Franchising

Franchising is a way to grow your business that lets you sell your knowledge, experience, and concept to dedicated individuals who put up the money to open and operate new franchise locations. Franchising will let you expand with less overhead and fewer day-to-day operating headaches, while the franchise buyers pay you upfront franchise fees and ongoing royalties forever.

Franchising has expanded to include an ever-widening variety of businesses, products, and industries. Its application to new concepts and emerging industries will only increase in the future.

Franchises are generally known to the public under a well-promoted name like McDonald's® not the names of the individual franchise owners. As a result, the general public may not realize that many businesses are in fact franchises. The first box below depicts 100 well-known franchises; the second box lists 100 relatively unknown franchise companies that have more than 200 franchises each.



Historical Definition
Historically, the word "franchising" meant the granting of a right or privilege to an individual or group. In more recent times it includes business arrangements known as franchises, licenses, dealerships and distributorships, to name a few.

Regulatory Definition
The Federal Trade Commission defines "franchising" as a business relationship in which an individual owner:

1. Uses a Common Name (such as Burger King® or Dunkin' Donuts®);

2. Receives Training/Assistance/Guidance (from the Parent Company);

3. Pays a Fee To the Parent Company ($500 or more within the first six months of operation).

If a business arrangement includes these 3 elements, it's a franchise. It could be called a license, dealership, distributorship, or association but it's still a franchise and must comply with the rules of the Federal Trade Commission and certain state regulatory authorities.

Business Definition
Franchising has been described as:

A method of DISTRIBUTION of goods and services;
A method of MARKETING;
A method of GROWTH;
A method of CAPITAL ACQUISITION;

And increasingly, franchising has become:
A method of EMPLOYMENT.

For a company wishing to expand to other locations, franchising offers the opportunity to have branch locations operated by "dedicated" managers rather than company employees. A franchisee is dedicated because it's their business (operating under the franchisor's name and rules) and they've made an investment. A franchisee will sell more, service customers better, and control costs more tightly than a company employee.

What Franchising is NOT

1. Franchising is not an industry. There is no such thing; over 300 different industries and types of business utilize franchising.

2. Franchising is not a magic show. Franchising is not about selling some franchises. It's about building a company - a serious business venture. A person who franchises their restaurant to others will still be in the restaurant business. They will have to develop new menu items, new promotional programs, new décor concepts, and so forth.

Types of Franchises
Historically, franchises have been generally categorized as "product and trade name" franchises or "business format" franchises. Today, the real difference is that under the "product and trade name" franchise, the franchisor is usually the manufacturer of a product, which it wholesales to the franchisee for resale. Under the "business format" approach, the franchisee is usually not reselling a product manufactured by the franchisor. Under both formats, the franchisee is operating the business according to the franchisor's rules, methods, and systems.

You've probably heard of these franchises:
Allstate
Days Inns
Jeep
Popeyes
Applebee's
Denny's
Jenny Craig
Porsche
Arby's
Domino's Pizza
Jiffy Lube
Prudential
Arthur Murray
Dunkin' Donuts
John Hancock
Quality Inns
Athlete's Foot
Exxon/Mobil
Kentucky Fried Chicken
Radio Shack
A&W Rootbeer
Firestone
Liberty Mutual
Radisson
Bacardi
Ford
Lincoln
Ramada
Baskin-Robbins
General Motors
Major League Baseball
Re-Max
Best Western Hotels
GNC
Manpower
Rolls-Royce
Better Homes & Gardens
Goodyear
Marriott
Roto-Rooter
BF Goodrich
Guinness
Maytag
Sears Roebuck
Blockbuster Video
Haagen-Daaz
McDonald's
7-Eleven
BMW
Hallmark
Mercedes-Benz
7-Up
Budweiser
H&R Block
Metlife
Shell
Buick
Hardee's
Midas
Sheraton
Burger King
Harley-Davidson
Miller Brewing
Stride Rite
Cadillac
Heineken
Mitsubishi
Sunoco
Century 21
Hertz
National Basketball Assn.
Taco Bell
Chevrolet
Hilton
National Car Rental
Texaco
Chrysler
Holiday Inn
National Football League
Toyota
Coca-Cola
Honda
National Hockey League
U-Haul
Coldwell Banker
Howard Johnson's
Pearle Vision
Volkswagen
Comfort Inn
IHOP
Pepperidge Farm
Volvo
Coor's
Jack In The Box
Pepsi-Cola
Wendy's
Dairy Queen
Jaguar
Pizza Hut
Westin


...but you may not have heard of these - each of which has more than 200 franchises
Aaron's Rents
Cruise Planners
Maid To Perfection
Qdoba Grill
AlphaGraphics
Culver's Frozen Custard
Marble Slab Creamery
Red Robin
Americ Inn
Del Taco
Matco Tools
Results Travel
Baja Fresh
El Pollo Loco
Microtel
Rita's Water Ice
Batteries Plus
Embroid Me
Minuteman Press
Round Table Pizza
Beef O'Brady's
Express Personnel
Moe's Southwest Grill
Signs Now
Big O Tires
Fast Frame
Money Mailer
Sign-A-Rama
Boston Pizza
Fastsigns
Mr. Electric
Sir Speedy
Breugger's Bagels
Firehouse Subs
Mr. Rooter
Spherion Staffing
Budget Blinds
First Choice Haircuts
Mr. Transmission
Stanley Steamer
Buffalo Wild Wings
Fox's Pizza Den
Once Upon A Child
Steamatic
Candy Bouquet
Golden Corral
One Hour Heating
Sylvan Learning
Carstar
Great Steak & Potatoe
Pak Mail
Taco John's
Cartridge World
Hollywood Tans
Papa Murphy's
Taco Time
Certa Pro Painters
Home Instead Senior Care
Paul Davis Systems
The Goddard School
Chester's
Huddle House
Perkins Restaurants
The Little Gym
CiCi's Pizza
Hungry Howie's
Pet Supplies Plus
Tropical Smoothie Cafe
Cinnabon
Interim Health Care
PIP
Tuffy Auto Service
Clean Net
Jamba Juice
Pizza Inn
Two Men And A Truck
Comet Cleaners
Jani-King
Planet Beach
Unishippers
Comfort Keepers
Kiwk Kopy
Plato's Closet
Valpak
Cost Cutters
Labor Finders
Play It Again Sports
Village Inn Restaurants
Country Inn
Lady Of America
Post Net
Wild Birds Unlimited
Coverall
Lawn Doctor
Precision Tune
Wing Stop
Cruise One
Maid Bridgade
Proforma
Zaxby's


The History of Franchising

The roots of franchising can be traced to the end of the American Civil War and the Singer Sewing Machine Company.



But, franchising really started growing at the beginning of the 1900's, when General Motors franchised dealerships. It spread through the automobile, soft drink bottling, and gasoline industries by the 1930's. By 1950, 100 companies were franchising.

Modern franchising evolved during the 1950's with the expanding post-World War II economy, growing interstate highway system, developing suburbs, and increasing automobile ownership. A mobile American public traveled farther from home and sought familiar names with standardized service.

The high growth and emerging popularity of franchising in the 1950's, 1960's and 1970's encouraged the start up of a number of ill-conceived, get-rich-quick schemes, ultimately leading to several states regulating franchising in the early 1970's. Regulation by the Federal Trade Commission followed in 1979. This regulatory activity helped legitimize franchising to the point that it is now a widely accepted method for business expansion.

During the 1980's, franchising began a period of exponential growth. In 1980, approximately 1600 businesses franchised; by 2000, the number had more than tripled!

Franchising Today

Each year more than $1 trillion in goods and services are sold through franchises in the United States.
35% of all retail goods and services are sold through franchises.
There are over 900,000 individual franchise outlets in this country.
Each working day a new franchise opens every 5 minutes.
Over 300 different types of industries and businesses are franchising.

Such factors as, the movement from a manufacturing to a service economy, technological advances, and women entering the work force, have provided expanding opportunities for people to own their own businesses. Franchising's impact has been to accelerate this private business ownership.

The Advantages of Franchising

To Consumers
Franchising is booming because consumers like to purchase goods and services from familiar names with reliable standards of service and quality. They like to deal with businesses where the owner is on-premise.



To Franchise Buyers
These are some of the advantages of buying a franchise.

Lower Risk - Since a franchise is usually a duplicate of an already successful business, it should have a good chance of success.

Quicker Startup/Higher Sales/Higher Profit/Increased Equity - When a person buys a franchise their getting start-up support and their buying the "learning curve." As an alternative, if they were to start a similar independent business it would take longer to achieve the sales volume associated with buying a franchise. The trial and error stages have already been done by the franchisor and as a result, profits and business equity are built faster.

Be One's Own Boss - Franchising allows an individual to feel the pride and independence of owning their own business.

Training - The training an individual receives in a franchise should help them avoid mistakes and generate more volume and profits.

Support/Ongoing Assistance - Ongoing support gives a franchise owner quick access to help solve problems and a feeling of not being alone.

Collective Buying Power - Collective buying power should help reduce costs of doing business.

Regional/National Marketing - A chain of operating units can afford to generate far more exposure and advertising than can an independent, resulting in higher sales volume.

Systems/Policies/Procedures Already Tested and Established - Tested and proven systems save development time and help prevent mistakes.

Trademarks - Customer awareness of the franchise name is a tremendous benefit.

Mutual Destiny - The success of the franchise owner is in the best interest of the franchisor.

Research and Development - The franchise owner can utilize the research and development performed by the franchisor. This saves valuable time and capital.

To The Franchise Company
These are some of the advantages of franchising your business.

Provides Expansion Capitol - The franchisee makes the investment to open the branch unit.

Fast Growth - Franchising allows companies to grow quickly because the franchise buyer puts up the investment capital and provides "dedicated" management - thus freeing up the franchisor's time to open more units.

Quality On-Site Management - Since the franchisee is more dedicated than a company employee, sales and profits will be higher, expenses will be lower, customer satisfaction will be greater, and quality standards will be maintained. Today, most franchisees are well-educated, experienced, former middle managers.

Fewer Day-to-Day Operating Headaches - The franchisee makes the day-to-day operating decisions. They take care of employee problems, hiring, firing, etc.

Less Corporate Overhead - Since the franchise owner takes care of the day-to-day operating responsibility, the parent company support structure for franchise units is smaller compared to company-owned units.

Faster Market Penetration - Franchising can allow a company to penetrate the market quickly.

Higher System-Wide Sales - Research has shown that individual unit sales increase when converted to a franchise system. Because the owner is on site, a typical franchise unit will have higher sales than a company-owned unit. McDonald's® says that "We've discovered that the franchised restaurants do better than the company owned."

Captive Market For Your Products - Franchising can provide a dedicated captive market to manufacturers.

Financial Leverage - Franchising provides a way to cash in on your experience and knowledge by selling it to others.

Opens Up Regional/National Account Opportunities - Some businesses lend themselves to serving regional or national accounts, whereas a local independent couldn't service a national account.

What's Driving Franchising's Growth?

1. Consumers
Franchising provides consumers with well-known, reliable, convenient name-brand products and services.




2. Companies Wanting to Grow

Companies need to grow to maximize sales and profits and to realize economies of scale and marketing efficiencies. Franchising provides companies with expansion capital, potential for high growth, dedicated local operators sharing the risks and costs, and better service to the customer.

3. Individuals Desiring to Own Their Own Businesses
Changing economic, demographic, and social factors are encouraging people to own their own businesses. They seek to be free from the pressures of the corporate world, and control their own destinies.

Here are some of the forces driving this desire to own a small business:

The Corporate Job Squeeze
Large companies aren't loyal anymore. Faced with competitive pressures, even the best of large companies that in the past never laid off workers, now are forced to do so as a result of corporate takeovers, leveraged buyouts, and increasing global competition. Employees increasingly feel "it's every man for himself!"

Transition from a Manufacturing to a Service Based Economy
The developed countries of the world are being transformed from manufacturing to service based economies.

In the U.S. in 1900, 70% of the work force was employed in the production sector; 30% in the service sector. By 1950, the ratio was 50%/50%, and now, 70% of workers are in the service sector.

Manufacturing derives its efficiency from big mass production factories requiring a large investment to set up, thus limiting the total number of factories and eliminating the opportunity for a middle income individual to own a factory.

Service businesses realize efficiencies on a much smaller scale and therefore there can be many of them. Since a smaller investment is required to open a service business many more people can own one.

Additionally, the huge, aging baby boom generation, large numbers of women entering the workforce, the growing elderly population, changing attitudes regarding convenience and quality, emerging technologies, and mass advertising have created a tremendous demand for services and have encouraged development of a wide variety of service businesses.



The Risk Takers
Members of the current generation are more likely to take the risk to start their own businesses.

Per capita income in real terms has increased dramatically, especially since 1950.

Women now comprise 50% of the work force. While this helps drive the demand for service businesses, it also provides families with two incomes and thus the financial ability to start a new business venture.

The current generation is used to living on credit, doesn't know about "The Great Depression," and will take risks more readily than its parents.

The civil rights movement, women's movement, high pay for athletes, entertainers, and corporate executives, combined with increased education and more individual freedoms have resulted in worldwide democracy movements and individuals seeking their "fair share." Individuals want to grab at the brass ring and fulfill their dreams.

All of the factors driving people to own their own businesses are also driving them to owning a franchise. Franchising offers these people opportunity with reduced risk. The high success rate of franchises, combined with the benefits of belonging to a network or chain, make franchising a very logical, attractive method of owning a business.

The Future of Franchising

These are the major trends that we see in franchising in the near future.



Conversion of Company-Owned Stores/Restaurants/Offices/Sales Reps to Franchising

As companies become increasingly aware of the benefits of franchising, we predict many will turn to it.

The Entrance of Fortune 1000 Corporations into Franchising

Faced with a massive drain of the best talent and brains, large corporations will turn to franchising not only for its benefits but also to "keep" their best employees.

International Franchising Will Boom

With the world getting smaller, many U.S. companies will embrace franchising to expand overseas. More foreign companies, with their desire to tap the huge American market, will start franchising in this country.

Franchising Predictions

We predict that franchising will not only continue its dramatic growth but it will actually accelerate exponentially worldwide.



Dollar Sales Through Franchise Outlets
Currently over $1 trillion in the U.S., we expect it to reach $2 trillion by the year 2015.

Percentage of All Retail and Service Sales Through Franchise Outlets
Currently at 35%; we estimate that 40%-45% of all retail and service sales will be through franchise outlets by the year 2015.

Number of Franchise Outlets
Currently over 900,000; we estimate this number will rise to over 1,300,000 by the year 2015.

Number of Companies that Franchise
Currently there are approximately 6,000 companies that franchise; due to the increasing awareness and popularity of the franchise concept, we expect this number to grow to 10,000 by the year 2015.