A franchisee is a person or local business entity that has undertaken the opportunity and responsibility of buying a franchise, which includes the legal right to use the name, products and methods of the company that owns the brand name. The local person or business entity has paid, and in many cases continues to pay licensing fees to the company that owns the legally registered name of the product or operation. This company is called the franchisor.
Now that we have gotten that ironed out, there is a seeming endless list of franchising options offered to business people today. Be aware that there are two general types of franchise opportunities. The first is product distribution, which is the method used by many soft drink manufacturers and others. In this instance, the product to be sold is created entirely by the franchisor, and brought to the consumer by the franchisee at the place of purchase. The second, and most common, type of franchise is known as the business format franchise under this arrangement; the franchisee actually plays a part in performing the service or creating the product advertised by the franchisor. A good example of this method is shown by nationally branded fast food restaurants with local retail outlets owned by independent franchisees.
Franchises offer self reliant people the opportunity to complete in business without having to “re-invent the wheel,” as some might say. Eyeglasses, auto repair, steakhouses and construction are just a few of the business fields that have become the subjects of franchised operations. Choosing one depends on the individual’s experience, interest, and abilities, but management capabilities are at the top of the requirement list for any aspiring franchisee. As with all forms of free enterprise business, there are no guarantees.
- I have a brand that I want to expand but lack the capital to do it myself. Franchising provides you with the vehicle to expand using the capital of others, your franchisees.
- I want to expand rapidly. Franchising provides you with the ability to grow faster than if you opened units on your own.
- I don’t have the human resources to open units on my own. As a franchisor, that is not your responsibility, it is the franchisee that has to staff each location, not the franchisor.
- There is a great deal of competition in my “space” and I need to move my brand out. Franchising will provide the speed to market necessary to join the space and be competitive in your marketplace.
- I need an exit strategy, how can I sell my company with only a few company owned units? Franchisors have an open path to exit by selling the company or even going public, whereas a small company owned system does not have this capability.
Franchising provides the vehicle to accomplish all of the five items above. The negatives to franchising your business are few and are outweighed by the overall benefits of what can be accomplished with the franchise model. While there are costs associated with putting together a franchise program, these costs are minimal in the grand scheme of growing a brand into a national chain.
Selecting a good franchise consultant could make or break the success of your business opportunity.
Franchising a business is a complicated process that needs to be done in the right way by using the services of a reputable and experienced consultant.
With any consultant, you will be investing in their expertise, knowledge and time. It is a false economy to go with the natural inclination of selecting the cheapest option available. The more economical options for franchise consultancy will quite often result in less time dedicated to developing a comprehensive franchise system. Short cuts taken during this process could lead to big problems in the future.
Each business is different and so are each business owners’ goals, so an individual approach is needed to franchise a business. The ‘off the shelf’ approach to franchise development simply doesn’t work.
Simply downloading a Franchise Agreement template from the internet will not give your business, brand and network of franchise owner’s sufficient protection.
Understanding franchising in all its various forms is essential before committing resources to the full development phase. As such, taking professional advice initially can save you a lot of heartache, pain and money through the various stages of franchise development.
Not all businesses meet the criteria for a franchise operation and over the decades, Franchise Development Services has helped many companies save substantial capital by revealing why franchise development would ultimately fail for them.
For those about to enter the world of franchising, the leap may seem daunting. After all, you are about to enter into an entirely new business – the business of selling and servicing franchises. And, just like the franchisees you are hoping to sell to, you will be going in blind – not knowing what you do not know. But not to worry, just as your future franchisees can turn to you for advice on how to run their new businesses, there is a cadre of experts who can help you with the various aspects of becoming a franchisor.
The first advisor you may want to consider hiring is the franchise consultant. Franchise consultants can play a vital role both in your decision to franchise and in your ultimate franchise plan. The first and most important role of the franchise consultant should be to provide you with objective advice about the franchise-ability of your business, an assessment of whether franchising is the best option for you in particular and an understanding of the process involved in franchising, so you can make an informed decision on whether franchising makes sense for you.
Should you decide to franchise, good franchise consultants will be able to help you with a wide array of your initial franchise needs, ranging from the development of your strategic plan, quality control tools and marketing strategies and materials. Strategic planning is perhaps the most important role of the consultant. Many of the key decisions you make in the initial phase, territory, support, royalties and fees, will have a profound impact on the long-term health of your franchise organization. To get you the best answers to these questions, franchise consultants will examine industry best practices, develop structural and staffing recommendations and subject all your decisions to sophisticated financial analysis.
Another key to successful franchising involves quality control. A well-rounded consultant will be able to help you develop the tools necessary to maintain the brand: operations manuals, site selection manuals, training programs and even training videos should be a part of your quality control arsenal, and the more aggressively you are growing, the more of these tools you are likely to need.
Of course, you cannot be a franchisor without selling franchises. That means your consultant should be able to advise you on the best methods for generating franchise sales leads.
Some consultants will also be able to offer their expertise in implementing your franchise marketing, developing marketing plans, brochures, Internet sites and videos on your behalf. Again, the difference of just one incremental franchise sale is likely to mean hundreds of thousands of brands over the years, so if your consultant can help you sell more aggressively, it is money well spent.
In evaluating potential franchise consultants, you should look for two things: integrity and expertise. Be very cautious of any consultant who says you should franchise before thoroughly evaluating your business, your goals and your resources. Franchising is not right for everybody, and those who would tell you that it is may be more concerned with their own welfare than yours.
In evaluating any potential advisor, be sure you understand the qualifications of every individual who will be working on your account. If you are a start-up franchisor, you are well advised to work with people who have built businesses from the ground up.
You should also look for breadth of expertise. The franchise consultant will be providing you with advice on a wide array of issues. The more brains the firm has to put on your engagement, and the more areas of expertise, the more value you will get.
What is a Franchise?
Although the word “franchise” often conjures images of particular kinds of businesses – such as fast food restaurants or budget hotel chains – franchising is actually used across a broad spectrum of enterprises. What all franchises have in common are (i) a branded line of products and/or services, (ii) an operating system prescribed by the franchisor, and (iii) one or more fees charged to franchisees for the right to participate in the business system by selling the branded products and/or services and by utilizing the franchisor’s operating system. Franchisors and franchisees are independent business entities, and franchisors typically derive their income from initial and ongoing fees paid by their franchisees. Sometimes franchisors also sell items to franchisees or collect fees from franchisees’ suppliers.
The Legal Framework for Franchising
In some jurisdictions, there is a separate legal framework that governs franchises. To form a legally valid franchise relationship, it is necessary for the franchisor and franchisee to enter into a franchise agreement and to register it. The franchise agreement is naturally a very important document to the franchisor and the franchisee alike. Although the franchise agreement will usually be based on the franchisor’s standard form, it is important for the franchisee to review the franchise agreement carefully and negotiate its key points with the franchisor. The key issues are likely to be: the fees that the franchisee will be obliged to pay to the franchisor; the services that the franchisor will provide to the franchisee (for example, training and marketing support); the scope of the franchise rights (for example, geographical reach); the reasonableness and attainability of any performance targets or restrictions that the franchisor may impose on the franchisee; whether the franchisee is being appointed on an exclusive or non-exclusive basis; and the governing law and jurisdiction clause.
Franchise Disclosure Documents (FDDs)
Every prospective franchisee would do well to obtain detailed information about the franchisors that interest him. Fortunately, when it comes to US franchisors, this information is fairly easy to come by.
US franchisors are required to deliver Franchise Disclosure Documents (FDDs) to prospective franchisees for locations within the US, although this requirement does not apply abroad. Franchise laws in twenty other countries also require franchisors to prepare FDDs. FDDs contain invaluable information about the experience of the franchisors and their executives, including the number of units of the franchise opened and closed in recent years, litigation and bankruptcy history, initial investment estimates, audited financial statements of the franchisor, and contact information for the franchisor’s current franchisees, as well as those who have left the brand during the franchisor’s last fiscal year.
We hear a lot of questions on this topic. Is there an accurate answer?
Let’s look at some of the data. According to the International Franchise Association, franchise companies often have a revenue advantage over independents. Sometimes a very large advantage. In the food and retail sectors, for example, franchises make up only fifteen percent of the business units, but they receive 40% of the revenues.
Do the math – these franchisees average much more revenue than the typical independent business.
This seems like a huge difference. Is there any logic to it? Of course there is. If not, why would thousands of people thoroughly research franchises each year and then decide to invest?
No rational person would pay the franchise fees required to open a franchise unless they saw a clear benefit to the franchise system. What kind of advantages are there? We usually focus on three:
1. Franchises provide a proven system.
They have already figured out what works and what doesn’t. They know what demographics need to be, how many employees you need, what kind of advertising works best.
The franchise company learned their lessons the hard way – by making expensive mistakes. They already tried advertising that doesn’t work. When you become a franchisee they will share this information with you. In a snap, you have access to all of that learned experience.
2. Franchises provide support and training.
Remember, the franchise companies make more money when the franchisees make more money. They have every incentive to help the individual franchisee succeed. Good franchise companies get this.
Because of this, most franchise companies have employees with the sole task of supporting the franchisees. Typical areas might be IT support, Sales Training, Advertising, Accounting and Human Resources. Imagine the cost of an independent business trying to hire experts to give advice in all of these areas!
3. Before you invest a single dollar into a franchise, you can find out all about it.
This is the advantage that gets people’s attention. With an independent business you have to make a lot of assumptions as you do your business plan. You really have no way of knowing if those are realistic.
With a franchise, there are many other franchisees that have already started this exact same type of business. They are all a resource to you. As part of your research you have the right to call as many of the existing franchisees as you like and find out what their experiences have been. It is a federal regulation that the franchise company gives you a list of every franchisee, including the phone number.
You have no need to make an assumption that might not be accurate. If you aren’t sure, just ask some existing franchisees. They will tell you if you are on the mark or not.
These are some of the reasons franchises are more successful. But let’s look at actual data. According to a study by the accounting firm Arthur Anderson, 96.9% of franchise units were still successfully in business five years after opening.
Similarly, a study by the U.S. Small Business Administration found the average franchise had five times the first year revenue of the average independent business.
If you think about it, it all makes sense.
We would all expect a business with more support, more training, and a more proven way of doing business to have the best chance of success.
It turns out the numbers back this up: Franchises are more successful than independents.
The initial founders focused the products on hamburger and later on french fries and milkshakes, and it was as a result of the milkshake venture that McDonalds is such a huge success today, Ray Kroc was a salesman of the Multi-mixer, which was a device used to make multiple milkshakes at one time. Mr. Kroc became friends with the founders and later he partnered with the founders to Franchise McDonalds across the USA, and later the world.
Mr. Kroc, together with the founders developed the franchise document, franchise agreement, franchise manual and various other franchise templates and documents that enabled successful duplication of the franchise operation.
In the early fifties, Franchising was the first of the initial boom, and other food stores started to franchise. Pizza outlets started to appear based on recipes that originated from Italy.
What are some of the advantages to Franchise a Business?
Franchising a business may offer a number of financial benefits and practical abilities over traditional growth methods like adding other locations, other locations, all which usually need a large investment for each new location.
The main benefits may include the following:
- Quicker Expansion compared to traditional one location at a time.
- The possibility to scale earlier and bulk purchasing resulting from purchasing products, furnishings, advertising, stock and equipment and promotional materials in larger quantities for both the main business and the new franchises outlets.
- Larger and more dynamic business image can result for a company that is franchised, this then gives an increased credibility and the overall result of a higher level of professionalism.
- A low capital investment from the founding company and less risk compared to opening other locations.
- Less new staff is needed, since staff for the new locations are employed and paid by the then new franchisee.
- More motivated staff to work in and assist new locations because the franchisee owner and new operators are essentially operating their own business.
- Somewhat of a fail proof operations and more success due to the franchise document, franchise manual, franchise templates and the franchise operations manuals, and staff training manuals.
- The number of franchise establishments currently in the United States is approximately 750,000. All of these businesses directly employ well over 8 million people combined, with Quick Service Restaurants (QSR) and Table/Full Service Restaurants accounting for approximately 50% of all jobs in the franchising industry.
- Albert Singer is widely considered the father of modern-day franchise model, particularly in the United States. Singer is credited with being the first to develop a franchise contract in the mid-1800s in order to help him distribute his sewing machines across the country.
- Dave Thomas, founder of Wendy’s, learned the franchise restaurant business under Colonel Harlan Sanders of KFC while working at locations in Fort Wayne, Indiana. Thomas would later earn the money to open up Wendy’s by way of profits from an ownership stake given to him by Sanders for turning around underperforming KFC locations in Columbus, Ohio.
- There are over 250,000 possible ways to order a burger at Five Guys. The “Five Guys” behind the burger chain are Matt, Jim, Chad, Ben and Tyler.
- Pinkberry rotates its flavor offerings several times a year. However, there is one flavor that is always regardless of the time of year – the frozen yogurt shop’s “Original.” Pinkberry also offers more than 30 toppings for its yogurt to customers.
- AlphaGraphics became the first desktop publishing retailer in 1984. Throughout the years, the company’s business center offerings have evolved to include printing, marketing communications as well as document creation and management.
- The original Gold’s Gym in Venice, California is nicknamed “The Mecca” (of bodybuilding). Gold’s Gym is the largest global co-ed gym in the world with members that range from novice to professional, including Hollywood stars.
- Honest-1 Auto Care has the only ESA (Environmentally Sustainable Actions) Certified eco-friendly locations and national franchise. Pollution prevention, recycling, resource conservation, and offering and promoting eco-friendly auto care services are the four primary categories of its ESA Program.
- Dunkin’ Donuts serves more than three million customers per day. Some of these customers are part of Dunkin’ Donuts coffee subscription service, Regular Refills, where the customers’ choice of coffee blend(s) is delivered to their home or office.
- Baskin-Robbins – known for its “31 flavors” slogan – has introduced over 1,000 ice cream flavors since 1945. The top five selling Baskin-Robbins ice cream flavors are Vanilla, Chocolate, Mint Chocolate Chip, Pralines ‘n’ cream and Chocolate Chip.