Franchise Fundamentals
If you are new to franchising, the following information will give you a handle on this dynamic business model and help you understand how exactly this exciting way of doing business works.
Okay … just what is a franchise?
The contemporary franchise business model is a way of distributing goods and services. There are two basic participants in the franchise system. The franchisor who issues the right to use his trade name, logo and business plan and the franchisee who pays an initial fee and a royalty free for the right to use the name and business plan of the franchisor. In most cases, the franchisor also provides complete training and support of the franchisee.
How did franchising come about?
Actually, the word "franchise" means privilege or freedom in old French. In medieval times -- lords or members of nobility would grant the right to hold commercial activities or to hunt on his land. This notion extended to the kings granting a franchise for all kinds of moneymaking activities such as operating a ferry, building toll roads, or brewing ale. Under the auspicious of the king, individuals were given the right to monopolize various activities. Ultimately, these commercial franchise ventures became a part of European Common Law.
In the United States, the I. M. Singer Sewing Machine Company started granting distribution franchises for their sewing machines in 1851. Singer also pioneered written franchise contracts similar to contemporary franchise agreements. By the 1880's cities and municipalities began to issue franchises for utilities for water, sewerage, gas, electricity and streetcar companies. By the turn of the century, companies involved in automobile manufacturing, oil refinery and soft drink bottling began to grant the right to distribute and sell their products.
It should be mentioned that in the early 1930's ... during the times of the great Depression ... Howard Johnson established a chain of 25 "Howard Johnson" roadside stands. This was a humble forerunner of the explosive fast food industries of the 1960's and 70's.
Franchising … a business plan for success!
According to a recent study, franchises account for more than 40% of sales in the United States. Currently, there are more than 1,500 franchise companies doing business in America via more than 320,000 retail units. This activity translates into annual retail sales of over $1 trillion across 75 separate and unique industries that utilize the franchising systems for business expansion and product distribution. And it should be noted that over time, the franchise industry has maintained significant growth rates. The franchise sector employs more than 8 million people and that a new franchise opens up every 8 minutes in America. Finally, 1 out of every 12 retail businesses is a franchise business.
Franchising is more than fast food!
Too often, when people think about franchising they see images of their favorite fast food establishments. Of course, this is understandable but do you know that virtually every kind of business can be a franchise? It’s true! You can buy a franchise for such diverse businesses as: home dog training … energy drink vending … air duct cleaning … self-service ice … party retail outlets … video business cards … postal centers … advertising agencies … even golf courses!
There are choices to match the needs of any potential franchisee from the traditional retail store unit to work at home, full-time or part-time business models. No matter what your personal interests or business objective, chances are there is an intriguing franchise opportunity already available to help you achieve your specific goals.
What are the advantages of buying a franchise?
If you want to be your own boss and start your own business ... there are some definite advantages to franchising. The products ... services ... and business operations have already been established. This is just one major advantage, some more are outlined below:
Franchise companies usually provide extensive training and support to their franchisees in effort to help them succeed. They want you to be able to run the franchise profitably. In essence, your success is their success.
The corporate image and brand awareness is already recognized. Consumers are generally more comfortable purchasing items they are familiar with and working with companies they know and trust.
It saves the business owner the cost of creating and advertising a name that customers already recognize.
Most franchise companies have the opportunity to purchase all their goods, products, equipment and supplies at reduced rates because they buy in bulk. These saving can be passed back to each franchise and provide a competitive advantage in the marketplace.
Franchises have an established business framework ... minimizing the startup problems and guesswork involved in starting a new business. With a franchise, proven successful operating methods and procedures have already been researched, tested and established.
In addition to on-going sales and marketing assistance, franchisors have developed a proven, existing and successful advertising system. In addition to a well established brand, most franchise companies support their franchisees with both local and national advertising and promotions to help drive sales.
How do franchisors generate revenue?
Plain and simple, the franchisor makes money by selling the right to franchise for an initial fee. This franchise fee is used to offset the costs associated with getting the franchisee established in the business. Once the franchise outlet is up and running, the franchisor will receive an on-going royalty fee, taken as a percentage of sales. In addition, many times the franchisee needs to pay a fee to contribute to the cost of advertising the franchise brand. Finally, many franchisors earn revenue by selling supplies and services to their franchises.
Why do franchisors have such as high ratio of success?
According to statistics by the US Department of Consumer Affairs, franchise opportunities have over a 90% success ratio. There is a higher likelihood of success since a proven business formula is in place. One of the predominant reasons why non-franchise small businesses fail is lack of proper management. With a franchise, you don’t have to go it alone. You have a corporation behind you with well-established skills and a management program and a business plan that works … and works repeatedly.