WHAT IS FRANCHISING?
Franchising is a method of distributing products or services. At least two levels of people are involved in a franchise system: (1) the franchisor, who lends his trademark or trade name and a business system; and (2) the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system. Technically, the contract binding the two parties is the “franchise,” but that term is often used to mean the actual business that the franchisee operates.
HOW DOES A FRANCHISED CHAIN START?
Imagine a store owned by an individual with a particular concept. If the business is successful, the owner may develop a second or third store and hire employees for the day-to-day operations. At that point, if the entrepreneur still wants to expand but prefers not to operate additional stores himself or herself, he or she may decide to “franchise” the store name and business system to an independent business person known as a franchisee. In return, the entrepreneur may ask for an initial fee and/or a continuing royalty payment based on a percentage of that franchisee's sales. The business is now franchised.
WHEN I VISIT A STORE IN MY AREA, FOR EXAMPLE, A WELL-KNOWN FAST FOOD RESTAURANT, HOW CAN I TELL WHETHER THAT RESTAURANT IS OPERATED BY THE FRANCHISOR OR A FRANCHISEE?
It's difficult to tell just by visiting the restaurant. However, if it is a franchise, there should be some signage in the restaurant which indicates that the restaurant is independently owned and operated. Many companies have stores that are operated by franchisees but also have stores that are company owned and operated. So it's entirely possible that of two stores with the same name, one may be operated by a franchisee and the other operated by the company. In either case, the products, services, and quality should be the same.
HOW WIDESPREAD IS FRANCHISING?
The answer may surprise you. By 2001, there were 767,483 business establishments in all domestic franchise systems (either owned by franchisors and franchisees), which employed almost 10 million people, with direct output close to $625 billion, and a payroll of $230 billion. These establishments account for significant percentage of all establishments in many important lines of business: 56.3% in quick service restaurants, 18.2% in lodging, 14.2% in retail food, and 13.1% in table/full service restaurants.
WHAT IS "BUSINESS FORMAT" FRANCHISING?
In business format franchising, the franchisor prescribes for the franchisee a complete plan, or format, for managing and operating the establishment. The plan provides step-by-step procedures for major aspects of the business and, anticipating most management problems, provides a complete matrix for management decisions confronted by the franchisees. The major advantage of buying a business format franchise is that the “system,” the means for distributing goods and or services, has been developed, tested, and associated with the trademark. As a result, rapid expansion of a successful retail concept can occur more quickly than through company-owned expansion.*
Sales by business format franchisors continued to increase steadily throughout the 1990s and into the 21st century. In 2001, comparing business format franchising to product distribution franchising, business format franchising had about 4.3 times as many establishments, employed 4 times as many workers, generated 2.5 times the payroll, and produced nearly 3 times as much output.
*Dave Thomas and Michael Seid, Franchising for Dummies 13 (IDG Books Worldwide, Inc. 2000).
WHAT ARE THE MAJOR GROWTH INDUSTRIES IN "BUSINESS FORMAT" FRANCHISING?
As the economy becomes more service and technology oriented, as more women enter the work force, and as a larger percentage of the population grows older, growth areas in franchising are responding to these changes. The industry categories in franchising that are expected to continue to experience rapid growth for the start of the new century are service-related fields such as home repair and remodeling, carpet cleaning, household furnishings, and various other maintenance and cleaning services; business support services including accounting, mail processing, advertising services, package wrapping and shipping, personnel and temporary help services, and printing and copying services; automotive repairs and services such as quick-lube and tune-up; and other areas such as environmental services, hair salons, health aids and services, computers, clothing, children's services, educational products and services, and telecommunications services.
While it is important to consider industry growth before investing in a franchise, it is more important to analyze an individual franchise company's track record, keeping in mind that quick growth does not always spell success. A franchise organization that grows too quickly might not have a service team in place to support all of the units properly. Overall, long range trends indicate a steady, solid growth in business format franchising. Some will fall by the wayside, as is natural with any business, but others may well be the “household name” franchise success stories of tomorrow.
SPECIFICALLY, WHAT KINDS OF BUSINESSES LEND THEMSELVES TO FRANCHISING?
Virtually every business form you can imagine. The International Franchise Association now lists more than 75 different categories to describe its members. Typically, you would think of fast food and restaurants first when thinking of franchising, but franchising covers the spectrum from almost A to Z, from advertising/direct mail to construction to dating services to home inspection to security systems to video sales and rentals. Printing and copying services, maid services, computer services, cleaners, lawn care services, real estate, hotels and motels, and travel agencies are excellent examples of successfully applying franchising to established industries.
ARE THE "LOOK-ALIKE" CHARACTERISTICS OF FRANCHISES A DISADVANTAGE? DON'T CONSUMERS WANT VARIETY?
The increasingly mobile American consumer has come to depend on and appreciate the consistent quality of franchised products and services. Today, no matter where they go, people expect and want the same quality, which is why consumers so often stop at franchised establishments. The ability to easily recognize a franchised store, restaurant or hotel from the outside guarantees there will be no surprises or disappointments on the inside. Quite simply, the public knows what to expect and likes it that way.