Frequently Asked Questions about Franchising
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 Franchise 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.
How Widespread is Franchising?
This answer may surprise you. It's estimated that there are over 909,000 franchisees operating within the US, creating 11 million jobs and contributing to $278 million in payroll.
What is the Franchise "System"?
In franchising, the franchisor prescribes for the franchisee a complete plan, or SYSTEM, for managing and operating the business. This plan provides step-by-step procedures for the major aspects of the business operation and anticipated management problems. The major advantage of buying a franchise is that the "system," the means for distributing the goods and/or services, has been developed, tested and proven by the franchisor. Thereby
S: Saving
Y: You
S: Serious
T: Time
E: Energy and
M: Money
What are the Major Growth Industries?
As the economy becomes more service and technology oriented, the franchises that are expected to experience rapid growth are: service-related fields such as home repair and remodeling, personnel and temporary help services, automotive service and repair; and other areas such as environmental services, health aids and services, computers and telecommunications services. While it is important to consider industry growth before investing in a franchise, it's equally 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, while a new franchise system may be tomorrows "household name" and franchising success story.
Are the Franchising "Look-alike" Characteristics a Disadvantage?
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.
What Kind of Investment is Necessary to Buy a Franchise?
Investment requirements differ tremendously. It all depends on the industry and the type of business. Total start-up costs can range from $20,000 or less, to over $1,000,000, depending on the franchise selected, and whether it is necessary to own or lease real estate to operate the business. Moreover, the initial franchise fee for most franchisors is between $10,000 and $30,000. 70% of franchisors charge an initial franchise fee of $40,000 or less. The average investment, excluding real estate costs, is between $350,000-$400,000.
Would I Make a Successful Franchisee?
A successful franchisee should be suited to the industry of which he or she is a part, suited to the particular franchise company, and suited to the franchise system generally. Important questions to ask yourself include: Am I suited to the industry physically and by experience, education, learning capacity, temperament and financial ability? What type of work is most appealing to me; for example, do I enjoy working with food, mechanical things, people, real estate, books and recordings, sporting goods, etc.? Am I prepared to work hard and take financial risks? Do my advisors, family, and friends think I am adaptable and trainable? How do I react to controls? Am I a loner - resenting authority and restraints, or can I accept guidance and direction happily? If I prefer to act as a passive investor in the franchise, will the company accept this? How do I personally feel about the company's image, products and services? The right answers to these types of questions help determine your potential success as a franchisee.
How Can I Be Sure I Won't Lose Money?
No one can be 100% sure. Although the majority of franchisees are satisfied, successful business people, some do suffer financial losses. That's why you must be particularly wary of any company which "guarantees" profit or certain success. If you hear a claim about a company that sounds too good to be true, it probably is. Investigation of all earnings claims made by a franchisor is especially important. But, regardless of earnings claims, you must recognize that your success can come only through hard work. Success or failure ultimately depends on you.
What Are Some of the Drawbacks of Owning a Franchise?
In exchange for the security, training, and marketing power of the franchise trademark, you must be able and willing to give up some of your independence. If you are a person who likes to make most decisions on your own or to chart the course of your business alone, a franchise may not be right for you. As a franchise owner, you must comply with the various controls and procedures established by the franchisor. Then, too, all successful businesses require a lot of dedication and plain, hard work. You must be prepared to make that commitment.
