chamber of Commerce,
provides key elements the parties should kept in mind while negotiating the franchise
agreement. The elements listed there are know-how; franchising trade name, trade marks and
patents; products and territory; payment of fees and royalties; term and renewal of the
contract.25
In a very general way, franchise agreements provisions could be divided into sections26:
-

the rights granted to the franchisee;

the obligations undertaken by the franchisor;

the obligations imposed by the franchisee;

the trading restrictions imposed upon the franchisee;

24

Debolt Don J., Shay Matthew R.: Franchise Rule Comment, in International Franchise Association webportal,
http://www.franchise.org/industrysecondary.aspx?id=31150.
25
Ramberg J. :Guide to Export-Import Basics, (2008), p. 145-146.
26
Mendelsohn M.: The guide to franchising, Oxford: Pergamon Press, (1979), p. 83.

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International Franchising as a Method for Business Expansion


-

assignment/death of franchisee;

termination provisions.
After the detailed overview of what should make up the structure of the franchise

agreement as it is recommended by several institutions and associations worldwide, I sorted


out the core provisions which should be certainly covered by the contract. Let is discuss
briefly each of them.
Franchisors assistance in business operation: each franchisor has its own training
program for franchisees and their staff, which could be done whether at the franchisee's
location or at the corporate headquarters. The additional ongoing support, including
administrative, technical, marketing assistance, should be provided the franchisee as well.
Trademark, patent and signage use: the provision represents the way how the
franchisee can exploit the franchisor's intangible assets; detailed explanation of which brands,
trademarks and patents the franchisee is entitled to use, as well as any restrictions of same.
Assigned territory: the identification of the exact territory, ranging from a single
store location to a wide geographic area, where the franchisee is legally allowed to run
business. It should be also defined whether or not the franchisee has exclusive rights, as the
granting of an exclusive territory will enable the franchisee, an independent business operator,
to prosper.27 The territorial exclusivity limits the franchisors possibility to operate itself or
to license any third person to run the business within definite territory.
Franchise fee, royalty and anticipated investments: the franchisee is required to pay
an initial franchise fee, granting them the right to use the franchisor's trademark and operating
system, plus an ongoing royalty mainly as a percentage from monthly sales. That is why the
fee costs and other start-up expenses should be clear defined in the contract to make the
business doors open.
Operating protocol: this contract section details the franchisees methods of
operating outlets, for instance how to run the day-to-day business, what equipment and
software can be used, how to hire and dismiss employees, etc.
Advertising: the type and nature of an advertising campaign that is planned to be done
on the behalf of the franchisee, plus attendant costs (as a part of the royalty or franchise fees
mentioned above), as well as any limitations to the type of ads, should be noticed.

27

Ramberg J. :Guide to Export-Import Basics, (2008), p. 146.

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International Franchising as a Method for Business Expansion


Resale rights: the special provision enables the franchisee to sell the franchise to any
potential buyer who has expressed interest in the deal. It is up to the franchisor to provide the
contract with the first refusal clauses - the right to have the first option to buy back the
franchise at a fair price and either sell it themselves to a new franchisee or turn it into a
company-owned location.
Duration, renewal and termination of the franchise agreement: provisions deal
with the length of the arrangement, as well as the conditions, on which the franchise could be
renewed, prolonged or terminated, e.g. for violations of the contract. It is quite frequently for
the franchisors to have an Arbitration clause included that requires the disputes between
parties to be heard first by a neutral third party. As for the contract duration period, the parties
should carefully consider if it is concluded for definite or indefinite period, taking in account
the franchisees investments: the capital invested should be reasonably recovered by the time
cited in the contract (Ramberg J., 2008).
All considerations, which were mentioned above, tend to help both sides, mainly the
franchisee, with the understanding of successful contract requirements and its influence on the
following business partnership right after an agreement was signed. Nonetheless, sometimes
the contracting parties could stipulate that an agreement will be concluded on a future
contract. It may happen if not all the necessary details have been considered yet (the business
location, for example).28 In those cases all the essential information must be provided by the
franchisor prior to conclusion the franchise contract. So, the franchisee should be informed
about the franchisor itself and his activity, what does he offer the franchisee (services
provided, industrial property rights, support), requirements and fee costs, etc. This rule have
been adopted in some European legislations (e.g. in Germany), but still there are countries
(e.g. Czech Republic), where entrepreneurs are only required to conduct themselves in
accordance with the principle of good faith, which is derived from good morals and the
principle of fair business practice(Kusak B., Zimova M., 2008, p. 80).
Business expansion is quite risky choice for the franchisor, so the overall purpose of the
franchise agreement, apart from protecting the intellectual property, is to transfer all possible
risks of business growth and profitability onto the franchisee. That is why you as a franchisee,
negotiating the franchise agreement, should be sure that the mutual risk share is fair and
proportionate. Otherwise, you could be driven into debt while helping to build the franchisor's
profits, for instance, having to pay a fixed monthly franchise fee, regardless of whether your
franchise is profitable or not. This is common franchising practice and it is done to completely
28

Kusak B., Zimova M.: Legal aspects of franchising in Czech Republic, in Czech Franchise Association, (2008), p.80.

13

International Franchising as a Method for Business Expansion


protect the franchisor from the success or failure of the franchise. And it becomes perfectly
legal, though completely unreasonable, if you sign the franchise agreement with this
arrangement specified. Summarizing all mentioned above, since franchise contracts will be of
decisive importance for the franchisor-franchise relationship, nothing should be left to trust.

1.3

Types of the Franchises

International franchising gives franchisors an excellent possibility to grow rapidly in


foreign markets with minimum capital investments. However, this form of shared investment
in the expansion and replication of successful business systems29 may not be suitable for all
businesses. Franchising is extensively used in retailing, multiple chains of catering outlets,
and, therefore, mainly associated in peoples mind with fast-food and coffee chains
(McDonalds, KFC, Segafredo Espresso) or popular cosmetic lines (Yves Rocher, LOccitane
en Provence). It is widely represented and, probably, even works best in services industries
such as numerous restaurant and hotel chains all over the world (Holiday Inn, Radisson,
Marriott, etc.). In spite of such involvement with the customers provision, the franchise
industry is also involved in supply of goods and services to other businesses. The examples
here could be different franchise associations - the members of the International Franchise
Association (the British Franchise Association, the Czech Franchise Association, etc.) - which
are required to comply with IFAs Code in their franchise relationships.
Whether buying a franchise or looking to franchise for an existing business, there are
numerous issues to consider. One of the core issue affecting prospective franchisees and
franchisors is the type of franchising which is relevant to individual circumstances. Now,
being familiar with what franchising means and what is the structure of the franchise
agreement, let is continue with the principal types of franchise businesses. There are three
distinct franchising formats: (1) product franchise, (2) business format franchise and (3)
manufacturing franchise.
Product (or trademark) franchise is a favourable way for the supplier (the
manufacturer) to control the process of how a retailer (the franchisee) gets their product out
there. In this relationship, the manufacturer allows the franchisee to distribute the product and
29

Ramberg J. :Guide to Export-Import Basics, (2008), p. 143.

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International Franchising as a Method for Business Expansion


permits the retails owner to use that brand name and trademark to further promotion and built
the trust of the consumers. The franchisee identifies here with the supplier through the product
line. As a result, the manufacturer gets the income from the purchase and the franchise fee,
and the retailer gets the benefit of the brand and experience of the franchisor. This franchising
model has been applied extensively in the auto and gasoline service station industries; now it
links mostly to a food service oriented business.30 Steve Rosen, chief executive officer of
FranNet, the franchising consulting portal, has commented on the product franchises: A lot
of product businesses are fad-based. It goes in cycles. People love coffee or ice cream or highfat or low-fat stuff; they love or hate donuts. You've got to take that into account.
Business format franchise covers a complete system of doing business, including
service concept and operations, in addition to trademark and logo rights.31 The business
format provides the franchisee a proven business concept using a recognized product and
brand, which are very well known and, thus, automatically treated as respectful. This
opportunity is reasonably popular, because an individual is allowed, without prior experience,
to be completely trained and informed about how to run a new business. The franchisee is
provided with the necessary knowledge concerning different business activities such as
marketing, promotion, site selection, price suggestions, management, operations, training,
financing, accounting systems, legal support, etc. Most well known fast food franchises, as
well as jewelers or other ubiquitous High Street names are of this type.32
In manufacturing (or production) franchise model, which is also fairly common, the
certain group or an organization has the right to produce a certain product, with the ability to
use that name and trademark for marketing and promotion benefits.33 The franchisee is
permitted to manufacture the products under license and sell them under the originator's
trademark and name. The company owning the product gets the franchise fee and takes the
benefits from the national advertising of the goods it manufactures. Examples here include the
food and beverage industry.
The new franchising techniques, which are recently appearing, allow independently
operated businesses to be able to convert to the form of an existing franchise business system.

30

Swanson B.: The three types of franchises, in Ezine Articles, http://ezinearticles.com/?The-Three-Types-ofFranchises&id=3436345.


31
Ramberg J. :Guide to Export-Import Basics, (2008), p. 144.
32
Daud N., Different types of franchise businesses, in Ezine Articles, http://ezinearticles.com/?expert=Nazir_Daud.
33
See Swanson B.: The three types of franchises.

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International Franchising as a Method for Business Expansion


As an example here could be the Business franchise venture, when the product is purchased
and distributed from the franchise owner who provides a client base for the franchisee to
maintain. Let is imagine, for instance, vending machines: the franchisee purchases the
machines, then distributes and services them, sharing the profit from business operating. 34
Now it is time to represent one more classification of the franchising systems. Though
further variations are possible, most international franchise systems draw from the following
common methods of franchising. Unit (direct) franchise is more suitable for the domestic
markets as providing the maximum franchisors control over the individual outlets. The
franchisor enters into agreement directly with each franchisee, who would then operate the
business in a particular location or area, but the trademarks themselves and promotion activity
are usually remained in the owners hands.35 The frequent result is a franchisor with a number
of franchisees owning and operating individual stores in different locations. However, it
would be very costly to supervise an international network from a single headquarters
(Ramberg, J. 2008). In international context, therefore, the direct franchising is reasonable
only if both target and home markets are similar enough in economical, geographical, cultural
sense. In case of area (territorial) franchise, the franchisee is only allowed to operate under
the trade mark or brand name in one designated geographical area, such as the province of
New South Wales as compared to the whole of Australia. There are two alternatives how to
cover multiple outlets in a definite area: a franchise development agreement, when the
franchisee (or developer) operates a number of units in certain geographical area within the
agreed time limits, or a master franchise agreement.36 It is very common practice for the
franchisor to penetrate the foreign markets by setting up a master franchise, which gives the
franchisee the possibility to operate in the whole country with outlets opened on its own or
through the sub-franchises appointed by him. 37 This method is defined as sub-franchising (or
master franchising) and involves the sub-franchisees who is paying royalties to the master
franchisee. In spite of getting a definite percentage from the franchisees profit, the franchisor
should expects here the decreased control over sub-franchisees as a result of the increased
decentralization. For instance, McDonalds runs its Japanese operations this way (Daniels
John D., Radebaugh Lee H., 2001).

34

See Daud N.
Ramberg J. :Guide to Export-Import Basics, (2008), p. 144.
36
See Ramberg J., p.144.
37
Daniels John D., Radebaugh Lee H.: International business. Environments and operations, Prentice Hall, 9th edition
(2001), p. 493.
35

16

International Franchising as a Method for Business Expansion


It should be mentioned that the international franchising could also takes the other legal forms
to work successfully. An overseas subsidiary is one variant to expand the business, when the
franchisor retains direct control over the foreign franchisees, but still benefits from local
know-how.38 Another option is to set up a joint venture, which could be running by both the
franchisor and the local company.
As was illustrated above, there is considerable variety in the methods of franchise
agreements available to franchisors and prospective franchisees. Both parties should consider
what method is most appropriate for their individual circumstances. For instance, costing
would differ for each type of franchises and could be also affected by the potential market
size and share in the targeted country. It is, thus, quite a complex process to choose the
relevant option as each one bears a set of advantages and disadvantages. Acquiring
knowledge of consumer behaviour patterns, local market conditions and regulations,
developing a suitable franchise concept as well as paying attention to various details in the
franchise agreements are just some of the more critical matters that the franchisor should take
into account.
Resuming the first Chapter of the Thesis, I would like to conclude, that in order to
create a very successful franchise opportunity it is essential to get the right product and the
right business model in the right area. The potential of the franchising is very real39,
especially when it comes to expanding the business overseas. However, and it will be
discussed particularly in the next Chapter, franchising is not just about gathering the harvest
from the fruitful business field; there are also potential pitfalls and risks involved. This can
be avoided, or at least minimized, if the necessary preparatory work is done before the
venturing into a franchise agreement with a foreign partner.

38
39

See Ramberg J., p. 145.


Purvin R.L.: The franchise fraud. How to protect yourself before and after you invest , (1994), p.20.

17

International Franchising as a Method for Business Expansion

Chapter Two: Franchising in Action


It is quite frequently last times, not so far from the beginning of the financial crisis,
that daily newspapers as well as national media are bombarded with bad economic news,
leading easily to the conclusion that in today's economy people would be crazy to consider
buying a franchise. However, it should be mentioned that many extremely successful business
were born during an economic downturn and the kinds of specific franchise models actually
tend to prosper in a recession.40 It is not by chance that during the period of economic
recession the demand for franchising often increases; the reason is that after the economic
downturn, many of the unemployed individuals and those impacted by corporate downsizing
are looking desperately for self-employment, including franchise opportunities. Others, at the
same time, do not pursue the dream of becoming an entrepreneur for many legitimate reasons:
either the personal desires and dreams don't include being in business for yourself41 or the
dream of going into business is breaking due to the lack the necessary skills, capital, or the
courage to risk their savings.
When it is still deeply in mind to start up your own business, you are faced with the
decision of whether to go it alone or to buy a franchise, which is looked pretty appealing.
Both options offer their own distinct advantages and drawbacks.
Franchising offers more opportunities over other types of new business: there are a
number of benefits to entering into a franchising agreement with an existing business as
opposed to going it alone and establishing your own brand. Buying a franchise investors find
that the business has already been created, while when starting a new business much of the
work usually required. So, it is very costly and difficult for an entrepreneur to establish its
brand name from the scratch: this needs years of brand equity building for the customers.
Starting a business under an already successful banner can provide an edge in the
marketplace. This can be a critical asset, especially in the fragile stage of developing a new
business.42 Moreover, franchises tend to be secure with relatively low failure rates. As IFA
surveys show, 92 per cent of franchise businesses in the US are still operating after 5 years

40

Barber C : Five reasons why now is the best time to buy a franchise, in Ezine Articles, http://ezinearticles.com/?5Reasons-Why-Now-is-the-Best-Time-to-Buy-a-Franchise&id=3096337.
41
Schooley D.: Franchise Opportunities - Fears That Drown Dreams, http://ezinearticles.com/?Franchise-Opportunities--Fears-That-Drowm-Dreams---Installment-1&id=3467469.
42
Swanson B.: Franchising - Why Make the Big Decision?, in Ezine Articles, http://ezinearticles.com/?Franchising---WhyMake-the-Big-Decision?&id=3441751.

18

International Franchising as a Method for Business Expansion


compared to an 80 per cent national small business failure rate.43 But this data are old
enough, and could be perceived as general suggestion. The real picture shows some different
measures. That is why it is in a vital importance to weight up proc and cons for the net benefit
to be derived and then ask yourself if it is still worth to franchise your business or not.

2.1

Franchising Benefits and Opportunities


For many business people, whether skilful or not, the benefits of the franchise

ownership far outweigh the associated risks. So what makes franchising so appealing, and is it
the right decision to invest into franchise?44
The principal advantages of running business trough franchise will be examined in this
section from different points of interests:
from contractual parties points of view - Franchisor and Franchisee;
from macroeconomic policy;
from consumers position.

Let is have a first look at some of the more obvious benefits for the direct participants
going into a franchise agreement. Franchising works mainly as a concept of business
expansion through opening additional branches by partnering with other investors. This
concept involves a symbiotic relationship between the contractual parties, which is beneficial
for both the franchiser and the franchisee. The franchisor gives basic know-how, supply
chain, brand name, and ongoing support for the franchisee. And it really makes sense for the
franchisor, who is signing up new contractors, collecting substantial fees from the potential
franchise buyers and, therefore, provides himself with a solid and predictable income. By
opting for a franchise, the franchisee could save the costs associated with the advertising of
the business; for the franchisor, the most important considerations are the expansion of his
business, extra profit and brand recognition.
The potential of franchising is obvious for everyone: it has a unique possibility for
rapid capital development and business expansion for franchisors, and, at the same time, the
potential to achieve reduced risk in business ownership for the franchisees. The relationship

43

Chapman J.A.: Five Franchise Myths - What You Must Know Before Starting a Franchise,
http://ezinearticles.com/?Five-Franchise-Myths---What-You-Must-Know-Before-Starting-a-Franchise&id=3566781.
44
Dormal D.: Four reasons why franchising is your best option, submitted 2009-11-20,
http://www.article-bank.com/Art/28248/24/4-Reasons-Why-Franchising-Is-Your-Best-Option.htm.

19

International Franchising as a Method for Business Expansion


enriches both parties by creating market penetration and sales volume through joint efforts to
market the franchised brand.45 The mutual efforts of the franchisor and franchisee,
together with a strong trademark and quality products, can lead to establishing a truly
impressive profit centre. So the case here is a win-win situation, and, probably, that is why
the franchising business model has such a vast popularity in today's world. Could you
somehow imagine that almost every shop today you are buying from is part of a franchise
system? For instance, there are 550,000 franchised outlets in the United States of America,
and this accounts for more than $1 trillion in sales per year. 46 Another example is Scotland,
where franchising is becoming increasingly popular these days. The Scottish market is
recognized as one of the most vibrant in the UK as making a substantial economic
contribution: there are about 2500 franchise units recently, employing 35,000 people with an
annual turnover of 800 million. According to the British Franchising Association (BFA), 90
per cent of all franchisees, including the newest start ups, are in profit, suggesting that
franchising can be significantly more successful than many other start-up businesses.47
The first-priority question the franchisor should ask himself is why he would want to
franchise the business. Let is consider primarily the franchise benefits from the franchisors
point of view.
Financial resources as personal investment from the franchisee who provides the
required capital for each new location. The franchisor does not need any additional injection
of capital in order to obtain a rapid expansion or growth rate: each outlet from the franchise
chain is capitalized from the franchisees pocket, while the franchisor tends to get a return
from the shared profit.48 Moreover, banks and other financial institutions may be more
receptive to a person who comes to them with a proven business idea such as a well-respected
franchise, as opposed to an unproven idea of their own.49
Franchising expansion rate is much more rapid that in case of natural growth of a
new established business. That is a result of domino principle or economies of scale, when
the success of one location is spreading to the rest of the franchise network with an ability to
control and dictate the operating system. Really, while entering the new or distinct markets
45

Purvin R.L.: The franchise fraud. How to protect yourself before and after you invest , (1994), p.44.
Winslow L.: Franchising and Ongoing Support Considered, in Ezine Articles, http://ezinearticles.com/?Franchising-andOngoing-Support-Considered&id=3306802.
47
Hawkins G.F.: Is Small Business Franchising the Way Forward For Scotland?, http://ezinearticles.com/?Is-SmallBusiness-Franchising-the-Way-Forward-For-Scotland?&id=3446858.
48
Holohan B.: How to franchise your business, in Summary prepared for the Irish Franchise Association,
www.holohanlaw.com.
49
Nagy A.: Three Reasons a Franchise Business May Be Right For You, in Enzine Articles, http://ezinearticles.com/?TreeReasons-a-Franchise-Business-May-Be-Right-For-You&id=2527882.
46

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International Franchising as a Method for Business Expansion


the control over the business is not lost, and the franchisor still has a power over the
franchisees operating work, though it is not about minute by minute supervision.50
Unprecedented franchisees incentive to minimize costs and maximize sales is much
higher than any manager in sales outlet has. Let is make a comparison: poor performance
leads to job loss in case of a unit manager, while to the franchisee it means the losses of the
entire franchise together with capital investment.51 So the franchisee is rather motivated than
is committed to prosper actively. It is thus obvious that well-motivated franchisee is for the
direct interest of the franchisor.
Smaller central management system, which contains just a few highly skilled experts
from the different business fields. Thanks to reduced structure, the company can earn a
reasonable profit without becoming involved in high capital risk in the day-to-day
details and problems that arise in the management of small retail outlets.52 As a
result, the franchisor faces with less staff problems because it is the franchisees responsibility
to supervise the staff issues in each individual outlet.
Wider distribution outlets, that is secure and directly tied for the franchisors
products and services. This is particularly the case of so-called wimpy franchise, where each
franchisee has to buy his wimpy as well as certain other items from his franchisor. No other
product that could be obtained anywhere on the market can be described as a Wimpy. Any
attempt to do so would be an infringement of the franchisors trade mark and a breach of the
franchise agreement.53
The potential benefits and opportunities of franchising should be underlined here also
from the franchisee's point of view. The following advantages would influence him in
making the decision of whether or not to run business in franchising manner and, finally, in
choosing of certain franchisor to cooperate.
The proven business concept reduces the risks, saves the investments, and makes it
easier to attract new customers. When investing in a franchise, the franchisee receives a welltasted model and training from the owner. Purchasing a franchise means purchasing more
than just a name; it is about an entire means of doing business. The benefit of an established
name, reputation and goodwill allows the franchisee to start quickly. Launching with a
50

Pirtle L.: Seven reasons to franchise your business, http://ezinearticles.com/?7-Reasons-to-Franchise-YourBusiness&id=2782147.


51
Siebert M.: The quality-control myth, in Entrepreneurs StartUps, (2009), http://www.entrepreneur.com/franchises/
franchisingyourbusinesscolumnistmarksiebert/article202330.html.
52
Mendelsohn M.: The guide to franchising, Oxford: Pergamon Press, (1979), p. 22.
53
See Mendelsohn M., p. 22.

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International Franchising as a Method for Business Expansion


business method that has already proved its consistency, the franchisee can focus on the
improvements. Furthermore, it is a marketing rule that people deal with the products and
services that they are familiar with. When you own a franchise, people know who you are
and what you're selling and are much more inclined to use your business than an unknown
independent.54
The chances of success become much higher as soon as the franchisee will be supported
by the franchisor, who has already incurred most of the risk. The right to use the franchisor's
patents, trade marks, trade names, service marks, trade secrets, know-how, secret processes
etc. - that is what the investor is really paying for.55 By the way, it should be mentioned that
any business is risky, and there is no exception for the franchise business. That is why the
franchisee has to work hard to be successful, because the great rewards will never be
promised for little efforts.56
Support network: built-up support system, mentoring, training and knowledge. When
purchasing a franchise, one of the things franchisee buys is the experience of the franchisor.
The lack of basic knowledge or practical experience can be overcome by the franchisors
training program. The franchisee has the sense of security then and is strongly motivated to
become the owner of a business, which has the franchisors backup and support. While the
franchisee remains an independent entrepreneur within the Franchise Network, building the
business on the proved experience and success could maximizes the value of their
investment.57
In general, an individual franchise package should include assistance in one of the
following activities (Mendelsohn M., 1979, p. 19):

site selection;

preparation of plans for remodeling of the premises, including layout, and


advice in relation to obtain town planning or building regulation approvals;

obtaining finance for the franchise business;

the training of staff;

purchase of equipment and stock;

general business management, which is getting the business open and running
it smoothly.

54

Swanson B.: Examining the Realities of Franchise Ownership, in Enzine Articles, http://ezinearticles.com/?Examiningthe-Realities-of-Franchise-Ownership&id=3436638.
55
Bach C.: Ten reasons to purchase a franchise, in Entrepreneurs StartUps, (2009),
http://www.entrepreneur.com/magazine/ entrepreneursstartupsmagazine/2009/october/203504.html.
56
Mendelsohn M.: The guide to franchising, Oxford: Pergamon Press, (1979), p. 19.
57
See Mendelsohn M., p. 18.

22

International Franchising as a Method for Business Expansion


For sure, in practice this list can be shortened or extended, depending on certain terms of
the franchise contract. Sometimes the researching and developing programmes could be
added to the franchise package as providing the improvement of the product or services and
keeping the business updated. But, anyway, when buying a franchise, the franchisee is getting
involved into a wide network of support for business activity. It looks like the co-operation
between two separate business units: because of the support of the established big business
(the franchisors company), there is a high probability that the small business (the individual
franchise owner) will run well. As a matter of the fact, the franchisor wants his business to
succeed which means greater profits from royalties, as well as the greater attractiveness of the
recognized brand for new potential franchisees. As such, any franchisor with an eye on
success will do everything in its power to provide you with the tools necessary to make your
business grow and flourish.58
Brand recognition is a strong foundation for the any business idea, because that is
what consumers really look for. For companies like Avon and many others, the name backing
or brand awareness is of the crucial importance: customers know the names, trust them and
respond in favourable manner to the suppliers. Your franchise comes with a certain
guarantee that you have an existing customer base, already familiar with and receptive to your
business before you ever even open your doors for the first time.59
The benefit of an advertising, promotional and other marketing activities, which are
handled by the business owner. Most of franchisors have national or, at least, regional
advertising and marketing campaigns to support their franchises. And usually the franchisee
does not bear the direct expense of buying the advertisement time on TV, printing up the
individual flyers for newspapers, etc. Probably, all these costs were already included as part of
the franchise fee. 60 Thus the franchisee has an opportunity of being promoted in nationwide
level by the franchisor and provided with materials for local marketing campaigns.
As soon as the newly franchised business concept becomes an element of the total
franchise network, the franchise owner (franchisee) is provided by the franchisor with the
bulk of the purchasing and negotiating capacity, also with the support of so-called trouble
shooters who will assist in case of some operational problems occur.61 Moreover, a kind of

58

Swanson B.: Franchise appeal - four reasons why franchising works, in Enzine Articles,
http://ezinearticles.com/?Franchise-Appel---Four-Reasons-Why-Franchising-Works&id=3301714.
59
See Swanson B.: Franchise appeal - four reasons why franchising works.
60
Devine J.: Advantages of franchises, http://ezinearticles.com/?Advantages-of-Franchises&id=3215866.
61
See Mendelsohn M., p. 19.

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International Franchising as a Method for Business Expansion


financial assistance or in-house lending can be available from larger franchise companies that
form together the whole franchising chain.
Finally, the franchisee is benefited from the possibility to make the orders for the
products or materials directly from the franchisor as producer, that would be cheaper than
dealing with external manufactures.
The most obvious and crucial benefits and opportunities were mentioned so far. Now it is
visible that the maximum amount of market information and experience which has been
accumulated by the franchisor could be available to the potential franchise owners.
Franchising is quite beneficial also from the social and macroeconomic points as
being a supportive and evolving tool for many of small and medium businesses. 62 The
increasing capital flow into the franchising sector can have a very positive impact on the pace
of the world economy. Consumers may enjoy the better quality of the goods that were
recognized as proven brand. They also can appreciate the higher level of services as the result
of the tough quality control which is necessary for running the franchise business
successfully. Furthermore, the continually expansion within the franchising network leads to
faster and easier access to the goods and services for the customers.
Franchising can be viewed as a real worthwhile investment, especially in the current
economic climate. For instance, interest rates and the buy-in prices became lower in times of
economic downturn. Investing in a business in a down economy is like buying a BMW for
the price of a Ford, says Harry Mathur, interim managing director of Northwestern Mutual in
Lombard, Illinois. During a recession, cash is limited even among the best businesses, and
franchisors that want to build capital to grow or simply to stay afloat are actually discounting
their franchise fees, knowing that when the market turns they will flourish.63
Moreover, the creation of new franchise establishments (ventures, corporations) is
resulted in increasing employment and acceleration of the economys restructuring: human
and business factors as know-how, jobs, capital are used much more effective.
One more effect of the franchise system expansion is the maintenance and support of the
middle-sized enterprises as important levers, which balance the economy and, thus, accelerate
the factors for the economic growth. Trade expansion becomes cheaper, the preferential
position on the marketplace makes trade barriers more transparent. In such favourable
conditions even inexperienced small-sized entrepreneurs are getting the possibility to start-up
the new business and participate on huge markets under the strong name and image of the
62
63

Tamchyna J.: Strun o franchizingu, (2005), p.5; http://www.ifranchising.cz/pdf/strucne-o-franchisingu.pdf.


See Bach C.: Ten reasons to purchase a franchise, in Entrepreneurs StartUps, (2009).

24

International Franchising as a Method for Business Expansion


franchisor. It is even more important today, when the small- or middle-level entrepreneurships
are not able to compete with the huge foreign conglomerates (Tamchyna J., 2005, p.6).

2.2

Weaknesses and Risks of Franchising


Franchise frequently seems as a lucrative investment. Subway, McDonald's, Starbucks

Coffee, all successful brand names we are familiar with, are some of the most popular and
well known franchises examples. But what about the other thousands, not so popular, cases?
Unfortunately, not all franchises can be successful and they do come with risks often higher,
especially in regards to capital invested. Franchisees success is far from guaranteed:
entrepreneurs choosing the franchising way to open a small business have different
complaints because they are ultimately bound to a long term deal with their franchiser.64 No
business relationship is without conflicts. Franchisee-franchisors disputes mainly arise from
allegedly noncompliant, improper, or inaccurate disclosures made by the franchisor before a
franchise agreement is executed... from real or perceived encroachment or failure of the
franchisor to support a franchisee... and from termination of a franchise by the franchisor.65

The purpose of this subchapter is to highlight the particular disadvantages of the


franchising for both franchisor and franchisee, and demonstrate the negative franchise effect
on economy in general. The most typical reasons for the contractual complaints also can be
found below.

An economic influence on franchising industry could be represented not only by the


positive effects which were specified above. Franchise companies continue to deal with the
challenges posed by the new economy. From the one hand, franchisors provide consumers
with the optimum choice of good and services for the lower prices. This business concept is
truly more efficient and more competitive, but it is hard for the non-franchise businesses to
compete with them. So, the downside here is the limited competition which is dictated by the
franchise monopolists.

64

Haiber R.: Franchise Owners' Biggest Complaints With Their Franchisers, http://ezinearticles.com/?Franchise-OwnersBiggest-Complaints-With-Their-Franchisers&id=3487057.
65
Einbinder & Dunn, LLP webportal ,Common franchise disputes, http://www.ed-lawfirm.com/franchise-disputes.php.

25

International Franchising as a Method for Business Expansion


In times of the economy recession, when lots of individuals loss their job, franchising
ensures a logical 'job replacement'. Job loss can be viewed as an opportunity to move into
ones own business as far as so many industry segments now available in franchise form.
Small businesses offer the best opportunity to promote a strong economic recovery by
sustaining and creating jobs, but more needs to be done to promote capital access to create
new businesses and to keep existing businesses growing, the International Franchise
Association says. It is for fair, that small businesses are struggling to access the capital needed
to stay open, pay debts, maintain payroll and expand operations. The situation is worse for
the first time entrepreneurs who is just starting with personal business. If to talk by numbers,
the International Franchise Association released recently that a shortfall of $3.4 billion in
lending to franchise businesses in 2010 will result in 134,000 jobs not created and 13.9 billion
in economic output lost. 66
One more obstacle to franchise successfully is the bureaucratic tendency within the
franchising system. The more scaled the franchise project is, the wider then the operation
network, which means the co-operation of plenty of institutions and individuals within one
franchise chain. In practice, a franchising business proves a lot of bureaucracy. Not just
because of all the administration procedures involved, but because of a certain hierarchy of
partners and functions which are decentralized, especially in case of sub-franchising. The
bureaucratic tendency appears clearly in certain kinds of franchise industries. For instance, in
construction franchise, where labourers are obviously involved in a dangerous occupation, the
higher insurance costs and strict health and safety regulations are required.

It is time then to move to the main heroes of any franchise story, franchisor and
franchisee, and follow the drawbacks they are mainly faced with. The most typical and crucial
reasons for the franchisors failure can be composed from the triangle: concept, capital,
management. Let is consider each of them.
No concept is beyond failure. Franchising always starts with the concept. As far as the
competition among franchisors is huge, each of them wants to be the first on the market and,
therefore, has to offer something unique for the consumers. In such a situation, the franchisor
should, at least, keep the confidence that a properly trained and supported franchisee will
achieve such a rate of return that is corresponding to the risk. It should be taken into account,

66

International Franchise Organization: Lending Shortfall Predicted to Slow Job Creation in 2010, in Frachising world,
(2009), http://www.franchise.org/franchise-news-detail.aspx?id=49356.

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International Franchising as a Method for Business Expansion


that any market changes over time, and the relevance of a concept within a certain market area
could be also modified. How to avoid such problems? While planning the development of
corporate locations franchisors, probably, have to carefully evaluate their risk exposure and
focus mainly on unit-level profitability, because only the concept, which works for everyonefrom the consumer to the franchisee, will prosper.67
Start-up capital is the other crucial point. New franchisors face with significant legal
and development costs associated with the realization of their franchise ideas. The initial
working capital, such as for the personnel and franchise marketing, should be financed by the
franchisor from the very beginning. Moreover, some budget could be required to get the local
permissions to run franchise outlets. It happens quite often, that local officials and even city
councils are somewhat hostile towards franchising companies who wish to consolidate its
positions on a definite territory. They don't want to see all the brand names and plastic signs,
they want to keep their community quaint, and they like to see local small businesses people
who support the community rather than franchised outlets.68
Next and, probably, the most significant reason for the lots of franchise failures is
poor management. Lack of vision systems, standards, motivating, communication,
measurement, accountability and enforcement will destroy any business, no matter how good
the concept and no matter how well capitalized the company.69 So, any deviation from the
quality standards could affect the franchisor's brand as well as the consumers confidence to
definite goods or services. It should, thus, become a key focus for both franchisor and
franchisee to maintain an appropriate quality of what is franchised. Unfortunately, but fact,
that most people associate franchising mainly with fast food industry. This leads to confusion
when the ultimate quality of the product (which can be judged as low) with the quality of the
operation. The fact of the matter is, McDonald's is among the world's most quality-oriented
brands, but the value proposition and the price point aren't appropriate for steak and lobster.
Quality is not about what's on the menu; it's about consistency of the operation.70

67

Siebert M.: Why Do Franchisors Fail? Keeping your concept, capital and management in check will keep your new
franchise from going bankrupt, (August 26, 2008),
http://www.entreprenuer.com/franchises/franchisingyourbusinesscolumnistmarksiebert/article196676.html.
68
Winslow L.: Anti-Franchise Sentiment Often Misguided, in Enzine Articles, http://ezinearticles.com/?Anti-FranchiseSentiment-Often-Misquided&id=3345570.
69
See Siebert M.: Why Do Franchisors Fail? Keeping your concept, capital and management in check will keep your new
franchise from going bankrupt.
70
Siebert M.: The Quality-Control Myth. Use motivated and committed management to maintain the value of your franchise
system, (June 18, 2009),
http://www.entreprenuer.com/franchises/franchisingyourbusinesscolumnistmarksiebert/article202330.html.

27

International Franchising as a Method for Business Expansion


Quality control is, in fact, the commitment that should be naturally followed, and for the
franchisor it comes at a price. Therefore, it is quite difficult, but necessary for the successful
franchisor, to force franchisees to keep all the operational standards (for instance, style and
decor of the premises) in accordance with the franchise contract and in a manner relevant to
the brand image of the Franchisor. To overcome such a difficulties franchisor can be assisted
by so-called trouble shooters, who were already mentioned. They are targeting to help with
identifying problems, keeping franchisees on their toes, but doing it in a constructive way.
Franchisee as a future competitor. Franchisor should be aware of the possibility to
compete with his franchisee, when the real partner may become a competitor in the future. If
the franchisee tends to be successful in running franchise, and feels himself much more
independent than before, he might expect to earn more. Being already trained and experienced
enough, the franchisee is able to set up a rival franchise network. To protect the franchisor in
this case the franchise agreement should specify certain restrictions on future competition.
However, the protection may not be guaranteed in a full manner. For instance, Irish
competition law is so strict that one can in reality only limit a Franchisee to a non competition
clause for a period of up to only one year after the Franchise has come to an end.71 So, after a
one year of a franchise been expired, accordingly to Irish law provisions, the franchisee can
freely establish a competing business chain. Simply said, the franchisor never knows if he is
bringing up his future rival or faithful partner.
The lack of trust and incompatibility between the contractual parties is, probably, the most
appropriate reason for the franchisors failure.72 But what are the cardinal drawbacks the
potential franchisee may face with? Let is go through them.

Lack of autonomy and imposition of control are ones of the biggest drawbacks as the
franchisee will never have ultimate control over the business, but, instead, need to comply
with to their rules, regulations and requirements stated by the larger franchise company. In
this situation the franchisee may not be provided with the total freedom as an entrepreneur
may: variables such as wages, hours of operation, suppliers are restricted to the freedoms the
company system allows.73 The liability to stay within franchise guidelines is going to limit
greatly the franchisees flexibility in the day-to-day business operations. It is all about the
71

See Holohan B.: How to franchise your business.


Mendelsohn M.: The guide to franchising, Oxford: Pergamon Press, (1979), p. 23.
73
Mossop M.: The 5 Major Myths of Franchising, in Enzine Articles, http://ezinearticles.com/?The-5-Major-Myths-ofFranchising&id=3039643.
72

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International Franchising as a Method for Business Expansion


disability to follow own business plan, but the obligation to follow a business plan the
franchisor has already set up. Playing a franchise game the franchisee must abide by the
companys rules.74
From the franchisors standpoint, such a control is necessary to regulate the products
quality and to ensure brand uniformity across the entire range of their franchising territory.
Therefore, the franchisor requires that standards are maintained so that the maximum benefit
is derived by the franchisee and indirectly by the whole franchising Network from the
franchisee's business activity. This does not mean, for sure, that the franchisee has no ability to
make any personal contribution to franchise at all.75 But for the franchisee, who is paying for the
right to be a business owner, it has even less legal independence than most employees have.
Franchisor standard operating procedures manuals usually dictate every minute detail of the
business operations - from the size and colour of the signs to the method of wiping the tables
or the proper way to wear a uniform.76 Anyway, by signing a contract, franchisee
automatically agrees in advance that the franchisor is any time free to modify unilaterally the
system operations. Moreover, the franchise agreement could limit the franchisees right to sale
or transfer of the business. This seems as a clear restriction on the Franchisee's ability to deal
with his own business and sell it when and to whom he wants.77
In the meantime, properly structured franchise organization should provide all business
partners with the regular and active collaborations. Franchisees tend to be the equal partners
with the company. So, logically, if the franchise owners have to invest on various policies
such as marketing spend, new products or expansion into new markets, they should be able
then to influence on important decisions regarding the future direction of the central company.

High start-up costs, required to buy and then run the franchise, represent, probably,
the most troublesome point for the franchisee. Franchise price includes often a high upfront
fee for the right to use just the Franchisor's trademark and name, and also royalties that must
be paid out of franchisees gross income for the entire time of running a franchise (as the
percentage of the gross revenue; the nation average is around 7 per cent, though the

74

Swanson B.: The downside of Franchising, in Enzine Articles, http://ezinearticles.com/?The-Downside-ofFranchising&id=3056809.


75
Mendelsohn M.: The guide to franchising, Oxford: Pergamon Press, (1979), p. 20.
76
Purvin R.L.: The franchise fraud. How to protect yourself before and after you invest , (1994), p.8.
77
Some states impose a defined good cause substantive standard that a franchisor must meet before it may lawfully deny a
transfer request. Other jurisdictions provide that a franchisee may transfer the franchised business and franchise agreement
provided that the transferee satisfies the reasonable current qualifications of the franchisor for new franchisees. See
Einbinder & Dunn, LLP webportal ,Common franchise disputes.

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International Franchising as a Method for Business Expansion


percentage charged varies from franchisor to franchisor).78 So it is required to give a certain
amount of sales to the franchisor every month, does not matter if the month will end up with a
very small amount of profit. The franchisee also has to pay some ongoing fees such as those
for marketing or advertising. And finally, franchisee can discover that the advertising fee goes
for the promoting the brand or for an attraction of new franchisees, but not to advertising his
business, that is completely unpleasant to realize.
As a rule, all possible fees should be outlined initially in franchise contract. The additional
royalties could cover advertising, services and support, marketing, inventory and other
equipment that the franchisee needs. Some forms of the franchise agreements include the
advertising fund as a separate fee, which is paid on a quarterly basis, and go towards nation
wide or regional marketing, promotion and ads for every one under the umbrella of that
particular franchise.79 In practice, most franchisors want these money as fast as possible, in
good times or in bed. Moreover, they have the right for some portion from the franchise
revenue. To be more precise, it is frequently stated in the franchise agreements that the
franchisors

have

right

to

draft

funds

from

franchisees

bank

account.80

So, to put it mildly, buying a franchise is not cheap. Investing in a brand-name franchise is
going to set the investor back somewhere in the hundreds of thousands of dollars: investing in
a potentially lucrative business quite a massive sum of money in something with such an
uncertain future. Even royalties for use of an ordinary trademark and ongoing fees can be still
a significant sum of money, which is sometimes nonrefundable, especially in the critical first
year of developing a new business. But, as the royalty fees are paid as a percentage of
revenue, it is in the best motivation for the franchisor to make its franchisees as profitable as
possible.
Anticipating competition by the franchisor - one of the most common complaints
from the franchise owners. It is quite naturally for small businesses to compete with each
others. But it becomes risky for the franchisee, if the franchisor is sharing the territory with
multiple chains inadmissibly close to franchisees ones and, thus, represents the real
competition.81 For instance, ice cream franchise might sell its products to a supermarket,
78

Yerxa V.G.: What is a disadvantage of a Franchise? Franchises vs home-based businesses, http://ezinearticles.com/?


What-is-a-Disadvantage-of-a-Franchise?-Franchise-Versus-Home-Based-Businesses&id=3494036.
79
Swanson B.: Understanding franchising fees, in Enzine Articles, http://ezinearticles.com/?Understanding-FranchisingFees&id=3436585.
80
Stacey D.: Franchising May Not Be the Wave of the Future, http://ezinearticles.com/?Franchising-May-Not-Be-theWave-of-the-Future&id=3791137.
81
See Haiber R.: Franchise Owners' Biggest Complaints With Their Franchisers.

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International Franchising as a Method for Business Expansion


causing competition for its franchisee(s) in the neighbourhood that the franchisee did not
anticipate. Or, with the advent of the Internet and e-tail, a franchisor might sell the franchise
product online. 82 This situation could be legally regarded as breach by the franchisor of an
implied covenant of good faith and fair dealing, if an agreement does not contain the
franchisors right to sell franchise products in either manner. Indeed, it is reasonably useful to
balance all the possibilities and restrictions for the specific franchise territory before signing
any franchise document.
Outlets cannibalization is one more challenge that should logically follow unexpected
franchisors competition. Usually the franchise chain operates within a specific geographical
territory and each outlet can be quite different to another. As a result, the types of business
and the demographics of a particular area may not have the same advantages to all
franchisees.
From the one hand, the franchisor needs market domination, and, thus, territories need to
be close together. But being placed too close to others, the franchised outlets then will
cannibalize sales off each other - in that case no one wins. From the other hand, if a franchisor
grants exclusive territories too far apart, there will be gaps with no service and customers
would have to travel too far for a brand name to buy from a franchisee.

83

So, looking at the

exclusive franchise territories, the market mix, demographic segment, the population density
and the competition should be taken into consideration.
In the Franchise Disclosure Documents the phrase in your protected franchise territory
or something similar, can be usually found along with a stipulation of the granted franchise
for X amount of dollars. In reality, the exclusive franchise territories sometimes are limited
by the door of the outlets. It can cut franchisees sales when the franchisor starts selling
products with the same brand name, let is say, in a shopping centre with a grocery store that
sells the same products next door. Such a franchisors behaviour should be regarded as
violating the franchise agreement.84 Unfortunately, cannibalizing tends to be a common
practice in modern franchising, resulting in numerous litigations. But similar, any independent
entrepreneur can set up a business that competes with the franchise outlet across the street.
And, after all, no franchisor can protect his franchisees from such competitors, otherwise this
would be considered as predatory competition, that is in violation of antitrust laws.
82

See Einbinder & Dunn, LLP webportal ,Common franchise disputes.


Winslow L.: How does a franchisor pick the territories?, in Enzine Articles, http://ezinearticles.com/?How-Does-aFranchisor-Pick-the-Territories&id=2161742.
84
Winslow L.: How protected is my franchise territory if i buy a franchised business?, in Enzine Articles,
http://ezinearticles.com/?How-Protected-is-My-Franchise-Territory-If-I-Buy-a-Franchised-Business&id=3299727.
83

31

International Franchising as a Method for Business Expansion

Anticipated changes in franchisors policy may influence on franchisees profitability;


such franchisors unilateral modifications as re-branding or renovating the products can lead
to franchisees losses. For example, if the franchisor decides to exclude the certain goods or
services from the chain, it will negatively affect on the franchisee's profit which will decrease.
Certainly, the franchisor could also make some policys mistakes, as for deciding to innovate
in business which would be unsuccessful. All these circumstances could be resulted in the
financial detriment of the Franchisee. Moreover, the good name of the Franchise business or
its brand image may become disreputable for reasons beyond the control of the Franchisee
(Mendelsohn M., 1979, p. 21).
Difficulties may appear as well in the quality of the franchisor who may not be able to
maintain ongoing services or, in fact, may not be providing them at all. It is quite risky, that
there are plenty of franchisors who have never developed a proven success formula. Too
frequently, companies launch into franchising without adequate preparation or an established
track record. Often franchising is used as a growth method instead of planned growth.85

Finally, the franchisee can bear the risk of domino (coattail) effects. It happens quite
commonly in franchising, especially with some smaller franchises. Domino effect
automatically leads to the same consequences for the whole franchise network. So, if a
number of some outlets fail, the effect can break the rest of franchises as well.86

It seems, from the very first view, that all the franchisee need to do is follow the franchisors guidelines to avoid the trial-and-error mistakes, faced by most inexperienced business
people, so to overcome all the operational and marketing drawbacks. And while many
believes that the franchise business tends to be stable and profitable, it must be always
considered, that there are still lots of fraudulent franchise companies which are not
professionals at all. However, even dealing with the honest franchisors, an investor can not
be completely insured against all the franchising risks.
It is a wrong assumption that the purchase of a franchise and payment of all necessary fees
will guarantee a full protection to the franchisee. The Franchise agreement is designed mainly
to protect the franchisor. Therefore, you, as a franchisee, must be aware of all rights and

85

Purvin R.L.: The franchise fraud. How to protect yourself before and after you invest , (1994), p.9.
Vower D.: The advantages and disadvantages of owning a franchise, http://ezinearticles.com/? The-Advantages-andDisadvantages-of-Owning-a-Franchise&id=3902838.
86

32

International Franchising as a Method for Business Expansion


limitations which are fixed in the contract you sign. Make sure then, that the given payment
terms are accurate and that there are no additional costs which are not listed. The contractual
issues like duration of the agreement, as well as its termination conditions, must be considered
too. And if the franchisee decides suddenly not to deal with a franchise anymore, but the
contract was already signed, he has to complete all undertakings before leaving the business.
Not without a reason, the American courts have agreed that there is no fiduciary liability of a
franchisor to its franchisees, and stated the franchise agreement as arm's length for business
transactions.87
The breach of the franchise agreement by violation of the contractual commitments
could have trouble consequences, such as losing the business and all assets invested, for both
parties. Various misunderstandings and violations could take, finally, quite serious forms of
numerous court litigations. To be more precise, let is have a look at the most popular
complaints from both sides perspectives.
After a heap of materials regarding different franchising suits was examined, I came to the
conclusion that the most common reasons for the franchise disputes cad by generalized into
two principal groups: so-called earnings claims and quality claims. Indeed, the group titles,
done by myself, are not so accurate, but this is my personal attempt of classification.
First of all, earnings claims, which could be represented by both contractual parties.
This mostly refers to the information given to a prospective franchisee by the franchisor or its
agent from which a specific level or range of actual or potential sales, costs, income, or profit
from franchised or non-franchised units may be easily clarified.88 Such information can be
submitted either as actual financial statement or as the project of the future performance of the
certain franchising units. Furthermore, under some national legislation, franchisor is required
to represent all the costs the potential franchisee will need to start-up a franchise. That is other
particular claim named as misleading initial investment costs.89
Franchisee may claim also against an advertising fund manipulation, which constitutes a
breach of the franchise agreement. It should be proved then, that advertising funds were used
by the franchisor not for the intended purpose, but instead for general corporate needs.

87

See Purvin R.L.: The franchise fraud. How to protect yourself before and after you invest , (1994), p.7.

88

For instance, in New York an earnings claim is any information that a franchisor seeks to impart to a franchisee that
states, suggests, or implies what sales, income, or profits a franchisee can derive from the operation of a franchised business.
See Einbinder & Dunn, LLP webportal ,Common franchise disputes.
89
See Einbinder & Dunn, LLP webportal.

33

International Franchising as a Method for Business Expansion

As for the franchisors earnings claims, he might seek judicial intervention if:

franchisee fails to pay royalty, advertising, and/or marketing fees;

franchisee does not disclose his true gross income in order to minimize the franchise
fees amount based on a percentage from the sales, etc.

Quality claims express another, the wider, category of contractual complaints, mainly
associated with operational and supporting activity, as well as duration and termination issues.
So, the franchisor, for example, might sue franchisees who do not follow the system
standards. Moreover, franchisor could complain against a terminated franchisee that continues
to use a franchisors trademarks or brand name. It is about unfair competition or even
trademark infringement, which leads to the consumers confusion as well as damages the
reputation of the franchise company. To avoid this, franchisor should enforce his intellectual
property rights by the court decision.
Franchisees quality claims involve usually the franchisors failure to complete the
promised training or support, encroachment90, and, finally, unexpected competition, which
was particularly explained above.
To crown it all, let is move to the last, but not the least, from the legal point, contractual
statement - arbitrary franchise termination or non-renewal. When the franchise agreement
expires and it does need to be renewed, usually this situation is governed by state law.
Generally, franchise length covers the period of about 10-20 years, and the risk, that franchise
agreement will not be renewed, always exists. If franchisee fails to pay the required fees, or
can not meet the standards of operation, the franchisor is eligible to cancel the agreement.
Relationship statutes forbid termination or non-renewal of a franchise except for good
cause (sometimes termed reasonable cause or just cause), often defined as the failure by
the franchisee to comply with any lawful provision of the subject franchise agreement after
being given the opportunity to cure that failure.91 Nonetheless, state laws typically determine
a minimum advance notification of franchise termination or non-renewal, which allows a
franchisee to correct defaults on time and thereby avoid termination.

Many of the advantages and disadvantages have been touched upon in the previous two
subchapters. And the actual list is not exhaustive. My intention here was simply to highlight

90

Encroachment is the term for the practice of a franchisors selling franchises to other franchisees too close to the units of
an existing franchisee. See Einbinder & Dunn, LLP webportal.
91
See Einbinder & Dunn, LLP webportal ,Common franchise disputes.

34

International Franchising as a Method for Business Expansion


the most typical opportunities and risks of the franchise model of doing business so, that
readers might make a more balanced, informed and intelligent decision concerning their likely
entrepreneurship.
As far as it was mentioned, there are plenty of upsides and downsides that international
franchising can offer. The truth is that for various franchises and various types of industries,
that could be franchised today, each one is going to be quite different. For sure, there are
some key factors that go into being a successful franchise owner. But, again, the success
depends mainly on the franchise itself, the contract content, and what rules and stipulations it
may provide in fact.92
Practically, modern franchise contracts often exceed 50 pages of minute details
supplemented by volumes of operating manuals that bring into effect complete control over
the franchise relationship. 93 So to speak, there is a lot of paperwork to fill out, which could be
found in franchising. It is, therefore, vital that each potential franchise player, either
franchisor or franchisee, could weigh up all possible Pros and Cons and consider all the
contractual insights before venturing to enter into a small business franchise.

2.3

Some steps before making a franchise decision


Franchising a business internationally seems to be a proven way to rapid expansion.

But, meanwhile, handling a franchise, especially in todays challenging economy, does not
grant automatically the ticket to success. So, the current data from the International Franchise
Association shows, that of the 105 companies that started selling franchises in 2008, more
than 40 had not reported the sale of their first unit by the end of 2009. 94
Frankly speaking, it is a quite discourage task to purchase a franchise, because the buyer
should consider then numerous issues, such as industry perspectives, brand awareness,
competitors, location, finance, etc. Personal experience, skills and lifestyle must be
considered as well. There is also lots of legal paperwork to study to verify that the ongoing
business is in compliance with federal and state laws regulating the franchise industry.

92

Swanson B.: The franchise advantages and disadvantages, in Enzine Articles, http://ezinearticles.com/?Franchise-101--The-Franchise-Advantages-and-Disadvantages&id=3436634.
93
See Purvin R.L., p.7.
94
Tice C.: Franchise Your Business in 7 Steps. A guide for becoming a successful new franchisor, (February 12, 2010),
http://www.entrepreneur.com/franchises/franchisezone/howto/article204998.html.

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International Franchising as a Method for Business Expansion


Take this process easier, the present subchapter will guide the reader to the important steps
before making a faithful decision to become a probable franchisee.
From the very beginning, the decision to deal with a franchise business should be based on
several basic understandings:
understanding of the advantages and disadvantages of franchising in general;
understanding of the target market;
understanding and evaluation of a particular franchise.
As far as all the possible Pros and Cons of franchising were analyzed in details in the
previous two subchapters, let is continue with the others necessary areas to be discussed.
And the first point here is the SWAT (Strengths, Weaknesses, Opportunities and Threats)
analysis as a marketing tool, which can help greatly in choosing a niche in particular sector
for the potential franchise. To ensure the long term success of your new franchise its a good
idea to get into the habit of performing a SWOT analysis as this can help you focus on a
specific goals or issues your franchise faces.95
No business can exist in isolation. That is why every potential franchise owner must
become aware of the business competition, business threats and risks an enterprise is likely to
face. Setting up a new franchise means to have a look carefully at a number of factors. Not
only marketing, but generally a business and planning tool, the SWOT analysis classifies the
internal aspects of the company as strengths and weaknesses, and the external situation factors
as opportunities and threats. Such a wide-range outlook, including a new market research,
evaluation of a new business competition in selected sector, allows the investor to put any
new business threat into the franchise context. So, by means of SWAT analysis various
situations arising in franchising entrepreneurship could be explored.
Below is just an overview of how the SWOT analysis can be used in order to evaluate the
individual potential of becoming a franchisee.

95

Business Franchise portal: SWAT Analysis for your franchise, http://www.abusinessfranchise.co.uk/swot-analysis-foryour-franchise.html.

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International Franchising as a Method for Business Expansion

While a new franchise businesses may have multiple strengths, try to focus just on the

key factors that you believe will make your franchise a success. The most important here is
the market research within the business competition, so imagine the franchises actual
strengths in the context of the wider market sector proper to your franchise.96

Look carefully then at the weaknesses a particular franchise may have. There is no

business that is completely perfect. But, considering the weaknesses, you can manage any
trouble situations the proposed franchise could face with.

Analyzing the core opportunities of a certain franchised business could bring the huge

dividends in the future as you will have a clear guideline to the market your franchise is going
to enter. Market research will display if the perceived opportunities are real or not.

No business is ensured from threats, which can take various forms: business, political,

social, legal risks, etc. Probably, you should pay attention mainly to the business threats,
especially during the initial stages of business planning.
Any well-formed franchise selection starts with the personal audit. Making the general
research at first, the potential investor may use whatever tools (Internet, magazines, etc.) to
find about the industry he is interested in to franchise. The selected industry has to meet the
franchisees personal needs. There are approximately 85 different industries using franchising
96

See Business Franchise portal: SWAT Analysis for your franchise.

37

International Franchising as a Method for Business Expansion


today. To begin with an industrys selection and examining each of them, the franchisee
should take into account not only the franchised competition within the certain industrial area,
but the established company owned chain operations as well.97
In case of deficit of experience with a franchising, the potential investor has first of all to
investigate entirely the market conditions in order to understand the marketplace, in which
his business will be competing. There are certain factors that make an importance here.98
For instance, it does matter how strong a brand is, especially if the target community will
not support the business. Moreover, the investor should consider the community scale, as well
as the degree of competition that the new business will face with. It is very useful also to
understand the community in terms of demand, because not all franchises do well in all
geographical areas, and the wrong location may even bring the business to failure.
Once the list of the appropriate industries was created, it is time then to begin with an
analyzing of the companies within those industries. It is obvious, that before investing into a
franchise operation, the deep research inside a specific company is required. Usually, the
basic information about the company and its franchise opportunities can be found on the
franchisors web pages. Contact every franchisor, you are interested in, for any additional
information available. Your interest should not be limited to how much Return on Investment
could be possible under the best circumstances. Compare the companies services, as well as
their fees. For example, if the franchise fees are high but royalty fees low, this franchisor,
probably, is more interested in selling their franchises than having continual revenue to
provide you with services.99
A complete franchisors research should involve also an investigation of the company's track
record, both with franchise owners and in the market. Take a look, for instance, at how the
brand growth over its history. If the brand still offers exactly the same products and services
as it did initially, then it is a risk of loosing its competitiveness in the marketplace.100
So, to summarize all the information the potential franchisee must consider during the
research, the issues of the primary interest should include the following: profitability and
return on investment; proven product and service; operating systems; training; marketing;
expansion plans (whether the franchisor more interested in worldwide expansion or individual
97

Seid M.H.: Franchise or business opportunity? Making your choice, (posted 2008), Franchise update network,
http://www.franchising.com/articles/48/
98
Sinsara K.: Being smart about franchising, in Enzine Articles (2009),
http://www.ezine-articles.co.uk/Art/150703/9/Being-Smart-About-Franchising.html
99
See Seid M.H.: Franchise or business opportunity? Making your choice.
100
See Sinsara K.: Being smart about franchising.

38

International Franchising as a Method for Business Expansion


franchisee success); field services; research and development; franchisee relations; franchise
system goals and ability to support the goals; and of course the financial health of the
franchisor.101
By the way, all the answers will be obtained either from the personal meetings with the
franchisor or contact with their franchisees. The best way is to meet with the franchisor
personally, because the franchisee then has a possibility to get a copy of the franchise
disclosure documents - valuable material for each franchise relationship. It is an obligation by
the franchisor, mandated by most of franchise laws, to provide the other party with all the
essential documents before signing the franchise contract.
The franchise disclosure document (or Uniform Franchise Offering Circulars - UFOC) is of a
crucial importance as it provides the franchisee with a wealth of information including the
experience of the franchisor and its staff in the business being franchised; the system's
litigation and bankruptcy history; the cost of opening a franchise, as well as the initial and
continual fees; an explanation of the relationship and responsibilities of the franchisor and
franchisee together with financial information on the franchisor; the number of franchises
opened, closed and most importantly, a list of existing franchisees.102 Therefore, it is in
franchisees interest to obtain legal advice on these documents, as the specialist could find
some specific financial or contractual insights that have not been considered.103 So, ask the
attorney or accountant for advice on franchising, because such a unique area with a
complicated legal regulation requires the participation of a well- practiced lawyers.

It could be, possibly, seemed that the obvious franchisees choice has to be done in
favour of well-established company with a large chain of franchisees. But do not forget that
the older systems are less flexible; so, the new opportunities to enter the market with
innovations may not be possible for such systems, as it is possible for newly-established
franchises.
Keep in mind also that most franchise agreements are typically concluded for 5-10 years.
During this period the other market entrants and competitors will appear. So, ask yourself in
10 years, if this will be still the kind of business where people do need a product?

101

See Seid M.H.: Franchise or business opportunity? Making your choice.


See Seid M.H.
103
Swanson B. : Straight Talk About Franchises, in Enzine Articles, http://ezinearticles.com/?Franchise-101---StraightTalk-About-Franchises&id=3436690.
102

39

International Franchising as a Method for Business Expansion


In conclusion of this Chapter, it should be noted again, that any prosperous business is
based on trust and co-operation between the both parties - Franchisor and the Franchisee. In
spite of many franchises fail, a lot are still successful. Franchising success formula contains
the following elements: Successful Franchisees + Successful Clients = Successful Franchise
Opportunity. This equation is simply proved by time.
So, should the franchising be considered as business option for a company? The answers
may vary depending on each company's objectives, values, financial resources. Companies
that decide to grow by expansion retain the total ownership getting revenues increased. On the
other hand, those companies have to give up some level of control and flexibility.
And, what about the franchising from franchisees perspective? Comprehensive research
helps them create a broader view, which can project likely outcomes and trends in the future.
These projections are the basis for making an intelligent decision about investing in a
franchise. Therefore, the wise franchisees critically examine the franchise possibilities in the
certain marketplace before making such a profound strategic decision.104 Frankly speaking, it
is really unwise to buy a franchise of something that is in vogue today, but might be out of
favour tomorrow. So, please, keep in mind, that all the prospective investors should deeply
investigate any franchised industry, obtain all the corresponding disclosure documents
available, and seek expert consultation before making any investment decisions.
I strongly believe that all, which were mentioned above, will provide the reader with an
understanding of franchising and give him a step by step approach to select the right
franchise. The next Chapter, which is more practical, will evaluate industry categories, the
recession-resistant segments and identify individual franchise companies.

104

Siebert M.: Why Do Franchisors Fail? Keeping your concept, capital and management in check will keep your new
franchise from going bankrupt, (2008),
http://www.entrepreneur.com/franchises/franchisingyourbusinesscolumnistmarksiebert/article196676.html.

40

International Franchising as a Method for Business Expansion

Chapter Three: Franchise Overview


In spite of troubling economic times reflecting on the world employment rate, banks
credit availability and general market situation, or maybe because of it, franchising is still
booming today, with numerous of people looking daily into franchise opportunities. Everyone
is acquainted with the great and successful franchises names, but is hardly recognizing that
almost every store they purchase from these days is part of a franchising chain. The statistics
shows that roughly three thousands various franchise brands operate in more than two
hundreds different lines of business.105 Let is consider Scotland, for instance, where
franchising is becoming increasingly popular. The Scottish market is recognized as one
making a substantial and growing contribution to the UK economy. There are now
approximately 2500 franchise units north of the border, employing 35,000 people and turning
over 800 million annually. 106 Moreover, as the British Franchising Association estimates,
90 per cent of all franchisees, including the newest start ups, are in profit, that proves the
franchising success is stronger than many other start-up businesses have.
As a matter of fact, there is very little that cannot be franchised. Why? Because of any
business, being run under management, is possible to being franchised. However, this does not
mean that any such business will franchise successfully. That is why the process of searching
for relevant industry and company, which is the next stage after making a decision to
franchise, should be of crucial importance. Evaluate industry categories first, review a master
list of franchise opportunities (which can be found, for instance, in Entrepreneur Franchise
500 published each January) and evaluate each individual industry group. Focus on the
recession-resistant segments, that will continue to do well regardless of the state of economy
(for example, damage restoration, fast food, senior care or hair cutting). Identify then the
individual franchise companies and select the ones that will have territories available in your
desired area and that seem most attractive to the potential business. 107

105

Instant Tax Services: Blog Fast Cash Chat, (October, 15,2010),


http://www.instanttaxservice.com/blog/category/franchising/.
106
Hawkins G.F.: Is Small Business Franchising the Way Forward For Scotland?, http://ezinearticles.com/?Is-SmallBusiness-Franchising-the-Way-Forward-For-Scotland?&id=3446858.
107

Elgin J.: 10 Steps to Buying the Right Franchise, (2008),


http://www.entrepreneur.com/franchises/buyingafranchisecoachjeffelgin/article198992.html.

41

International Franchising as a Method for Business Expansion


It is time then to look at the various categories of franchised industries in a little more details,
taking into account the official statistics and ratings.

3.1

General Statistics
The right selection the foreign partner is essential for international franchising. It is

very important decision to join forces with a right company or individual as establishing the
ground for the brand expansion and for a sustainable franchise business relationship in any
particular international market. It could be very promising, but challenging task to expand.
That is why before starting an expansion process, a strategic plan of what industries are going
to be franchised must be created. A person concerned should consult, probably, with
international franchise experts and lawyers, or seek an advice of the best-known franchising
organizations, such as International Franchise Association which is offering various options to
promote (trade missions, international expos, etc.).
The International Franchise Association (IFA), founded in 1960, is the worlds oldest and
largest organization representing franchised small-businesses in almost 80 diverse industries.
As being a worlds premier association, it protects, reinforces and promotes franchising as a
responsible method of doing business.108 Its Code of Ethics works as a framework for the
implementation of best practices in the relationships of IFA members - more than 1,300
franchise systems, 10,000 franchisees and more than 500 firms that supply goods and services
to the industry.109
The IFA promotes mostly the interests of the U.S. franchise industry, which is
contributing considerably to the economic situation worldwide. To show this impact, the IFA
Educational Foundation, an informative and researching centre of the association, released the
second

annual

Franchise

Business

Economic

Outlook

2010,

prepared

by

PricewaterhouseCoopers (PwC)110 especially for the International Franchise Association. This


document forms the basis for the IFA awareness campaign and projects key national-level
economic measurements of business format franchises. The report presents the forecast from
the establishment, employment and economic output points for 10 business lines, excepting

108

International Franchise Association Membership Handbook, (2007), p.4,


http://www.franchise.org/uploadedFiles/Franchise_Industry/Member_Portal/Members_Content_and_Downloads/Membershi
p%20Handbook%20web.pdf.
109
Wikipedia, http://en.wikipedia.org/wiki/International_Franchise_Association.
110
"PricewaterhouseCoopers" (PwC), one of the largest professional services and auditing firm, refers to the network of
member firms of PricewaterhouseCoopers International Limited (PwCIL), http:// www.pwc.com.

42

International Franchising as a Method for Business Expansion


some kinds of distribution franchises (automotive and truck dealers, gasoline service
stations, beverage bottling). Perhaps, the major part of this subchapter is resourced from the
analytical estimations, numbers and statistics of Franchise Business Economic Outlook 2010.
Here are 10 business lines in which franchising is prevailed, according to PwC
economic outlook111 (for the detailed composition of each line see Annex 1):

Automotive
Commercial and Residential Services
Quick Service Restaurants
Table/Full Service Restaurants
Retail Food
Lodging
Real Estate
Retail Products and Services
Business Services
Personal Services

For each of these business lines, the projections include forecasts for 2010 and estimates over
2007-2009 period for such franchise indicators as establishments, employment and output.

Let is consider the definitions before moving to statistics itself. An establishment is a


single physical location at which business is conducted or services are performed, owned by
the franchisor or the franchisee. The word employment is used in terms of positions filled by
part-time and full-time employees or by self-employed individuals. Output is the gross value
of goods and services produced. For most industries, output is measured by receipts or
revenues from goods and services sold. The wholesale and retail industries output, however,
is particularly measured by the difference (margin) between receipts or revenues and the cost
of goods sold.112
It should be specified that the current PwC's franchise analysis was grounded on the following
sources:
(1) the latest macroeconomic and industry forecast prepared by Inforum113;

111

PricewaterhouseCoopers: "2010 Franchise Business Economic Outlook", (December 21, 2009), p.1,
http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/2010%20Franchise%20Busi
ness%20Outlook%20Report_Final%202009.12.21.pdf.
112

See PricewaterhouseCoopers: "2010 Franchise Business Economic Outlook", (December 21, 2009), p.1.
Inforum, established in 1967, is an economic education and research organization that specializes in the development and
use of Interindustry-Macroeconomic (IM) models that combine input-output structure with econometric equations in a
dynamic and detailed framework., see http://www.franchise.org.
113

43

International Franchising as a Method for Business Expansion


(2) franchise establishment data provided by FRANdata114; and (3) PwC's analysis of
historical relationships between franchised businesses and the rest of the U.S. economy.
The franchising activity prognoses based on previous PwC researches that measure the
economic impact of franchising in the United States115.

Generally, as PwC reports, franchising activities are about to expand gradually in the
current year. To be more precise, the moderate growth in the number of establishments,
employment, and output for business format franchises is forecasted in 2010, that is opposing
to recession-induced drop experienced in 2009. After improving by more than 40 per cent
between 2001 and 2008, the number of franchise establishments has declined by 0.1 per cent
over the period 2008-2009 (see Table 1 below). PwC estimates that the amount of business
format franchise establishments grew to 883,984 units in 2008 before declining to 883,292
units in 2009. And, following this 0.1 per cent decline in 2009, PwC assesses then the
expanding of the number of business format franchises from 883,292 in 2009 to 901,093 in
2010 (that is the increase of 2.0 per cent or 17,800 units). It is quite expected situation in a
current macroeconomic environment where the economic recovery is slowly going on. As for
the employment factor of franchise businesses, it is estimated to have peaked in 2008 at 9.9
million. In 2009, however, employment rate experienced a significant fall (4.1 per cent), that
meant a reduction of 409,000 job places. In 2010, PwC forecasts that franchise employment
will grow modestly (0.4 per cent), increasing the total number of jobs by 36,000; nevertheless,
employment rate is going to remain below the 2008 level. The Table shows also an economic
output indicator generated by business format franchises. It grew by 5.9 per cent in 2008
before an estimated decline of 0.7 per cent to $844.7 billion in 2009.
Currently, PwC forecasts franchising output will grow by 2.8 per cent ($23.6 billion) in 2010.

114

FRANdata, founded in 1989, is the U.S. research and information services firm specializing in franchising industry data:
database of the companies that franchise, the brands they manage, and the franchisees who invest in those brands. The
information is derived from the Franchise Disclosure Documents (FDDs),
http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/2010%20Franchise%20Busi
ness%20Outlook%20Report_Final%202009.12.21.pdf.
115
PricewaterhouseCoopers LLP, Economic Impact of Franchised Businesses (February 24, 2004) and Economic Impact of
Franchised Businesses, Volume II: Results for 2005 (January 29, 2008).

44

International Franchising as a Method for Business Expansion


Table 1: Franchise Business Economic Outlook, 2007-2010116
Estimates

Establishments (units)
Employment (Thousands)
Output (Billions of dollars)

2007
847,244
9,859
$802.9

Forecast

2008
2009
883,984 883,2929
9,931
9,522
$850.4
$844.7

2010
901,093
9,558
$868.3

Annual percent change

2008-2009
-0.1%
-4.1%
-0.7%

2009-2010
2.0%
0.4%
2.8%

Source: PricewaterhouseCoopers.

In spite of the U.S. economy started to overcome the crisis, franchised small businesses
still continue to compete strongly because of the low consumer confidence, high
unemployment rates and tight credit markets. We are pleased that the 2010 outlook for
franchise businesses is projected to be more positive than 2009, but access to credit remains a
major hurdle to increase jobs and economic output at the levels we have seen during past
recoveries, said International Franchise Association President and CEO Matthew Shay. An
expected $3.4 billion shortfall in lending to franchise businesses in 2010 will result in 134,000
jobs not created and $13.9 billion in economic output lost. 117 It should be underlined that the
economic recovery will have different effects on growth in the number of establishments,
employment, and output within different business sectors (see Table 2).
Table 2: Franchise Business Economic Outlook by Business Line, 2010118

Establishments

Business Lines

Automotive
Commercial and Residential
Services
Quick
Service Restaurants
Table/Full Service Restaurants

116

Percent
change
Amount over
prior
year
38,340
57,007
192,827
48,609

1.8%
0.3%
3.1%
2.1%

Employment

Output

(Thousands)

(Billions of
dollars)

Percent
change
Amount over
prior
year

Percent
change
Amount over
prior
year

182
230
3,343
1,066

0.4%
-0.9%
0.8%
0.4%

$36.4
$38.2
$203.6
$64.0

2.2%
1.5%
3.2%
2.3%

See PricewaterhouseCoopers: "2010 Franchise Business Economic Outlook", (December 21, 2009), p. 2.

117

IndUS Business Journal: IFA report suggests recovery is on way in 2010, (issue date: March, 2010),
http://www.indusbusinessjournal.com/ME2/dirmod.asp?sid=4CEC54B78BA54A11B360971278D9B043&nm=Archive&type
=Publishing&mod=Publications%3A%3AArticle&mid=8F3A7027421841978F18BE895F87F791&tier=4&id=4E068781F6
E64FDE9F911B8E33994A25.
118
See PricewaterhouseCoopers: "2010 Franchise Business Economic Outlook", (December 21, 2009), p. E-2.

45

International Franchising as a Method for Business Expansion


Retail Food
Lodging
Real Estate
Retail Products and Services
Business Services
Personal Services
Total

70,722
31,827
41,630
88,312
231,669
100,151
901,093

2.4%
-0.8%
3.0%
2.3%
1.7%
1.8%
2.0%

853
627
160
577
1,420
1,101
9,558

0.7%
-2.4%
1.3%
0.6%
0.1%
0.7%
0.4%

$67.5
$62.7
$22.8
$50.5
$189.6
$132.8
$868.3

2.3%
1.8%
1.4%
2.5%
2.6%
4.4%
2.8%

Numbers may not add up to totals because of rounding.


Source: PricewaterhouseCoopers.

Establishments by business line: 2007-2010


Let is examine now the Table 3, which represent below the projected franchise establishment
units for the 10 franchise lines over the period of 2007-2010. 119
As PwC estimates, nine of the 10 franchise business industries experienced growth in
establishments between 2007 and 2008, with only Real Estate declining. In the beginning of
2009, however, PwC considers an overall reduce in the establishments quantity, with positive
growth and largest gains for only Quick Service Restaurants, Table/Full Service Restaurants,
Real Estate, and Personal Services. For 2010, the number of establishments is going to
increase in all franchise business lines, as PwC forecasts. Lodging is the only sector expected
to experience a decline (-0.8 per cent). The largest percentage growing here is projected in
Quick Service Restaurants (3.1), Real Estate (3.0), and Retail Food (2.4). Totally, in 2010 the
number of establishments is projected to rise by 2.0 per cent.

Table 3: Franchise Establishments by Business Lines, 2007-2010


Estimates
Business Lines
Automotive
Commercial and Residential Services

Forecast Annual percent change

2007

2008

2009

35,695

38,074

37,646

2010 2008-2009

20092010

38,340

-1.1%

1.8%

60,270

61,950

56,836

57,007

-8.3%

0.3%

177,498

183,135

187,068

192,827

2.1%

3.1%

Table/Full Service Restaurants

45,836

47,013

47,592

48,609

1.2%

2.1%

Retail Food

65,377

70,011

69,093

70,722

-1.3%

2.4%

Lodging

31,003

33,133

32,076

31,827

-3.2%

-0.8%

Real Estate

40,577

39,933

40,426

41,630

1.2%

3.0%

Retail Products and Services

82,105

87,133

86,315

88,312

-0.9%

2.3%

Business Services

219,636

228,761

227,813

231,669

-0.4%

1.7%

Personal Services

89,247
847,244

94,840
883,984

98,427
883,292

100,151
901,093

3.8%
-0.1%

1.8%
2.0%

Quick Service Restaurants

Total
Source: PricewaterhouseCoopers.

119

See PricewaterhouseCoopers: "2010 Franchise Business Economic Outlook", (December 21, 2009), p. 3.

46

International Franchising as a Method for Business Expansion


Employment by business line: 2007-2010
Table 4 shows the projected franchise employment indicator for all 10 franchise industries
during 2007-2010 period.120 PwC assesses that in 2008 six of the 10 franchise business lines
faced with the employments growth. Later, though, the recession caused a reduction in
employment in 2009 for all business format franchises, particularly in Commercial and
Residential Services with the largest drop estimated.
As it can be seen from the Table, that most business lines are planned to experience the
modest growth in employment rate in 2010, with the largest increase expected in Real Estate
franchises (1.3 per cent). An exception is created by franchises in Commercial and Residential
Services and Lodging, which could be suffered from the further declines in employment of
0.9 and 2.4 per cent respectively. Overall, PwC's analysis indicates a reduction in franchising
employment in definite industries of 4.1 per cent in 2009, followed by an increase of 0.4 per
cent in 2010.

Table 4: Franchise Employment by Business Lines, 2007-2010 (Thousands)


Estimates
Business Lines
Automotive
Commercial and Residential
Services
Quick Service Restaurants
Table/Full Service Restaurants
Retail Food
Lodging
Real Estate
Retail Products and Services
Business Services
Personal Services
Total

2007
192
313
3,397
1,102
888
668
164
602
1,479
1,055
9,859

2008
193
296
3,382
1,090
904
699
164
611
1,495
1,097
9,931

Forecast

Annual percent
change

2009

2010 2008-2009

181
232
3,316
1,061
847
643
158
573
1,419
1,093
9,522

182
230
3,343
1,066
853
627
160
577
1,420
1,101
9,558

-6.3%
-21.6%
-2.0%
-2.7%
-6.3%
-8.1%
-3.9%
-6.1%
-5.1%
-0.4%
-4.1%

2009-2010
0.4%
-0.9%
0.8%
0.4%
0.7%
-2.4%
1.3%
0.6%
0.1%
0.7%
0.4%

Source: PricewaterhouseCoopers.

Output by business line: 2007-2010


The economic output indicator for all franchise lines determined since 2007 till present time
could be found in Table 5 below. PwC's found that nine out of 10 business lines faced with
120

See PricewaterhouseCoopers: "2010 Franchise Business Economic Outlook", (December 21, 2009), p. 4.

47

International Franchising as a Method for Business Expansion


output growth in 2008. The only exception is Real Estate, which experienced output decline of
1.8 per cent. In contrast, all but three business lines experienced reductions in output in 2009,
with the largest percentage decreases in output occurring in Commercial and Residential
Services, Lodging, and Real Estate. As it forecasted for the year 2010, PwC projects growth
in output for all business format lines. Personal Services (4.4), Quick Service Restaurants (3.2)
and Businesses Services (2.6) will see the largest percentage increases. The smallest growth in
output is expected in Real Estate (1.4 per cent). In total, annual franchising output figures are
going to increase by 2.8 per cent in 2010, following a decline in 2009. 121
For the more detailed information regarding market share distribution by industry see the
Annex 2. Moreover, the following table in the Annex 3 offers a breakdown of the average
initial franchise investments per industry which is estimated.

Table 5: Franchise Output by Business Lines, 2007-2010 (Billions of dollars)


Estimates

Forecast

Annual percent
change

Business Lines

Automotive
Commercial and Residential
Services
Quick
Service Restaurants
Table/Full Service Restaurants
Retail Food
Lodging
Real Estate
Retail Products and Services
Business Services
Personal Services
Total

2007
$33.3
$41.5
$181.7
$58.9
$61.7
$61.4
$23.5
$46.4
$175.7
$118.7
$802.9

2008
$35.8
$42.6
$191.7
$61.8
$66.2
$65.7
$23.1
$49.4
$187.3
$126.9
$850.4

2009
$35.7
$37.6
$197.3
$62.6
$66.0
$61.6
$22.5
$49.3
$184.9
$127.2
$844.7

2010 2008-2009 2009-2010


$36.4
-0.3%
2.2%
$38.2
-11.6%
1.5%
$203.6
2.9%
3.2%
$64.0
1.2%
2.3%
$67.5
-0.2%
2.3%
$62.7
-6.3%
1.8%
$22.8
-2.2%
1.4%
$50.5
-0.2%
2.5%
$189.6
-1.3%
2.6%
$132.8
0.3%
4.4%
$868.3
-0.7%
2.8%

Source: PricewaterhouseCoopers.

To conclude this subchapter, let is consider one more statistics. The Franchise Business
Economic Outlook reports overall forecast aligns with the results of a new Franchise
Business Leader Survey conducted by the IFA in November 2009. Franchise business
leaders are more optimistic about the U.S economy performance in 2010, than they were a
year ago: more than half (51.3 per cent) of survey respondents say the U.S. economy will be
better in 2010, compared to only one quarter (24.6 per cent) of respondents from 2008.122

121
122

See PricewaterhouseCoopers: "2010 Franchise Business Economic Outlook", (December 21, 2009), p. 4.
See IndUS Business Journal: IFA report suggests recovery is on way in 2010, (issue date: March, 2010).

48

International Franchising as a Method for Business Expansion


As we can see from the Graph 1 (Annex 4), Franchise business leaders have a less optimistic
view on their ability to develop new units in 2010 than they were a year ago due to ongoing
challenges in accessing credit for new franchise prospects and for existing franchisee
expansion.123 Really, just some 78 per cent of surveyed expect currently increases in
Franchise units, compared with 86 per cent of respondents a year ago. Moreover, concerning
the employment measures, as Graph 2 shows (Annex 4), half of the franchise business leaders
surveyed expect employment levels to stay about the same, while the rest say they plan to
increase employment.

3.2

Franchise Ratings
To franchise internationally, the potential franchisor or franchisee must be aware of

various franchises worldwide, and the list of national or regional franchise companies is not
enough then. But does it really possible to study every franchise opportunity by the individual
compiling and verifying information on thousands franchises all over the world? And how
much time should it take?
It was mentioned previously, that the basic information about the company and its
franchise opportunities is grounded on each franchising companys web pages. To have a
fairly comprehensive overview on franchising in the world or even in specific continent, the
narrow-specified franchise portals could be reasonably explored.
One of such particular portal, presented as a dedicated resource with a wide list of
businesses and franchise opportunities for sale, is Franchise Direct. It seems to be number one
franchise directory in the world. Let is consider how this franchise directory can be useful.
Franchise Direct is ranking annually the best franchises in the globe context. And the most
significant merit of the portal is, certainly, the creation of the Top 100 Global Franchises as a
research tool in franchise systems benchmarking (see Annex 5). In order to produce the Top
Global Franchises list, plenty of companies on the same objective values, regardless of their
size or country of origin, have been analyzed. The only requirement for the company to be
appropriate for ranking is that each franchise must be actively franchising.124

123

See IndUS Business Journal: IFA report suggests recovery is on way in 2010, (issue date: March, 2010).
Franchise Direct portal: Research methodology,
http://www.franchisedirect.com/top100globalfranchises/methodology/158/768/.
124

49

International Franchising as a Method for Business Expansion


The top franchises have been selected from thousands of companies that have invested in
international expansion strategies, and various factors had been taken into account while
rating, as following:125

numbers of units the Franchise system has (see Annex 6);

sales revenue for the system;

stability and growth;

number of years in operation;

market expansion international unit numbers (see Annex 7).

The grading is also grounded on the implementation of:

best practice in the areas of franchisee support and training;

environmental policy and local and national projects engaged in by the franchises;

social responsibility.

So, the best internationally performed franchises create this exclusive Top list. In this way,
the Top 100 Global Franchises is likely to be a blueprint for experienced franchisors that are
looking further to expand beyond internal borders. The franchises precise description of the
first 10 companies, in accordance with the factors mentioned, is enclosed in Annex 8.
Because of Franchise Direct provides the Top 100 ranking with companies worldwide,
non-U.S. franchises are also presented there, though the majority is still of American origin. A
list of the non-US Franchises in the Top 100 rating can be found in the Annex 9.
For instance, Top 100 Global Franchises 2009 contained 15 non-U.S. companies. In 2010,
two new non-U.S. companies have been added: Yogen Frz, a Canadian frozen yogurt retail
franchise (has ranked number 15), and TeaGschwendner, popular German tea retailer which is
currently belonging to the leading global specialty retail tea chains.126

An expansion rate into foreign markets represents a crucial indicator for ranking. As it
was mentioned above, market expansion is one of the factors influencing the successful
franchise performance. To expand internationally, the franchisor has to run business
successfully, which is well-established in the domestic market. Franchise companies must
also generate enough cash flows to support their business operations internationally from their
125

Franchise Direct portal: The Top 100 global franchises, http://www.franchisedirect.com/top100globalfranchises.


Franchise Direct portal: Expansion into foreign markets,
http://www.franchisedirect.com/top100globalfranchises/expansionintoforeignmarkets/158/886/.
126

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International Franchising as a Method for Business Expansion


home offices. If to consider just the costs, it may make financial sense to establish a regional
office abroad. For instance, there can be up to a 13 hour difference between the U.S. and
Asia. This means that something as simple as making a telephone call between the offices can
be difficult. Also, due to language barriers, a franchise company may have to have manuals,
advertising, websites and training materials translated into the local language.127
In fact, each franchise which appears in The Top 100 Global Franchises has international
expansion, investing time and resources to be adapted to the cultural differences in new
markets. Globalization and the melting of trade barriers make franchises achieve better
economies of scale, and, therefore, grow and develop internationally.128 The vast distribution
of the Top 100 global franchises is clearly imaged in the Annexes 10 and 11.

To continue with expansion issues, it should be also noted, that recently the franchising
opportunities of developed countries tend to be somehow diminished. Therefore, international
franchisors are starting to seek development opportunities in emerging markets, containing
almost eighty percent of the world's population. China and India, as the largest emerging
market places, are considered to be among the most attractive locations for expansion. As the
U.S. Department of Commerce estimated, over 75 per cent of the expected growth in the
world's trade over the next two decades will come from developing countries, particularly big
emerging markets, which account for over half the world's population, but only 25 per cent of
its gross domestic product.129 While evaluating the economic potential in emerging markets,
the most common economic factors such as the GDP per capita, the population level and the
growth rate of the economy should be taken into consideration. Moreover, it is quite
complicated task to enter emerging markets due to strong rules and regulations concerning the
business ownership there and the operational process in general. And, probably, the best way
to overcome such barriers is to franchise business operation in these marketplaces. It is not by
chance then, that franchising is the ideal route for many US and UK companies who want to
test the water without expending large sums of capital. This gives them a chance to dip their
toes in the water without risking large sums of capital.130

127

See Franchise Direct portal: Expansion into foreign markets.


See Franchise Direct portal: The Top 100 global franchises, http://www.franchisedirect.com/top100globalfranchises/.
129
Alon I.: Economic potential of international franchising in emerging markets, http://www.franchisechat.com/resources/franchising_in_emerging_markets.htm.
130
Daud N.: Franchise your business to enter an emering market, in Ezine Articles, http://ezinearticles.com/?FranchiseYour-Business-to-Enter-an-Emerging-Market&id=536583.
128

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International Franchising as a Method for Business Expansion


Nowadays, lots of franchisors are focusing their expansion plans on China - the country
with a GDP of $7.8 trillion and the growing real rate of 9.8 per cent per year131. An increased
prosperity, emerging middle class, and a franchise market that is expected to grow at US $100
per annum for the next few years132, all these trends make China a prime target for franchises
seeking global expansion of their brands. Coming back to Franchise Directs ranking, all of
the Top 10 has successfully expanded to China with some 40 per cent of the remaining Top
100 Global Franchises.133

Let is consider, for example, Yum! Brands, Inc. - the world's largest restaurant company
with more than 37,000 restaurants in over 110 countries and more than million associates. It is
not surprising then that Yum! is ranked as number 239 on the Fortune 500 List, with almost
$11 billion revenue in 2009.134 The Yum! system includes five successful brands, all of which
are ranked among Franchise Directs Top 100 Global Franchises (see Annex 5): KFC, Pizza
Hut and Taco Bell are placed within the Top 10, while Long John Silvers and A&W
Restaurants take 20 and 23 places respectively. The Yum! operates within three divisions: the
U.S. division, International (Yum! Restaurants International) and China division (includes
China, Thailand and KFC Taiwan). Comparing to others, China is the first-priority market for
new company restaurant development worldwide. In 2009, operating profit for the China
division of Yum! brand was $602 million and the company is running there about 3,000
restaurants.135

So, it goes without any doubts, that in the near future the emerging markets are forecasted
to compete with the western powers in terms of buying power and economic strength. As a
result, the companies, franchised in the developing world, will appear in global ratings even
more often. By this reason, with the fast growing economies and developing franchising
perspectives emerging markets have, they can not be ignored by international franchise
companies.

131

International Franchise Association: "Insider", Volume 14, Issue no. 25, (Dec 7,2009).
Franchising & Licensing Association (Singapore), franchiselicenseasia.com.
133
Franchise Direct portal: Spotlight Emerging markets,
http://www.franchisedirect.com/top100globalfranchises/spotlight/158/875/.
134
Yum Companys portal: About Yum!Brands, http://www.yum.com/company/ourbrands.asp.
135
See Franchise Direct portal: Spotlight Emerging markets.
132

52

International Franchising as a Method for Business Expansion

3.3

Franchise Categories and Subcategories

Before to start negotiation with a particular franchise company, investor have to


evaluate different industry categories in order to choose relevant business industry for
franchising. According to PwC economic outlook 2010, as it was mentioned above, there are
10 business lines in which franchising is prevailed. But the PwCs Report doesnt cover all
business industries available for franchising. Therefore, the supplemented composition of
business lines you will find in Annex 12. .This list of franchise categories was compiled from
several sources, mainly from the franchising portals like Franchise Direct136, but still it does not
represent an exhaustive catalogue.
The following material covers just some of the enumerated lines and sub-lines of business
format franchises, which are mostly worth to be explained in details, from my point of view.

Automotive Franchises
Main category
Automotive

Category
Appearance Services, Brake Repair, Car Washes,
Miscellaneous Auto Products, Miscellaneous Auto Services,
Mobile Auto Services, Oil-Change Services, Rentals &
Sales, Repair Services, Transmission Repair, Tune-Up
Services, Vinyl Repair, Windshield Repair

Trends and Facts.


Automotive industry comes with different forms of franchises: motor vehicle parts and supply
stores, automotive equipment rental and leasing, tire dealers and automotive repair and
maintenance franchises. This sector generates around $25 billion in sales annually and
employs over 175,000 people in 35,600 franchise establishments.137
Automotive franchise industry consists of aftermarket franchises, car rental and sales
franchises. The products and services, used for vehicles after the original sale (for instance,
accessories, lubricants, replacement parts), create an aftermarket. Following the numbers of

136

Franchise Direct portal: Browse franchise by industry, http://www.franchisedirect.com/.


PricewaterhouseCoopers: Executive Summary & Highlights Economic Impact of
Franchised Businesses, Volume 2, (March, 2008), p.11,
http://www.franchise.org/uploadedFiles/Franchisors/Other_Content/economic_impact_documents/DirectImpact.pdf.
137

53

International Franchising as a Method for Business Expansion


the Automotive Aftermarket Industry Association (AAIA), this sub-sector is valued at $283
billion of the sales volume and contains about 4.5 million people employed. 138

Over the period 2006-2009, the sales volume in this industry has dropped nearly at 40 per
cent, that was caused by the continuing usage of old cars. People have no enough money and
so they keep using their cars longer and more often use repair services.
Moreover, only in the USA automotive sector employs about 2.6 per cent of all
employees, that is some 3.7 million jobs in numbers. Continuing with the analysis of the US
market there are about 130.000 companies focused mainly on auto services and car repairs.
The most prominent examples of such franchises are Express Oil Change, Rent a Wreck and
Midas Muffler, Maaco and AAMCO Transmissions.139
Because of fragmentation, auto industry does not typically contain any businesses with
dominant position: numbers say that about 50 large companies serve nearly 10 per cent of the
market share.140 In fact, the automotive sector includes more individual franchise companies
than any other franchising segment except food.

What are the main threats for franchising in automotive area? First of all, it is quite usual
for gas stations or supermarkets to compete with auto services franchises by offering to clients
the products or services being traditional for automotive industry. The other factors which
influence the profitability of auto market are location, marketing, and brand recognition. For
instance, by the extending of a repair shops locations, the franchisor can increase the profit.
Because of the franchises in automotive sector vary greatly, the fees keep large differences
as well. An average franchise fee for a single unit franchise is about $25.000. And the higher
the franchise fee, the higher the level of franchisors support or possible financial returns from
a quality business model. The size of territory within a given franchise system may also affect
the franchise fee amount.141 Annex 13 represents an overview of the estimated initial
investment necessary to open a single auto franchise unit. It also includes the ongoing sales
royalties that are payable to the franchisor. All the data is taken from the Uniform Franchise
Offering Circulars (UFOC) or Franchise Disclosure Documents (FDD) of these franchisors.

138

Aftermarket: "About AAIA" in aftermarket.org, http://www.aftermarket.org/AbouttheAftermarket/AboutAAIA.aspx.


Franchise Direct portal: Automotive franchise opportunities, http://www.franchisedirect.com/automotivefranchises/7.
140
See Franchise Direct portal: Automotive franchise opportunities.
141
Franchise Direct portal: Auto franchise fees and costs,
http://www.franchisedirect.com/automotivefranchises/autofranchisefeesandcostsbusinessreportiii/7/250.
139

54

International Franchising as a Method for Business Expansion


For the typical ongoing fees and payments, see Table 6 below. The table shows that the
average royalty charged by auto franchises is about 5 per cent of total sales ranging from 2 to
30 per cent plus ads fee of about 2 per cent of gross sales. Some franchisors can charge a
fixed fee monthly.

Table 6: Typical ongoing fees and payments


Royalty (% gross sales)
5%
Advertising fund (% gross sales) 2%
Ranges from $100- $600 per day plus expenses
Additional training
$5,500
Transfer fee
$2,500 -$5,000 (some franchises do not charge renewal fees)
Renewal fees
1.5% per month
Late charge
1.5% per month
Interest
Source: Franchisedirect.com

It should be also noted, that typically the franchise period in automotive industry lasts 5-10
years. Renewal fee is charged by many franchisors in case of the franchise licenses
prolongation. This fee ranges between $2,500 -$5,000 or 10-50 per cent of the initial license
fee. If the franchisee decides to sell the franchise, he must pay a transfer fee ($5,500 in
average) in order to compensate money invested in the training and developing a new
franchisee.142

Business Services Franchises

Main category
Business Services

Category
Accounting & Tax Services, Advertising Services, Business
Brokerage, Business Financial Services, Business Support
Centers, Business Training, Consulting Services, Management
Training Programs, Miscellaneous Business Services, Shipping
Services, Signs, Staffing Services

Trends and Facts.


In order for one business to run effectively, it requires definite necessary services which can
be provided by the other business structures. That is why companies rely on business service
franchises whether they need expertise on advertising, tech support, financial services,
business management facilities, or consulting services. Moreover, the business support is
142

Franchise Direct portal: "Table 3: Typical ongoing fees and payments",


http://www.franchisedirect.com/automotivefranchises/autofranchisefeesandcostsbusinessreportiii/7/250.

55

International Franchising as a Method for Business Expansion


required also in providing accountancy advice, creating signage for retail locations,
conducting employee training, cleaning the commercial facilities, creating cost-effective
telecommunications packages - let is say all that is crucial to the day-to-day business activity.
That is why business-to-business franchises (B2B) appear as a respond to the huge
demand for their services in the commercial client market. Let is take as an example the
United Kingdom, where the number of businesses has increased greatly with nearly 2.16
million businesses registered, mostly as corporate establishments, sole proprietors,
partnerships and non-profit organizations.143
In this sense, business-to-business services are highly profitable type of business opportunity:
they still experience a stable growth as lots of corporations and individuals are taking up the
various kinds of support every day. So, many professionals today prefer the B2B franchises.
However, the practice shows that ninety percent of the current franchise options have
business-to-consumer direction (when business is sold directly to a consumer, mainly like
retail). Really, B2C franchise concept is more popular due to low entry barriers and relatively
simplicity to operate. But it is also more generic, that is leading to higher risks.
B2B franchise industry provides the potential franchisee with a wide spectrum of options as
following144:

Commercial Cleaning Franchises provide businesses with cleaning services for their
commercial facilities - different buildings, retail establishments, schools etc.

Business Consulting Franchises support other business growth, cut irrelevant costs
and generally improve the performance of the company, enhancing therefore franchise
brand recognition.

Business Training Franchises implement a system of training for companies


employees in sales and management, IT and other business skills.

Telecommunications Franchises supply the clients with telecommunications package


including phone and Internet capabilities.

Marketing Franchises act as the experts in building of the marketing campaign.

Recruitment Franchises match companies with the best potential candidates for
temporary and permanent staff, create a large client base.

143

Franchise Direct portal: Trends and facts about B2B franchises, http://www.franchisedirect.co.uk/b2bfranchises/172.
Franchise Direct portal: Great ways to own a B2B franchise,
http://www.franchisedirect.co.uk/b2bfranchises/tipsforowningabusinesstobusinessfranchise/172/111.
144

56

International Franchising as a Method for Business Expansion

Accountancy & Financial Franchises assist in tax preparation, accountancy, financial


advice and loan businesses for corporate and individual financial issues.

Safety & Security Franchises can provide the right package for any commercial
facility in order to let business owners keep calmness.

Computer/IT Franchises secure the clients with an on-site help.

Print & Sign Franchises provides the corporations with signage that can best represent
its business, especially in case of retail locations.

Courier Franchises are designed to meet companies mailing needs by providing fast
delivery.
Nonetheless, there are also plenty of other variants for B2B franchises that are

available, but these are the most profitable and suitable forms of B2B franchising for sale.

Food Franchises
Trends and Facts.
The number of food franchises is proportional to the number of meals types. The investments
here vary from extremely high amount for full-service restaurants to quite law costs for
vending machines. There are numerous kinds of food franchises that specialize in pizza,
coffee, candy, ice cream, sandwiches, barbeque, burgers, smoothies, etc. But what is really
associated in our minds with food sector is restaurant business.

Main category

Category

Subcategory

Food

Food/Quick Service

Bagels, Bakeries, Breads, Candy, Chicken, Chinese Fast


Food, Cinnamon Rolls, Coffee, Cookies, Donuts, FastFood Fish Restaurants, Frozen Yogurt, Hamburgers, Hot
Dogs, Ice Cream, Italian Fast Food, Japanese Fast Food,
Juice Bars, Mexican Fast Food, Miscellaneous Fast Food,
Muffins,
Pizza,
Pretzels,
Salads,
Sandwiches,
Sandwiches-Micellaneous,
Sandwiches-Submarine,
Shaved Ice

Food

Food/Full-Service
Restaurants

Barbecue Restaurants, Burger Restaurants, Family


Restaurants, Mexican Restaurants, Miscellaneous FullService, Seafood Restaurants, Steakhouses

Food

Food/Retail Food
Sales

Candy, Convenience Stores, Food Design, Food Gifts,


Ham Stores, Miscellaneous Retail Food Sales, Vitamin
Stores

57

International Franchising as a Method for Business Expansion


Restaurant Franchises
This industry has risky but well-paid reputation. Some analysts claim a dubious 90 per
cent failure in the first year. But if a restaurant is based on proven franchise system, it might
have a higher success rate than any independent entrepreneur - about 62 per cent over four
years.145 For instance, the National Restaurant Association shows the statistics in the USA:
restaurant profits reached $566 billion in 2009 together with the number of restaurants
reached 945,000 across the world. These numbers prove the fact, that the restaurant
franchising is one of the fastest-growing American industries and the nations largest
employer after the US government. Moreover, the U.S. restaurant revenue rate increased by
2.9 per cent in 2008 and make up 4 per cent of the gross national product.146
And some more statistical data. The Restaurants & Institutions Company (R&I)147, a
leading information source for the entire food service industry, in its New American Diner
Study 2008 discovered that eating out continues to be a crucial part of Americans everyday
life. Numbers say that people buy a meal or snack when they are not at home about 4 times
every week. And nearly 31 per cent of them (one third of respondents) confirm that during the
working days they always make use of restaurant or fast food provider148.
Really, during the times of bad economic environment the snack segment makes has the
biggest growth, so the sales volume of chains selling ice cream, smoothies, doughnuts and
coffee is constantly increasing. With the slowing economy, gas and electricity prices rising,
people have less money to spend on restaurants. That is why, instead of building new units,
many well established franchises previously specialized in particular food segments, which
are expanding their menus and adding breakfast, lunch and dinner specialties as well as free
Wi-Fi and high-definition television to attract clients.
By the way, what factors are the most influential for consumers to choose some
restaurants or fast foods? As Chain Leader Magazine, an American publisher, indicated from
the survey results of one market research company (Technomic Inc., Chicago), 65 per cent of
respondents choose the food taste and freshness as the most important criteria for selecting the

145
146

Franchise Direct portal: Food franchise opportunities, http://www.franchisedirect.com/foodfranchises/14.


Franchise direct portal: Restaurant franchise opportunities, http://www.franchisedirect.com/restaurantfranchises/81.

147

R&I is trade publication and web site owned by Reed Business Information serving the information needs of foodservice
professionals at chains, independent restaurants, hotels and institutions, see Reed Business Information: About Us,
http://www.reedbusinessinformation.com/index.asp?layout=inside&articleId=CA317441.
148

Direct Franchises portal : Restaurant franchises,


http://www.franchisedirect.com/restaurantfranchises/trendsandfactsaboutrestaurantfranchises/81/88.

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International Franchising as a Method for Business Expansion


place where to eat out.149 It is not surprising then, that plenty of todays customers look for
environmentally friendly establishments in order to find healthier eating options. So,
according to Franchise Direct portals data, the sale of organic foods generated $33 billion in
revenue in 2008, and dropped off slightly in 2009 with the global recession.150

Full Service Restaurants. The term full service restaurant is defined in business
dictionary as the place that is offering the fine dining with a wide selection of foods and
beverages, and table service. It may also have attached coffee shop, specialized (for instance,
ethnic) and fast food restaurants.151 Such places represent anything from a casual familystyle fast-food to an elegant restaurant, where food is served directly to the customers table.
The possibility for a takeout, delivery or present live entertainment can also be provided by
full-service establishments.
The full-service sector contains such categories as Barbecue, Burger, Family, Mexican,
Italian, Seafood restaurants, as well as Steakhouses and Pubs. The famous web-portal
Entrepreneur has ranked the 80 Top restaurants in this category, and the list of first 10 Top
can be found in Annex 14.
The market volume for this industry is represented by almost 250,000 restaurants
including franchised establishments: national and local restaurant chains, fast food outlets,
sandwich stores, other franchised businesses chains and independent operators are competing
with each other. Moreover, according to the Consumer Expenditure Survey152, released by the
Bureau of Labor Statistics of the U.S. Department of Labor, an average annual expenditures
per consumer on food purchased away from the home was $2,698 in 2009.
As it was projected by aforementioned National Restaurant Associations in 2009
Restaurant Industry forecast, the total sales in this category reached the amount of $182.9
billion in 2009, up 1 per cent from previous year. Because of drop in consumer confidence
during recession period, 2009 was a challenging time for full-service franchising sector: total
revenue amount is similar to the 2008 gain of 1.1 per cent, but remains below the average
annual increase of 4.8 per cent gained over the period 2002-2007.153

149

See Direct Franchises portal : Restaurant franchises.


See Franchise Direct portal: Food franchise opportunities, http://www.franchisedirect.com/foodfranchises/14.
151
BusineesDictionary.com, http://www.businessdictionary.com/definition/full-service-restaurant.html.
152
Bureau of Labor statistics: Consumer expenditure survey, http://www.bls.gov/cex/.
153
Franchise Direct portal: Full-service restaurant franchise industry report,
http://www.franchisedirect.com/foodfranchises/fullservicerestaurantfranchisestudy/14/261.
150

59

International Franchising as a Method for Business Expansion


Comparing to other food franchises, the full-service restaurants require a greater personal
and financial resources. As a rule, the type of franchise and the brand will determine the
initial financial investment. The table in the Annex 15 provides an overview of the estimated
initial outlays to open the restaurant franchises listed. The initial franchise fee as well the
ongoing sales royalties are included. To present these costs in more detail, the table also refers
to the profiles of each franchisor which were extracted from the Franchise Disclosure
Documents.

Fast Food restaurant is a quick-service establishment where food is packaged for


immediate consumption.154 It also is known as a quick service restaurant (QSR), where
customers are usually looking for value in return for their money.
The USA is the leader in the global fast food market, with markets total value of about 53
per cent. The U.S. fast food industry includes 300,000 restaurants and franchises, and is
predicted to reach a sales volume of about $163.8 billion for 2009, that exceeds the gain in
2008.155 Moreover, as the Datamonitors report states, the fast food market reached a volume
of 36.6 billion sales transactions in 2008. The number of sales transactions has grown at a
stable rate of 1.6 per cent for 2007 and 2008 but is however predicted to slow marginally in
the coming year due to a lack of consumer spending.156
Among the most respectful fast food franchises are McDonalds, Burger King, Pizza Hut,
KFC. McDonalds still keeps the dominant position in the market, with outstanding volume of
sales of $30,025 million recorded in 2009. It is quite reasonable then, that McDonalds
Company is ranked at the head of Top 100 Global Franchises list (see Annex 5). Burger King
is another fast food giant with the volume generated of about $9,500 million.157

Generally speaking, fast food industry is very fragmented, similar to the automotive sector
which was described before. The Annex 16 will provide the reader with the estimated initial
investment outlook which is necessary to open one of 22 fast food franchises which are listed.

154

Franchise Direct: Fast food franchise industry information,


http://www.franchisedirect.com/foodfranchises/fastfoodfranchiseindustrystudy/14/262.
155
National Restaurant Association: "2009 Restaurant Industry Forecast", http://www.restaurant.org/research/forecast.cfm.
156
Datamonitor, report United States - Fast Food, (published August 2009).
157
Franchise Direct: US fast food franchise industry report,
http://www.franchisedirect.com/foodfranchises/fastfoodfranchiseindustrystudy/14/262.

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International Franchising as a Method for Business Expansion


Take-out and Delivery Franchise is a type of business where food can either be taken to
go by the consumer or delivered to the destination point. In such franchises a dining service
area, as well as full menu and take away services can be founded. As the National
Restaurant Association states, this sector accounts for about 6 to 12 per cent of restaurant
franchising total sales. Moreover, the food take-out franchises have lower start up costs: the
average initial investments vary approximately from $155,600 to $453,600 in numbers. 158
Obviously, the demand for take-out meals is increasing nowadays. In this sense, its very
effective way to increase sales. Consumers are saving money by ordering food to their homes.
In accordance with the market research firm NPD Groups 2009 study A Look into the Future
of Eating, the number of restaurant meals eating at home will grow by 20 per cent in the next
10 years.159 The NPD Group, Inc. (formerly National Purchase Diary), the leading North
American market research company, 160 provides in its report a ten-year forecast of eating
trends based on generational influences, population, etc. The results of NPDs research are
displayed in Table 6 below.

Table 6:
Top Food Trends
Eating Behaviors Expected to Grow More Important
During the Next Decade
Organic

41%

Restaurant meals eaten in-home

20%

Light/lite/diet/low calorie labels

18%

Salty/savory snack foods

16%

Easy meals, e.g. fruit, snacks as meals, yogurt, bars, etc.

16%

Appetizers eaten as in-home main meals

16%

Leftovers as end dish foods

15%

Fresh as end dish foods

14%

Source: The NPD Group, A Look into The Future of Eating, National Eating Trends

The key to such a statistics, probably, is the number of home leisure activities that has been
increased. And that is the reason of the growth in the take-out franchise sector, especially in

158

Franchise Direct portal: Food take out and delivery franchise industry report,
http://www.franchisedirect.com/foodfranchises/takeoutanddeliveryfranchiseindustrystudy/14/263.
159
NPD Groups report: "Better for You" Foods to Grow Significantly Over the Next Decade (2009),
http://www.npd.com/press/releases/press_090707a.html.
160
NPD Group: "About NPD", http://npd.com/corpServlet?nextpage=profile_s.html.

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International Franchising as a Method for Business Expansion


pizza home delivery franchises. The pizzas market is very competitive and demanded. And it
is even more advanced in the USA, where about 60 per cent of all pizzerias are franchised and
some 93 per cent of consumers buy at least a pizza per month.161 A list of Top 10 Pizza
Franchise Chains youll find in the Annex 17.

Let is move to an example of a take-out industrys rising success. One of the leading
delivery and take-out franchises is Dominos Pizza, Inc., an international pizza delivery
corporation headquartered in Michigan, United States.162 It serves their clients throughout the
world with a network of 9.000 franchised and company-owned stores. The huge generated
revenue of $1.32 billion in 2009 (that is 76.6 per cent versus the year 2008) is likely caused
by international store expansion, the growth of sectors popularity, high operating margins. 163
For franchises specifically focused on offering the take-out or delivery services (Dominos
example), an accelerating consumer demand creates a favourable business climate for a longterm period. The numbers clearly shows that take-out and delivery industry tends to be a
prosperous for the franchised restaurant market, which is expected to grow constantly in 2010.

To complete the food franchises category, let is take a brief review of the Food Retail
sector. Food retail business includes different types of store outlets such as candy shops,
bakeries, organic and health food stores, etc. This special market is quite dynamic and highly
competitive, despite the retail performance decline over previous years. For instance, in the
USA, it includes nearly 20,000 businesses, accounting for revenue of $20 billion
annually.164
The Food Marketing Institute in its State of Food Retailing 2009 report demonstrates the
significant extension of the retail-food chain all over the world. Responding to the consumer
demand and strong competition, retail-food stores reduce the food costs, and diversify the
product assortment. These new measures are reflected in strong sales increases, with overall
hourly sales for retail stores increasing to $145.51 in 2008. This shows a remarkable increase
from $138.90 in 2007 and $133.31 in 2006.165

161

Franchise Direct portal: 2010 Food franchise industry report,


http://www.franchisedirect.com/foodfranchises/2010foodfranchiseindustryreport/14/267.
162
Domino's Pizza: "About Domino's", http://www.dominosbiz.com/Biz-PublicEN/Site+Content/Secondary/About+Dominos/.
163
See Franchise Direct portal: Food take out and delivery franchise industry report.
164
First Research Inc., Specialty Food Stores Industry Profile, http://www.firstresearch.com/Industry-Research/SpecialtyFood-Stores.html.
165
Food Marketing Institute (FMI): "State of Food Retailing 2009",
http://www.fmi.org/news_releases/index.cfm?fuseaction=mediatext&id=1065.

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International Franchising as a Method for Business Expansion


As the CEO and president of the Food Marketing Institute (FMI), Leslie G. Sarasin, noted
the industry (Retail-Food) showed its resilience in the most challenging economy in modern
history. Retailers aggressively discounted products and increased their lines of private brands
to help American families lower their grocery bills. At the same time, they continued to
control costs by improving efficiency and productivity, a hallmark of this industry. 166
It should be finally noted that, in spite of current economic situation, which is non-stable,
the Retail-Food market remains to be quite elastic. For franchisor this means the great
opportunity to increase his market presence and expand the franchise chain with a moderate
amount to invest. An appropriate information on the initial costs to franchise in retail food
sector is introduced in the Annex 18.

Vending Franchise Opportunities.


The last, but not the least, franchise category I am going to touch with in this Thesis,
refers to the vending machines industry. And it really becomes a quite tangible part of
peoples everyday lives: drinks, snacks, beverages, coffee, lottery tickets and many other
kinds of personal goods are dispensed to consumers by coin-operated machine immediately at
the push of a button. They might be found in subways, public buildings, retail stores, gas
stations, hospitals and even at courthouses - so to speak, any place where person can appear is
a good location for vending machines.
Trends and Facts.
The vending industry has a stable growth during the last century. A franchise in the vending
business represents a unique opportunity for investors as it does not require set up costs and
ongoing business overheads, or any advertising and marketing budget. The owner of the
vending machine pays a rental fee for the place and also pays for other expenses concerning
maintaining of a normal work of this machine.167 And location here is of crucial importance:
the right product should be available at the right place.

166

Franchise Direct portal: Retail food franchise industry report,


http://www.franchisedirect.com/foodfranchises/retailfoodfranchiseindustryreport/14/264.
167
Franchise Direct portal: Vending franchise opportunities,
http://www.franchisedirect.com/vendingfranchiseopportunities/121.

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International Franchising as a Method for Business Expansion


Let is consider some statistical numbers. The Vending Times168, one of the most
popular trade magazines for the U.S. vending industry, reported the permanent increase of
vending sales in the USA during the early beginning of the 2000s, with a strong growth rate
of about 43 per cent.169 And what is the situation in European market? In the United
Kingdom, for instance, vending machines industry forms a lucrative business sector. It was
calculated that the sales volume of the UK vending market for 2008 reached the amount over
3.6 billion, with the most purchasable items such as cold and hot drinks and snacking stuff.
This trend is predicted to continue as the market evolves with new products and innovative
vending equipment that gives consumers more convenient access to low price point impulse
purchase products.170 It is quite interesting to know, that the British consumers spend over
1.5 billion on use of nearly 510,000 refreshment vending machines today, purchasing
millions cups of coffee and tea from the automates daily.171
The last tendency in vending industry is the diversification of merchandises that are offered.
With people getting more information about junk food, the automates offer a kind of healthy
drinks and snacks. Today we can buy also DVD, books, mobile phones and other electronic
gadgets via vending machines, placed in high traffic areas like airport terminals and shopping
malls. For instance, in Japan, the country with a high population density and low rates of
vandalism, there seem to be no limits to what is sold by vending machines: even bottles of
wine and underwear can be purchased by such way.172
As a matter of fact, vending franchises keep the place of a pretty profitable low cost
business ventures available. The reason is the set of advantages vending business has. These
are low capital investments, including overheads and start-up costs; availability for 24 hours a
day, that makes the vending operations very flexible and simple to run; instant cash flow.
Moreover, unlike other businesses, this sector remains stable even in crisis times as vending
machine operators are not much affected by economic downturns. The vending trade is
consistently brisk due to the low cost impulse buy nature of most vended products,

168

The Vending Times magazine attempts to cover the entire vending industry, addressing the business, legal, legislative
and regulatory concerns of companies providing industrial, institutional and public vending, refreshment, feeding and
recreational services; Vending Times: "About Vending Times",
http://www.vendingtimes.com/ME2/dirsect.asp?sid=F096C4D0B94F4982B253C12BCA5B4C15&nm=About+VT.
169
See Franchise Direct portal: Vending franchise opportunities.
170
The Vending Revolution: Franchise Opportunities Defying the Credit Crunch, http://www.vendingrevolution.com/.
171
Franchise Direct portal: Vending franchise and business opportunities in the UK ,
http://www.franchisedirect.co.uk/vendingfranchises/209.
172
ArtRM.com: Japanese vending machines, http://www.artrm.com/retail/vending-machine.

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International Franchising as a Method for Business Expansion


particularly comfort eating treats which consumers purchase regardless of a faltering
economy.173
Undoubtedly, the refreshment vending machine business tends to be a kind of a market
that consumers always have an appreciation for, as they need snacks and drinks to survive
during the day. And it can not be influenced by the trouble economic situation worldwide.

To resume the last Chapter, I would like to point out the following. Franchising
remains a time-tested concept of business conduct in more than 80 industries available. And
this number is continually growing. The four industrial categories which were examined
above - automotive, business services, food and vending operations - represent the most
popular types of franchised business today. In fact, they have been not so much affected by
the recent events in a world economy, and sometimes even proved the tendency to grow
during the recession. But, of course, the economic impact is equally important for the
franchise business as well as for non-franchised operations. The case is the level of risk
avoidance for each individual sector, so it is better to franchise in the recession-resistant
segments.
Today the franchising services face with a great demand, because the consumers are
franchised focused. The brand identification together with successful business concept and
proven marketing and distribution system - all this has an influence on the franchise owners
benefits. In short, franchising is a strategic alliance between the business owner and the set
of support and operational guidance provided by an established corporate office.174
Every potential investor has the possibility to achieve a considerable return on his
franchising investment. And if the person is financially able to franchise some business, all
that he needs is to evaluate numerous industry categories available, choose the right segment,
and take a final decision regarding an individual franchise company. Certainly, an invaluable
contribution here is given by the companies with their publicly introduced experience in
international franchising.

173

See The Vending Revolution: Franchise Opportunities Defying the Credit Crunch.
Instant Tax service: Diversify your investments: Franchise!, (May, 2009),
http://www.instanttaxservice.com/blog/2009/05/.
174

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International Franchising as a Method for Business Expansion

Conclusion
The present Master Thesis describes the concept of international franchising from both
business and legal standpoints. The research was focused on detailed description of related
issues in the three major pillars: franchise contract, franchising perspective through its
strengths and weaknesses, and, finally, the franchise overview with the analysis of the specific
industries.
Following the Thesis structure, I believe that the theoretical part provides the useful
information to start with. I intentionally shortened the overview of numerous definitions of
franchising which can be sometimes seemed confusing. Instead, I tried to create the general
definition summarizing the classical ones to take it easier for understanding. It was not by
chance also that the franchise agreement was touched so deeply. The crucial importance of
this document is recognized on the level of the international organizations. For instance,
International Institute for the Unification of Private Law (UNIDROIT) defines the Franchise
contract as the vehicle most commonly adopted for international expansion, considering
such items as the nature of the relationship between the master franchise agreement and the
sub-franchise agreements; problems associated with the three-tier structure of the relationship
between franchisor, sub-franchisor and sub-franchisees, particularly in relation to termination;
the settlement of disputes; applicable law and jurisdiction; and disclosure.175
Thanks to the theoretical framework provided in the first charter, the practical meaning of
the franchising was evaluated in the following parts of the thesis. So, the second chapter
represents franchising in action, where both the positive and negative examples of the
franchising diversified influence were included respectively. The possible franchise threats
and weaknesses were examined not only from the franchisor-franchisees perspective, but
from the consumers point and within the current economic situation.
The final chapter resumes the whole work with the concrete statistical data and ranking
concerning the franchised companies and the particular franchised industries worldwide. As
soon as the company is aimed at the international expansion, it is important to evaluate firstly
the attractiveness of the market in general, then to specify the relevant industry to franchise in,
and, at last, to identify the particular franchise company to deal with.

175

UNIDROIT: Model franchise disclosure law, (September, 2002), Explanatory report , p.13,
http://www.unidroit.org/english/modellaws/2002franchise/2002modellaw-e.pdf.

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International Franchising as a Method for Business Expansion


In regards to the main hypothesis, I dare to say that the purpose of this Diploma Thesis
was achieved. The reader can observe a quite ambiguous influence of the franchising on the
business and economic environment. Of course, the penetration of new markets is a difficult
process, and the business expansion bears certain risks. Many companies still feel the deficit
of the abilities to operate globally; the most common barriers are poor marketing
infrastructure, lack of experience, and, surely, various restrictions implied on international
trade operations (tariffs and non-tariffs barriers). The strongest companies try to avoid these
risks switching the business models and the forms of entrepreneurship, though by the cost of
losing control and flexibility. However, the feedback can be rewarding: all the current big
names have grown from the small local enterprises.
A number of people franchise to expand internationally. They sell the rights to their
product for a fee and future profits. Actually, there are lots of successful examples which
speak for themselves: McDonalds, KFC, Holiday Inn, Radisson, IKEA, Yves Rocher,
Segafredo Espresso, and many other names mostly associated with the USA or Western
Europe. In the meantime, there is growing trend for Asian and Eastern companies to expand,
that is quite remarkable for business reality. Not only the extremely big companies, but the
middle-sized ones are expanding globally too and appear in the worlds ratings - among the
Global Fortune 500 or in the list of the Top 100 global franchises.
Mention has already been made of the fact that almost any business could be franchised
today, regardless of how profitable it is. Therefore, franchising has become a lucrative
business system worldwide, and this tendency is strong enough. Today franchising
symbolizes about only a tenth of the total number of the businesses, yet franchises hold nearly
40 per cent of the market sales176.
The main conclusion that arises from this thesis is, definitely, that international
franchising is not just a vehicle for conducting business177, but a real driver for the
globalisation process with its opportunities and risks. The world economy is constantly
changing, and the international presence is becoming necessary for many businesses to
survive. Looking back at the initial presumption, that international franchising tends to be
rather the great business opportunity, even for small or medium companies, than a risky

176

Cantrell J. : Facts About Franchise Ownership - Is Franchise Ownership For You?, http://ezinearticles.com/?FactsAbout-Franchise-Ownership---Is-Franchise-Ownership-For-You?&id=3004613.
177
See UNIDROIT: Model franchise disclosure law, (September, 2002), Explanatory report , p.10.

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International Franchising as a Method for Business Expansion


business concern, the Master Thesis with all statistical analysis and results prove its
consistency. As a matter of fact, the unit weight of franchised businesses in international trade
is continually growing. It offers the potential for the economic development to increase,
especially among countries seeking access to know-how. Consequently, international
franchising enables the companies to combine the short-run goals of small business system
with long-run perspectives of the large-scale business formats.

To crown it all, it should be pointed out that franchising itself is not automatically the
key to success. In business, as in life, there are never any guarantees. Starting new business is
always risky and tough process. If the company or individual entrepreneur has the real
potential to run the business, internationally or locally, franchising is probably the great
option to get started. Anyway, no matter what decision an investor go with, he should just
remember: whatever to put into business is what will be got back out of it.

And, finally, I would like to emphasize that the topic of this Thesis is an extremely
complex matter of business. While working on it, i personally realized how strong is the
correlation between the economic and legal environment, from the one hand, and the business
opportunities, from the other. Moreover, it is my great hope that this Diploma Thesis might be
used as specific manual for those who is on the way to make a decision to franchise.

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International Franchising as a Method for Business Expansion

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List of Tables

Table 1: Franchise Business Economic Outlook, 2007-2010..45

Table 2: Franchise Business Economic Outlook by Business Line, 2010..46

Table 3: Franchise Establishments by Business Lines, 2007-201046

Table 4: Franchise Employment by Business Lines, 2007-2010....47

Table 5: Franchise Output by Business Lines, 2007-2010.48

Table 6: Top Food Trends.......61

73