5.01 – What is a Franchise?
Three constants have fueled the growth of franchising over its long history: the desire to expand, the limitations on human and financial capital, and the need to overcome distance. While you may think of franchising mostly in the context of fast food outlets, it has transformed how people purchase products and services today. Numerous distinct industries use franchising, making it nearly impossible to drive down any major street without passing by a business that’s part of a franchise network. This lesson begins your exploration of franchising by providing some basics to help you understand what franchising is all about.
Understanding What a Franchise Is
Franchising is, in a word, a licence. It’s a system for independently owned businesses to share a common brand, distribute products and services, and expand. It’s a contractual relationship between a brand owner (the franchisor) and an independent local business owner (the franchisee).
For example, BrightStar Care doesn’t “franchise” medical and non-medical home care assistance, FASTSIGNS doesn’t franchise printing, Wetzel’s Pretzels doesn’t franchise pretzel shops, and Dat Dog doesn’t franchise hotdogs, sausages, and beer. Each “franchise” is a system that delivers quality branded products and services to consumers through a network of independently owned and operated businesses that provide a consistent customer experience.v
Playing by Brand Standards to Create Consistency
A franchise occurs when a franchisor licences its trade name and intellectual property – the brand and its operating methods – to a person or group who agrees to operate their business to the franchise system’s brand standards. The franchisor defines the brand promise, provides the franchisee with initial and ongoing support, and ensures compliance with brand standards. The magic of franchising is that consistent brand standards can be achieved at each location without the franchisor being involved in day-to-day management.
In exchange, the franchisee pays an initial franchise fee to join the system and a continuing fee known as a royalty to remain part of the franchise system.
People have grown accustomed to the consistency that comes from shopping at branded locations. From the comfort of knowing exactly what you will find when you check into a Courtyard by Marriott, to the quality of the chicken at Popeyes Louisiana Kitchen, or a haircut at Sport Clips, customers know what to expect when purchasing under a franchisor’s brand. The number of companies and industries using franchising to bring goods and services to consumers is growing, limited only by the imagination of those who understand its potential.
Setting Your Sights on Success
Franchising creates opportunities for business ownership, personal wealth, and local job generation. It also consistently delivers products and services globally to the brand standards established by the franchisor.
When exploring becoming a franchisee, be cautious of statistics touting high “success rates” in franchising. For instance, as late as 2000, the International Franchise Association (IFA) claimed franchisees had a success rate of 95 percent versus an 85 percent failure rate for non-franchised start-ups within their first five years. These statistics turned out to be inaccurate and misleading.
The IFA has frequently reminded franchisors not to use these outdated and misleading statistics. Unfortunately, some franchisors, franchise brokers, and franchise-packaging firms continue to use them to attract potential franchisees. It’s essential to focus on how well a specific franchise system is performing rather than relying on general franchising success rates. Be wary of anyone using invalid claims of franchise industry success statistics, and it’s strongly recommended to avoid working with them.
Franchising can be an effective method of starting a business, but its success depends on how well the franchise system is structured and supported. Even in highly successful franchise systems, locations can fail for various reasons. Prospective franchisees must conduct a thorough examination of every franchise opportunity that interests them.
Additional Insights for Aspiring Franchisees
Evaluating Franchise Opportunities
When evaluating franchise opportunities, consider the following:
- Franchisor Support: Assess the level of support provided by the franchisor, including training, marketing, and operational assistance.
- Brand Reputation: Research the reputation of the brand and its standing in the market.
- Financial Performance: Review the financial performance of existing franchisees within the system.
- Franchisee Feedback: Speak with current and former franchisees to gain insights into their experiences.
- Market Potential: Evaluate the market potential for the franchise in your desired location.
Legal and Financial Considerations
Entering a franchise agreement involves significant legal and financial commitments. Consider consulting with a franchise attorney and a financial advisor to thoroughly understand the terms and implications of the franchise agreement. Be aware of the initial franchise fee, ongoing royalties, and any additional costs associated with operating the franchise.
By thoroughly researching and evaluating franchise opportunities, aspiring franchisees can make informed decisions and increase their chances of success in the franchising world.
