Nature of Franchising

The History of franchising can be traced to the Middle Ages when landowners made agreements similar to franchise agreements with tax collectors who retained a percentage of the money they collected. In the 17th Century, franchisees were granted licenses to sponsor markets and fairs or operate ferries. The need to control the unrestricted availability of alcohol led to the ‘Tied House’ system in the UK in the 1700s wherein only landlords issued with licenses could sell alcohol. The licensed landlords were required to maintain some environmental standards in their pubs which some of them could not afford thereby leading to them leasing their pubs out to brewers for a fee.

The idea of having an alternative to alcoholic drinks led to the conceptualisation of the non-alcoholic beverage Coca-Cola in 1886. Initially, it was sold from soda fountains and this limited the scope of the market. However, the emergence of bottling technology led to the issuance of licenses to bottle Coca Cola and this was a pivotal moment in the history of franchising as monumental growth and successes were recorded in this period particularly in traditional/ product franchising.

The Harper beauty salon network is regarded as the first true business format/ retail franchise. It was created by Martha Matilda Harper in 1891 and by the mid-1920s; over 500 beauty shops were operating under the Harper network in the USA, Canada, and Europe

Franchising can in its simplest form be defined as a commercial relationship where an established business (the franchisor) grants an independent entity (the franchisee), the license to exploit its brand name and goodwill in line with the terms (franchise agreement) agreed to by the parties. Franchising is divided majorly into two types, Business format or retail franchising and Traditional or product franchising.

Business format franchising essentially involves the franchisor granting the license to replicate its business in other territories to the franchisee. Traditional franchising on the other hand involves the franchisor granting the franchisee the license to distribute its goods or products. Business format franchising is used across many sectors whilst traditional franchising is prevalent in the distribution of food and beverages, automobiles, and petroleum products.

Further, Franchising can also be adopted in the social enterprise sector by social and or essential service providers such as the government in the delivery of essential services such as electricity, gas, broadcasting, transportation and so on. The license to provide such services is granted to entities who are capable of rendering/delivering such services adequately and they are to recover the license fees and profits from the monies paid by the customers.

There are different types of Franchisees. A management and investment franchisee exercises an oversight of the business. A master franchisee is granted a license to establish the franchise in another country or continent and recruit sub-franchisees. A job franchisee involves an arrangement where the franchisee will be required to do most or all the work personally such as remote book keeping and accounting franchisee, mobile lawn mowing and treatment, fire security, and so on.

The franchisee is obliged to pay the franchisor an initial fee and royalties in exchange for the license and support from the franchisor. The franchisee is also required to comply with the obligations stated in the franchise agreement which are often around brand protection and compliance to ensure uniformity in the franchise network. It is widely accepted that franchising is about collaboration and franchisees are expected to be versatile because they will be required to wear different hats beyond daily operations, such as accounting, human resources, marketing, and administration and so on.