Franchising 101
Franchising is a method of distributing goods or services to consumers. The franchising company owns the rights to the trademarks of a business. The franchisee purchases the right to use the trademarks and operating system.
Most people associate the word “franchise” with fast food restaurants. But, there are many more types of franchise businesses, including everything from advertising to automobile repair, printing services to party supplies and many more.
Franchise Types Business Format Franchise Product Distribution FranchiseFranchise Facts
Franchise businesses account for nearly 50% of all retail sales in the United States. Franchise businesses employ more than 14 million Americans There are an estimated 4,000 franchise companies operating in the U.S. doing business through close to 500,000 retail outlets. Seventy-Five (75) industries use franchising to distribute goods and services to consumers. A 1999 study by The United States Chamber of Commerce found that 86% of franchises opened within the last five years were still under the same ownership and 97% of them were still open for business. U.S. department of commerce study conducted from 1971 to 1997 showed that during that time less than 5% franchise businesses were closed each year. Compare that to a U.S. Small Business Administration study conducted from 1978 to 1998, which found that 62% of non-franchised businesses closed within the first 6 years of their existence due to failure, bankruptcy, etc. Total sales by franchised businesses are projected to reach $1.7 trillion, this year. One out of every 12 business is a franchised business. A new franchised business is opened every 8 minutes of every business day. In 2000, the median gross annual income, before taxes, of franchisees was in the $75,000 to $124,000 range, with over 30% of franchisees earning over $150,000 per year.
History of Franchising
The word "franchise" comes from Old French meaning privilege or freedom. As economies evolved, so did the concept of franchising. It is believed that our current concept of franchising comes from the mid 1800s when a major German ale brewer granted certain taverns the exclusive right to sell their ale.
Around the turn of the century, the face of franchising looked very much the same. This system essentially granted the right to distribute and sell a product. At this time, the trend-setting model was the franchising rights concept authored by oil refineries and automobile companies.
In the 1860s, the Singer Sewing Machine Company was the first to use franchising in the United States. Singer developed written franchise contracts for the distribution of their sewing machines and was the first to implement the predecessor of modern franchise agreements.
After WWII, millions of servicemen and women returned home, and the Baby Boom began. The large work force demanded the opportunity to explore and develop more and better business opportunities, which changed the business and our economy forever. With these demands, franchising evolved into the dominant and most successful concept - business format franchising. In this type of franchising, the franchisor (example: McDonald's) not only allows the franchise to use its name and sell its products or services, but also involves the total transfer of a way of doing business. This includes marketing, operations, technical training, management techniques and expertise developed and perfected by the franchisor. The franchisor will also provide on-going training and support throughout the life of the franchise agreement.
Future of Franchising
Within the next 10 years, franchising will comprise over 50% of the retail economy and employ millions of people. This growth should be anticipated based on the simple logic of the underlying concept. Franchising offers success to aspiring, new business owners with the least amount of risk. These systems will enable hundreds of thousands of new business owners to realize the dream of successful business ownership and financial independence.
Like the US and world economies, franchising is evolving. There will be even greater opportunities for wealth creation among both franchisees and franchisors as this evolution progresses. New franchises will be developed while the existing systems become more fortified and continue to grow.
If you are ready to take the next step and go into business for yourself or if you have an existing business that you want to optimize, then you should look closely at franchising as the vehicle to take you to where you want to be in the 21st century.
Common Elements of a Franchise Agreement
Grant of Franchise
Term of Franchise*
Name of Franchise
Location of Franchise
Obligations of Franchisee
Initial franchise fee
Franchise service fees; reporting and audits
Advertising fund
Training assistance
Operation of the business format
Representations by franchisor
Representations by the franchisee
Relationships of the parties
Renewal and renewal fee*
Assignment
Termination*
Procedures after termination
Remedies for breach, and methods of enforcement, of the agreement*
Attorney fees
Amendment
Waiver
Approvals
Construction and venue
Severability
Binding to successors
Exclusive property
While there are as many franchise agreements as franchisors, the above represents several common elements fundamental to most agreements. The few that vary widely from franchisor to franchisor are identified with asterisks*.
Questions to ask yourself
How much capital do you have to invest?
What is your net worth?
How much of your net worth is liquid?
Do you require a specific level of annual income?
Are you interested in pursuing a particular field?
Are you interested in retail sales or performing a service?
Do you want a part-time or fulltime opportunity
How many hours are you willing to work?
Do you want to be an Active or Passive owner?
Do you want a “brick and mortar” business?
Do you want to have employees?
Do you want to have inventories?
Do you prefer a cash business as opposed to one that must carry accounts receivable?
Will franchise ownership be your primary source of income or will it supplement your current income?
Would you be happy operating the business for the next 20 years?
Would you like to own several outlets or only one?
Questions to ask a Franchisor
What assistance does the franchisor provide? Do they assist with training, store design, construction, site selection?
Do they have access to demographic data to get an understanding of the audience within the market area?
What types of support will the franchisor provide once your franchise has opened its doors?
After the initial investment, will there be additional financial obligations requiring working capital?
Does the franchisor offer any form of financing?
Ask the franchisor how many franchises have been sold in the state you will be operating in during the last 12 months, and how many have been opened for business?
What types of territorial restrictions and protections have been set up by the franchisor?
Is the franchisor planning on expanding within your state? Are they focusing on any specific locations?
What arrangements are established through the franchisor in terms of product supply?
Ask to see a current price sheet.
Ask if the franchisor has been forced to terminate any of its franchisees and if so, can they detail the reasons for this decision. Have any franchisees failed or gone bankrupt?
Are there any current lawsuits pending or past judgments against the franchisor?
What steps are taken to settle disputes between the franchisor and franchisees?
Questions to ask Franchisees
How long have you owned your franchise?
Is your franchise profitable?
In which month did you reach your breakeven point?
Have you made approximately the same profit that was forecast in the disclosure document?
Were your opening costs consistent with the original projections in the disclosure document?
Are you satisfied with the franchisor's support?
Are you satisfied with the product or service?
Is the operations manual, clear, up-to-date and adequate?
Are you satisfied with the marketing and promotional assistance provided by the franchisor?
Was the initial training and ongoing support sufficient for you to operate your business?
What was your background prior to buying your franchise?
Are deliveries of goods provided by the franchisor timely and competitively priced?
Is the franchisor fair and friendly to work with?
Does the franchisor listen and help you with your concerns?
Have any franchisees had disputes with the franchisor? What was their nature? Were they resolved fairly?
Do you know of any disputes between the franchisor and the government?
Do you know of any disputes with competitors?
Who are the major competitors?
What is the company's biggest competitive advantage? What is the company's biggest competitive disadvantage?
Is Franchising right for you?
Can you follow somebody else’s rules, even when you think you have a better way?
Do you think you can change the franchisor’s system after you are on board?
Do you think that your local market is different from all others in the system and that the franchisor is willing modify the system just to suit your needs?
Can you trust (with some honest skepticism) that your franchisor is working for the benefit of the entire system – even when his or her decisions do not necessarily go your way?
Are you willing to share financial information and provide required reports each month? Are you prepared to accept coaching and advice on business practices from your franchisor’s field staff?
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