Franchise Ethics and International Franchising

There are a number of additional issues pertaining to the franchisor–franchisee relationship. Three important topics, for both franchisors and franchisees, are franchise ethics, international franchising, and the future of franchising as a method of business ownership and growth.

1. Franchise ethics

The majority of franchisors and franchisees are highly ethical individuals who are interested only in making a fair return on their investment. In fact, in- stances of problems between franchisors and their franchisees tend to be iso- lated occurrences rather than prevalent practices.26 There are certain features of franchising, however, that make it subject to ethical abuse. An understanding of these features can help franchisors and franchisees guard against making ethical mistakes. These features are the following:

The get-rich-quick mentality: Some franchisors see franchising as a get- rich-quick scheme and become more interested in selling franchises than in using franchising as a legitimate means of distributing their product or service. These franchisors have a tendency to either oversell the potential of their franchise or overpromise the support they will offer to their franchisees.

The false assumption that buying a franchise is a guarantee of business success: Buying a franchise, as with all other business investments, involves risk. Any statement to the contrary is typically misleading or unethical. A franchisor must steer clear of claims that it has the “key” to business success, and a franchisee needs to be wary of all such claims.

Conflicts of interest between franchisors and their franchisees: The structure of the franchise relationship can create conflicts of interest be- tween franchisors and their franchisees. For example, franchisees benefit from the profits of a unit, while franchisors benefit from increased revenues (recall that a franchisor’s royalty is typically paid on a percentage of gross profits rather than net profits). This anomaly in the franchise arrangement can motivate franchisors to take steps that boost revenues for the entire system but hurt profits for individual franchisees. For example, a franchisor might insist that a franchisee sell a product that has high revenue but low margins (or net income). Similarly, a franchisor might sell several franchises in a given geographic area to maximize the revenue potential of the area regardless of the effect on each individual franchisee’s net income. These actions can at times be ethically questionable and can often lead to conten- tious conflicts of interest in franchise systems.

Despite the protection of law and the advocacy of franchise associations, individual franchisors and franchisees must practice due diligence in their relationships. “Buyer beware” is a good motto for franchisors selecting fran- chisees and prospective franchisees selecting franchisors. Entering into a franchise relationship is a major step for both parties and should be treated accordingly. The metaphor used frequently to describe the franchisor–franchi- see relationship is marriage. Similar to marriage, the franchisor–franchisee relationship is typically close, long-term, and painful to terminate. Each side of the franchise partnership should scrutinize the past ethical behavior of the other before a franchise agreement is executed.

2. International Franchising

International opportunities for franchising are becoming more prevalent as the markets for certain franchised products in the United States have be- come saturated.27 Indeed, heavily franchised companies, such as McDonald’s, KFC, and Century 21 Real Estate, are experiencing much of their growth in international markets. The trend toward globalization in many industries is also hastening the trend toward international franchising, and the growing middle classes in many countries are creating large populations of consumers eager for American-style goods. In fact, to illustrate how global many familiar franchise systems have become, there is a Papa John’s pizzeria in Karachi, Pakistan, a Denny’s in Christchurch, New Zealand, and a Chili’s Grill and Bar on a riverboat on the Egyptian Nile.

A U.S. citizen who is thinking about buying a franchise abroad may be confronted with the choice of buying from an American company or a foreign company, regardless of the location in the world. For U.S. citizens, these are some of the steps to take before buying a franchise in a foreign country:

Consider the value of the franchisor’s name in the foreign country: There are very few franchise systems whose names are known worldwide. Beyond a select few—McDonald’s, Coca-Cola, and KFC come to mind—the majority of trademarks well known to Americans may be known to only a small percentage of the population of a foreign country. When consider- ing the purchase of a U.S.-based franchise in a foreign country, carefully evaluate the value of the trademark in that country.

Work with a knowledgeable lawyer: Many of the legal protections af- forded to prospective franchisees in the United States are unavailable in foreign countries, highlighting the need for the purchaser of a franchise in a foreign country to obtain excellent legal advice. All the hazards involved with purchasing a domestic franchise are magnified when purchasing a franchise in a foreign country.

Determine whether the product or service is salable in a foreign country: Just because a product or service is desirable to Americans is no guarantee of success in a foreign culture. Before buying a franchise in a foreign country, determine if sufficient marketing research has been con- ducted to ensure that the product or service will have a sufficient market in the foreign country.

Uncover whether the franchisor has experience in international mar- kets: It is typically not a good idea to be a franchisor’s “test case” to see if the franchisor wants to operate in foreign markets. Be leery of franchisors with aggressive expansion plans but little international experience.

Find out how much training and support you will receive from the franchisor: If your franchise unit will be in a foreign country and the franchisor remains headquartered in the United States, make sure you fully understand the amount of training and support you can expect. Will the franchisor have an area representative in your country? If not, do you have to make an international phone call each time you want to talk to your franchisor? Will your franchisor be willing to travel to the foreign country to offer you training and support? Who pays for the international travel of the franchisor’s training staff? Who is responsible for advertising in the foreign country, the franchisor or the franchisee?

Evaluate currency restrictions: Evaluate any restrictions that the for- eign country places on the convertibility of its currency into U.S. dollars.

To avoid some of the potential problems alluded to here, U.S. franchisors typically structure their expansion into a foreign country through the following:

Direct franchising arrangement: Under a direct franchise arrangement, the U.S. franchisor grants the rights to an individual or a company (the de- veloper) to develop multiple franchised businesses within a country or ter- ritory. For example, if Play It Again Sports decided to sell franchises for the first time in Spain, Play It Again Sports may grant the rights to a Spanish company to develop multiple Play It Again Sports franchises there.

Master franchise agreement: Under a master franchise arrangement, the U.S. firm grants the right to an individual or company (the master franchi- see) to develop one or more franchise businesses and to license others to develop one or more franchise businesses within the country or territory.

Other agreements: Combinations of other arrangements are also em- ployed by franchisors expanding to foreign markets. Examples include joint-venture arrangements, direct-sales arrangements, or straight fran- chising agreements.

3. The Future of Franchising

The future of franchising appears bright. Franchising represents a large and growing segment of the retail and service sectors of U.S. businesses and is in some cases replacing more traditional forms of business ownership. More and more college graduates are choosing careers in industries that are heavily dominated by franchising. Franchising is also becoming more popular among seniors. At the same time, the number of franchises focusing on “senior care” is increasing. Aging Excellence, FirstLight HomeCare, and Visiting Angels are examples of senior care franchises, as is Comfort Keepers, which we discussed previously in this chapter.28

There are also innovations taking place today in franchising, such as the extensive use of social media that is occurring in many franchise organiza- tions.29  There are additional innovations as well, such as the extensive use of instant couponing to encourage people to drop in and make a purchase. Many restaurant franchises are revamping their menus to appeal to health- conscious consumers. There are a growing number of Internet-based franchise organizations. An example is My Destination (www.mydestination.com), which is an Internet franchise opportunity. The franchisor sells exclusive rights to franchisees for specific destinations, such as Vienna, Austria, Auckland, New Zealand, or Orlando, Florida. The franchisee then develops comprehensive in- formation about the destination, with unique travel articles and guides, insider tips, videos, and panoramic virtual tours, all designed to be posted online. The franchisees make money in a number of ways, including by selling their content to business directories and local businesses. Franchisees are carefully selected, and they must have a unique passion and love for the destination they are purchasing.

Source: Barringer Bruce R, Ireland R Duane (2015), Entrepreneurship: successfully launching new ventures, Pearson; 5th edition.

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