What's in a name? An introduction to franchising

The term 'franchising' has been applied in sports, entertainment, tax collection and even pyramid schemes. Stuart Anderson traces the true meaning of 'franchising'

Despite the growing contribution the franchise industry makes to the UK economy (the latest UK Franchise Survey* estimates the industry turned over £9.1 billion in 2004*), awareness of the concept is not universal. The word 'franchise' however, is becoming more widely used as new meanings are applied to it.

The origins of the word 'franchise' are thought to be in Old French - 'franc', meaning 'free'. Only 'Franks' had full freedom in Frankish Gaul, leading to the term being adopted to describe the full rights of citizenship, including voting rights (suffrage is an example of political franchise).

This meaning was extended in the Middle Ages to cover the rights of local noblemen to collect taxes on behalf of the monarch. Usage became more widespread with feudal lords charging fees to laymen in return for certain rights to carry out community activities like operating ferries and drawing water from wells. These laymen would be said to possess the 'franchise' for their activity, a practice which is still in use by today's government, which grants franchises to public service providers such as rubbish collectors, telecommunications companies and rail services.

Throughout its usage franchising has represented a form of licensing - the granting of a privilege in return for a form of compensation (such as the right to vote in return for a mandate, permission to collect taxes in return for remaining a subject, or a concession to operate a community service in return for a fee). In business franchising the franchisor grants the franchisee the right to operate a business replicating the franchisor's brand and business model in return for an initial investment and ongoing royalty or Management Service Fee. This professional arrangement sets out an agreed territory for an agreed number of years on a renewable basis.

In North America professional sports leagues grant franchises which authorise the ownership of a team. By association the term has come to reflect the tendency of these teams to move their geographical location while retaining their original name or brand. We saw this in the UK when Wimbledon FC moved from Wimbledon to Milton Keynes (re-branding to 'MK Dons FC' in the process), an action which earned the club the nickname 'Franchise FC' in some quarters.

Similarly, business franchises are not tied to a specific area - they are designed to be replicable across the country and even internationally, all under the same brand. This nationalisation of the franchise brand brings value to each franchisee and many franchisees identify investing in a national brand as one of the main attractions of franchising.

The word 'franchise' has also been applied in the entertainment industry, with movies, games and comics, which spawn more than one sequel - such as James Bond, Harry Potter and Spider-man - often dubbed 'franchises'. This meaning is reflected in business franchising where a proven concept is replicated with the intention of achieving a similar level of success. This provides franchisees with the ability to use the lessons learned by previous franchisees to sidestep the usual pitfalls and mistakes made by new business start-ups.

Also, because the franchisee is investing in a proven and developed business concept, there is rarely a requirement for relative industry or business management experience. Rather franchising is providing a route into business ownership for thousands of people across the UK who dream of breaking the chains of employment but still desire the security of back-up from a larger organisation.

Even in business, the term franchising has been appropriated to cover a range of business activities, including offering territorial distribution licenses, sales employment opportunities, exclusivity agreements and even pyramid schemes. The British Franchise Association (bfa) pioneered the term 'Business Format Franchise' to disassociate franchising from its less ethical competitors. Members of the bfa are required to sign up to the European Franchise Federation's European Code of Ethics for Franchising and the bfa's Code of Ethical Conduct: Extension and Interpretation, which set out a number of guiding principals for the structure and behaviour of franchising (see box, right).

The Business Format Franchise relationship is often described as a 'business marriage' in which, in return for an initial investment from the franchisee, the franchisor provides licensed rights to a business system that's tried and tested, including branding, management infrastructure and protection of the know-how underlying the system. The franchise agreement provides for training in the operation of a business and the implementation of the franchise concept. This is followed by ongoing franchisor support in such activities as launching the business, sourcing stock, marketing campaigns and attaining sales contracts.

The UK Franchise Survey suggests that 96 per cent of Business Format Franchises will still be in operation in five years - an unprecedented survival rate that is being achieved in franchising because of the proven nature of franchised business concepts and the training and support offered by the franchisor. This incredible success rate drew investors and entrepreneurs to open some 500 new franchised units last year (according to the UK Franchise Survey).

These new businesses cover a range of industries, such as retail, business coaching, quick service and traditional sit down restaurants, automotive retouching, snack vending machine distribution, tax and accountancy services, lawn care and commercial cleaning. With the full training and support incorporated into the Business Format Franchise model, the opportunities offered by the franchise market represent a route into future business success with a wide range of choice for the prospective franchisee.