Franchising first started with the licensing of Singer sewing machines in the1890’s. It became more predominant as a business growth strategy in the 1950’s. It has since evolved and continues to evolve with changes in technology and laws. It has become a part of every major industry and has proven its ability to grow brands around the world.
Facts
- In the United States franchised business directly accounts for more than 733,000 establishments that support nearly 7.6 million jobs and $764.3 billion of economic output for the U.S. economy.
Source; Franchise Industry Report, United States of America Department of Commerce, 2018
- In Canada, it was reported in 2018 there are over 78,000 franchisees and an estimated 1,300 franchise brands accounting for 1.5 million jobs (full- time equivalent) and $6 billion in federal taxable revenue.
Source; The Canadian Centre for Economic Analysis Report, January 2018
- In Australia there are 1,120 franchised brands with 79,000 operating units generating 472,000 permanent, part-time and casual employees employed by franchised locations with an estimated total annual sales revenue of $146 billion.
Source; Franchise ED Survey, 2016
- In the UK there are an estimated 48,600 franchised units employing over 700,000 people and contributing in excess of €17 billion to the UK economy.
Source; Franchise Landscape Report, BFA and NatWest, 2018
Franchising is a business relationship where a franchisor (a company or individual who owns the franchise system) grants a license to a franchisee (a company or person who contracts to use the franchise system) the right to use the franchisor’s brand and operating system for an initial franchise fee. In addition the franchisee provides a share of the income back to the franchisor, typically as a percentage of sales, referred to as a royalty. The license is contractual and is usually for a fixed period of time. The franchisor selects candidates to become strategic partners in implementing the business plan and selling products and services to the franchisor’s customers using a proven business model and/or their proprietary products. The fran- chise has in place policies and procedures so as to create consistency from one franchise location to the other.
Quality franchisors are constantly monitoring the customer experience. Through such things as customer surveys, comment cards, focus groups, operational reviews and mystery shopping the franchisor ensures that each location is duplicating the customer experience and building a solid brand. This protects each franchisee’s investment.
As a growth strategy it provides franchisors the ability to gain market share by increasing their points of distribution. This results in greater exposure and brand awareness. Franchisors are able to grow and have committed individuals operating and driving the customer experience at each loca- tion . From a franchisee’s perspective, it allows the franchisee to get into business with support, a brand name and a proven business model. This helps to reduce the risks involved with getting into business.
It has become a part of almost every industry. Although people most often think of fast food when they think of franchising, it is also found in retail, service, automotive, business services, real estate and lodging.
There are several things that one must understand about a franchise. You are not buying the franchise. Instead, you are acquiring a license to operate a franchise. You do not own the name but instead have a license to use the name . You do not own the business model but instead have the rights to use the business model for a period of time.
A franchise license is like a drivers license. Both are licensing relationships. You have to apply for a drivers. You have to take training and pay a fee .The drivers license has a term and at the end of the term you have to renew your license .The drivers license give you the right to drive on the road but this right also comes with obligations .You have to follow the rules of the road . (Stop at the stop sign, follow the speed limit and don’t drive while on your cell phone!) The rules are put in place in order to create unifor- mity so that we are all driving the same way and not crashing into each other. As long as you follow the rules of the road you are fine If you stop following the rules of the road, depending upon the severity, you may loose your drivers license. You would own your car but not be able to drive it.
A franchise license is the same. You pay an initial franchise fee. You take training. The franchise license has a term At the end of the term you pay a renewal fee. The franchise license gives you the right to use the franchisor’s business model, but it comes with obligations You have to follow the operating standards and systems of the franchise. (Use the logo and approved advertising, provide the same menu items, and keep the washrooms clean!) As long as you follow the rules you are fine but if you stop
following the rules of the road, depending upon the severity, you could loose your franchise license. You will still own the furniture, fixtures and equipment but you would not be able to operate it under the franchise brand. These rules are intended to create uniformity.
Uniformity is a fundamental principal to the success of a franchise there must be consistency from franchise to franchise within a given business. By having the same product in similar outlets with consistent levels of service the franchise can build confidence in the mind of the customer, and this drives people to the brand. Customers gravitate to what they know, what is familiar and what they trust the uniformity is created through operating standards and procedures that are clearly documented in operation manuals Franchisees are required to follow the operating system and use the same suppliers of product, take the same training The system, suppliers and training are all designed to create a consistent experience to the end user of the product or service and thus create an expectation and impression in the mind of the customer as a franchisee you are able to take advantage of the customer goodwill the franchisor has developed.
Compliance to the system drives the market and enhances your investment. When you first look at a franchise agreement, you may find it controlling and very one-sided in favor of the franchisor. This is normal and required to allow the franchisor to control the integrity of the brand. As a franchi- see, you must understand that you simply can’t do what you want .You are required to conform . This consistency enhances and protects your invest- ment in the franchise.
Although you can’t simply do what you want, strong franchise organiza- tions value franchisees’ input and create advisory groups to provide feed- back and input to the franchisor to assist in the strategic direction of the company. They view the franchisee and franchisor relationship as a partner- ship; a partnership in a strategic sense, not a legal sense . Franchisees are on the front lines and have strong knowledge of the needs of the customer. Strong franchisors listen and value input from franchisees.
Common Terms in Franchising
Franchisee. The person or company that receives the rights from the franchisor to do business using the franchisor’s brand and operating system.
Franchisor. The company that owns the brand and operating system and grants the franchisee the right to do business under that brand and using their business system.
Franchise Disclosure Document (FDD). Is typically required by law in many parts of the world. It provides detailed information about the fran- chise or and franchise so that the prospective franchisee can make a fully informed business decision.
Franchise Agreement. A license that defines the relationship between the franchisee and franchisor. It defines the relationship, including the rights and obligations of both the franchisee and franchisor.
Royalty. The regular payment that franchisee pays to the franchisor for the use of the brand. It is often a percentage of the franchisee’s gross sales.
Marketing Fund. The regular payment to the franchisor that pools together the franchisee’s marketing dollars to achieve more than if each franchisee spent the marketing dollars independently. Usually a percentage of gross sales.
Trademark. The brand name and logo owned by the franchisor which is licensed for use by the franchisee.
A year ago a good friend asked me to assist her in researching an existing distribution business that was for sale. It was a business that had been established for 10 years, had 6 long-term employees, several longstanding clients and was profitable. I assisted my friend in reviewing the financial statements. The business would be able to support 100% financing and still provide her with a $100,000 salary. The owner was retiring and was prepared to provide financing and stay on as a consultant for 1 year to ensure a smooth transition. It sounded like an ideal opportunity.
A lawyer was hired to draft the purchase and sale agreement. The lease agreement and other documents were reviewed. Negotiations went back and forth regarding the details of the loan payment. After much discussion, the seller was willing to provide a 5 year loan, but if the sales dropped to a certain level, loan payments could be deferred until cash flow improved. The terms were good, and yet, after one and a half years of negotiations and substantial legal bills, my friend could not move forward and walked away from the deal. She decided that entrepreneurship was not for her. When I asked her why, she stated that she was simply not willing to take the risk.
Over the years I have repeatedly seen people who are looking to get into business for themselves who spend considerable time and effort doing due diligence and research but in the end simply do not move forward. Some, I come across a few years later still looking at opportunities but still unable to make the final commitment. They are looking for a business that has no risk .With risk comes the potential for great rewards .
It is hard to go from the security of being an employee to becoming an entrepreneur. But once you have made the commitment and leap of faith to being in business for yourself, with all of its risks and rewards, it is very rare that you can go back to being an employee.
Wayne Maillet is a franchise management consultant and founder of the consulting company Franchise Specialists. Respected within franchise circles, he brings a realistic, practical understanding of business and franchising. This article is based on excerpts from his book, Franchising Demystified. The book can be ordered through most book retailers or directly from the publisher at www.franchisingdemystified.com