Franchise Business Model
The paper deals with the phenomenon of the franchise business model, its characteristic aspects, peculiarities, and perspectives. Furthermore, the paper investigates a particular type of franchising – a restaurant franchise. The host country where the franchise business is planned to be established is Australia. The purchase of franchise business requires a profound insight into the essence of the phenomenon as well as the proper and consistent consideration of the major legal issues in the context of purchase of the business and its establishment as well as further development and improvement.
According to Drisdale Law Firm (n.d.), Franchising is a major component of all business conducted in the United States. The International Franchise Association (IFA – www.franchise.org) reports that franchising spans 75 industries and constitutes more than half of some business lines. Franchising offers the seller means of expanding its distribution network while providing the buyer with a business system and brand to facilitate its business operations.
It is evident that the phenomenon of franchising is a well-developed and consistent model of the business establishment. Therefore, it is necessary to define the most significant factors, relevant legal issues, as well as business risks.
Analysis of Legal Issues and Business Risks
It is essential to dwell on the reasons for the popularity and success of franchising before analyzing legal issues and business risks.
According to Moore-Gillon, Macdonald, and Marchese (2012), the phenomenon of franchise as a significant pattern of business performance provides the owner with an excellent opportunity for perspective expansion of the territorial footprint. It is possible on the territory of one country as well as on the global and international scale. This great opportunity is provided with no excessive leveraging of the business venture in terms of financial and administrative scope. Moreover, the brand does not suffer from the significant reduction of identity and basic corporate priorities and values. The franchise business model may also be characterized by such an aspect as the process of apportioning on the scale of financial assets as well as risk dimension between two partners of the franchising business venture. Providing the proper, consistent and efficient management of corporate finances along with the alignment of business risks, challenges and perspectives may significantly contribute to the potential expansion of the business venture into a new area or market for further development.
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Moore-Gillon, Macdonald, and Marchese (2012) provide statistical evidence to illustrate the efficiency and success of the franchise business model. For instance, the most perspective models of franchising in the UK are considered to be such franchise industries as restaurant chains, fast food outlets, coffee shops, etc. “In a recent NatWest sponsored BFA Franchise Survey, more than four fifths (81%) of franchisees surveyed said they believe franchising gives a competitive edge – and nearly half cited a “big competitive advantage” – when compared with non-franchise small businesses.”
It is necessary to admit that contemporary banks are also claimed to provide significant support for franchising as a sample and relevant basis for a new business venture. Hence, it is obvious that this type of business venture is perspective and is rapidly and efficiently developed in the current course of time. Moreover, the restaurant franchise is considered to be one of the most profitable and successful types of this business model.
It is necessary to emphasize the significance of a brand name as far as it popularizes a newly opened business venture immediately. Such an effect attracts the attention of regular followers of the brand as well as the audience of potential visitors. Australia may be characterized as a country with certainly marked priorities and values. Therefore, the relevance, credibility, and authority of the brand, under which a new business venture is established, contribute sufficiently to the level of further development, popularity, and subsequent profitability. Such effects may be regarded as unconditional and sufficient advantages of the franchise business model in the course of comparison with the establishment of a unique, absolutely new brand name of the restaurant. Such a variant is much more risky and expensive. Moreover, the development of the whole concept of the restaurant brand demands not only huge costs, but also much time and professionals with a high level of competency. Hence, the alternative of the franchise business model is more reliable, secure, and potentially efficient and profitable.
The restaurant business is also considered to be in demand in the current course of time in Australia. Though, the overall success of such a business venture actually depends upon two significant factors. The first one is the exact location of the future restaurant. Given that the choice of location of the restaurant is made properly, constructively, and from the perspective of future development, it is crucial to control the course of the business plan implementation. These criteria are quite essential in terms of successful establishment and further management of the business venture. They are the basic principles which should be taken into consideration before the analysis and subsequent conclusion.
The first step in the analysis is the discussion of the major legal issues which are directly connected with the franchise business model
There are two fundamentally important legal documents which directly concern the franchise business model. According to International Franchise Association data, they are the disclosure document and the franchise agreement. The disclosure document may also be referred to as the FDD. The purpose of the FDD is to provide prospective franchisees with information about the franchisor, the franchise system and the agreements they will need to sign so that they can make an informed decision. The franchise agreement is more specific than the FDD about the terms of the relationship between the franchisor and franchisee.
These documents provide the basis for the future process of franchising and establishing a new restaurant in Australia. The position of the franchisor is crucially significant for the success of a new venture. Moreover, it is recommended not only to acquire more documents for the franchisee’s consideration, but also to provide the collection of extra data for the potential client of the franchise business venture: the overall record of the franchisor’s business performance as well as the opinion and level of satisfaction of actual customers of the brand named restaurant chain. It is significant to underline that the collection of such data should be based on the opinions and records within the territory of the restaurant’s future location. Furthermore, the data should be as detailed as possible. One more recommendation concerns the potential impact of the survey. The final outcomes of the survey should account for the attitudes, vision, expected improvements of the franchise business venture as well as personal wishes and experience concerning the brand of the selected franchisor. The data will provide a necessary and quite useful background to the establishment of the restaurant in the context of the expectations and wishes of potential visitors as well as the future development and qualitative improvement of the whole franchise business venture.
One more significant issue to dwell on in the context of major legal issues of the franchise business model performance is the question of agreements which both parties are to sign to make the whole business venture valid and legitimate. Actually, all the necessary agreements are to be included in the aforementioned disclosure document.
According to Moore-Gillon, Macdonald, and Marchese (2012), there are such types of legislation concerning the franchise business model:
- anti-trust regulations (principally to prevent restraint of trade);
- foreign trade and investment regulations which regulate the entry of foreign businesses into a domestic market;
- regulations covering technology licensing agreements;
- registration for the purposes of securing double taxation relief;
- specific local regulations dictating the franchisor/franchisee relationship.
For instance, such countries as Canada, Brazil, the USA, Australia, as well as Mexico and Georgia tend to follow closely the characteristic features of the franchise legislation system in Italy, Spain, France, and Sweden. One more significant aspect to account for is the set of specific laws which have to secure and protect the investments of the franchisee. It is a vital issue as far as the franchise business model requires significant financial expenses.
Moreover, it is compulsory to take into consideration the third parties, which appear to take part in the course of the partnership between the franchisor and the franchisee. These third parties include different suppliers, vendors, etc. They are not central, but sufficiently influential elements of the whole franchise system. Hence, it is recommended to determine and examine in detail their role in the course of the negotiations, which concern the establishment and signing of the agreement. The agreement is considered to be a cornerstone of the relationship between the counterparts of the franchise business venture. Therefore, all the nuances and aspects of the agreement should be regarded thoroughly and properly in order to avoid possible confusions or even subsequent failure of business relations between partners.
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Types of Business Risks
The next step in the course of analysis of the franchise business model of a new restaurant in Australia is the discussion of business risks.
There are five types of business risks. They include transaction risks, currency risks, cultural as well as lingual differences, political risks, and exposure to foreign law systems and courts.
The first type of business risks is the transaction risk
It comprises a framework of risks relating to the credit or payment risk that may be connected with the failure of proper and timely payment or excessive financial expenses. Transaction risks may be managed by means of advance payment or Letter of Credit.
According to Risk Management Resources Company (n.d.), the phenomenon of transaction risk management presupposes the provision of the following capacities:
- realistically assess the risk associated with a transaction,
- understand the extent to which you can realistically rely on insurance to fund the risk you determine to accept,
- negotiate with a realistic view of what is necessary to accomplish to achieve risk in proportion to benefit,
- when appropriate, determine when to walk from the deal when the realistic assessment is risk out of proportion to benefit.
The other types of transaction risks comprise counterfeiting, delivery or property risk, as well as customs classification
The delivery risk may be properly managed by means of insurance and relevant contractual terms and conditions. The alternative solutions for counterfeiting may be connected with licensee, adjusted contract terms and conditions, as well as IPR laws and enforcement within the host country.
Currency risks are directly connected with the phenomena of inconvertibility and fluctuation. The fluctuation risk is compulsory to happen in terms of international partnership as a direct ramification of the fact that currencies in the host country and in the home country are different. The risk is immediately transferred to a person who performs financial operations by accepting the foreign currency.
It is also significant to underline the fact that concerns the phenomenon of convertibility. According to Best (2011), the phenomenon of convertibility may be regarded as “the risk that capital and exchange controls may be imposed by government authorities that would prevent or materially impede the private sector’s ability to convert local currency into foreign currency and/or transfer funds to nonresident creditors.”
One more significant aspect in the context of convertibility phenomenon and its impact is the issue of insurance. The insurance is to be issued by the home country and follow all the valid regulations and norms.
The third type of business risks is quite miscellaneous and controversial as far as it involves the culture and language of each country
It is necessary to define this type of risk properly. It assumes all the differences and apparent lack of familiarity within the lingual system, social norms and standards, as well as local customs both in the host country and the home country. Subsequently, these differences may result in significant misunderstanding that leads to serious problems in the course of business performance and the cooperation process.
Furthermore, it is necessary to manage the aforementioned risk timely and properly.
- First of all, it is recommended to implement the impact of native speakers in the host country.
- Second, in order to provide guarantees and security of the whole franchise business venture, it is compulsory to make sure that there are contracts in both languages, and that they are absolutely identical.
- Besides, it is highly recommended to provide support and assistance of different consultants and intermediaries, as well as distributors and local sales agents. These agents should mitigate the potential tension between the representatives of different cultures and languages. Moreover, they help avoid and prevent misunderstandings and subsequent problematic situations. One more significant aspect is that the aforementioned agents will contribute sufficiently to the quicker process of integration between two different cultures and find mutually beneficial consensus.
The issue of political risk requires special clarification as far as it is also quite miscellaneous and controversial
According to Alon (2006), “Political risk may affect import restrictions or the remittance of royalties to the home country, significantly influencing the profitability of the foreign operation… Given the effect of political risk on international franchising, Flandmoe-Lindquist (1996) wrote that a host country policy evaluation and exchange rate management are two key skills a global franchisor must possess.”
In order to manage or prevent the political risk, it is recommended to learn the history and current political situation in both countries, then to analyze and compare the data. The conclusions of the analysis may become the key.
Furthermore, it is necessary to align all the aspects of the contract with the counterpart as far as the contract may appear to have hidden conditions. The alignment is to be performed in strict accordance with the applicable law systems.
The fifth business risk is exposure to foreign laws and courts
Actually, the phenomenon of exposure to foreign laws and courts may be defined as a direct connection between the application of foreign laws and regulations and subsequent primary risk in the course of all the business transactions on the internal level. The process of mitigation may include the alteration, adjustment, or development of the appropriate laws, licenses, and permissions. It is significant to underline the issues which should be addressed or taken into account in the course of business performance: IPR laws, corruption laws, etc.
Thus, the phenomenon of the franchise business model has been regarded from different perspectives and angles. For instance, the phenomenon was discussed in terms of five types of business risks, their definitions targeted at proper and consistent comprehension, and peculiarities and methods aimed to mitigate or even prevent them. Moreover, the aspect of general characteristic features and essence of the discussed case and the notion of the franchise business model are also presented in the paper. In general, the issue of legal aspects and contract clauses are of vital importance to the franchise business in Australia.