Franchising is a method of disseminating products or services. Franchising consists of a franchisor that provides use of a trademark or trade name and a business system and a franchisee that pays a franchise fee to become part of the franchise business as well as a royalty on a regular basis. For any franchisor to succeed, the majority of its franchisees should carry on profitable franchise units over the long term. A brand’s success depends on a continuing partnership between franchisor and franchisee.
The greatest attraction in franchising is the opportunity for an individual to be in command of their destiny and secure their future. The franchise model has caught on as an attractive business opportunity for wealthier individuals and investors who buy many units at once; or who buy the rights to develop a geographical area or “territory” and develop a certain number of units within a specified time-frame. These multi-unit owners, area developers, or area representatives oftentimes recruit new franchisees and support them within their territory are part of a growing movement in franchising, and account for about 50 percent of all franchised units in the U.S. today.
“Multi-brand” franchisees are also increasing. These franchisees operate different brands under a single organization, creating efficiencies, economies of scale, and market penetration to increase sales and profitability. The leading reasons successful franchisees seek additional brands are because they have “saturated” their territory for their current brand, or they are seeking a new, corresponding brand to level out the ups and downs of business or seasonal cycles. Franchisors, too, are combining several different brands under one roof, and frequently offer concessions to current franchisees that expand into a second or third brand. “Co-branding,” in which a franchisee operates two brands from the same location, is another recent trend. Co-branding saves on real estate or leasing costs, allowing more profit per square foot.
Entrepreneurs oftentimes seek franchising in order to have peace of mind. They want to know, with as much assurance as possible, that if the franchise opportunity is presented accurately and realistically by the franchisor and they take the time to perform “due diligence” by speaking with current franchisees, reading the Franchise Disclosure Document (FDD) carefully with the aid of an experienced franchise attorney and after comparing the brand and sector under consideration with the competition (franchised or not) then their chances of making money and building a successful business are better than if they started a business from scratch.
For many aspiring entrepreneurs looking at the franchise business model for the first time the business proposition can seem absurd. Why would someone pay tens of thousands of dollars before starting, and then a percent off the top every month for 10 or 15 years? For those who consider further, the answer is obvious. They can make more money faster through franchising than on their own; and they realize the potential for a greater long-term return on their investment. Legally, franchisees do not “own” the franchise but rather they are granted, or awarded, a license that gives them the right to operate and manage the franchise business. However, franchisees do own the assets of their company, and as long as they adhere to the franchise agreement have specific rights under state and federal law. Franchisees can form franchisee associations that can play a part in. They can become involved in corporate decision-making if the franchisor is amenable, or band together to oppose decisions they see as injurious to their operation and the brand in general.
Criteria of Franchising
Determining whether a business can be franchised is not an easy task however there are some predictive factors which can be used to assess the readiness of a company for franchising and the probability that it will achieve success as a franchisor.
To sell franchises, a company must first be reasonable to prospective franchisees. This can be discovered in a number of ways: organization size, number of units, years in operation, look of the prototype unit, promotion, familiarity of the brand, and strength of management.
In addition to believability, a franchise organization must be sufficiently segregated from its competitors. This can come in the form of a unique product or service, a reduced investment cost, a unique marketing tactic, different target markets or a business model sufficiently different from others.
Conveyance of knowledge
An extremely important aspect of successful franchising is the ability to teach a system to others. To franchise, a business must usually be able to systematically educate a prospective franchisee in a comparatively short period of time. If a business is so complex that it cannot be taught to a franchisee in three months, a company will struggle with franchising. Some more multifaceted franchisors offset this shortcoming by targeting only potential franchisees that are already knowledgeable in their field. A medical franchise targeting only doctors is a prime example.
A prospective franchisor should know how well a model can be modified from one market to the next. Some concepts do not modify easily over large geographic areas because of local variations in consumer tastes or preferences. Others are controlled by varying state laws. Other models work only because they are in a very unique location. Some work well due to the unique abilities or talents of the individual behind the model. Some models are only successful based on years of determination and relationship building.
Thriving prototype operations
A thriving prototype is required to exhibit that the model is proven, and is generally integrated into the training of franchisees. The prototype also functions as a testing ground for new products, new services, marketing techniques, merchandising, and operational efficiencies. The exception to this is with companies whose franchises involve the direct sale of a proprietary product or service.
All profitable businesses have systems. But in order to be franchisable, these routines must be documented in a manner that conveys them efficiently to franchisees. In all cases a franchisor will need to record its policies, procedures, systems, forms, and business routines in thorough and user-friendly written operations manual. Some franchises offer computer-based training modules or both written and computerized manuals.
Affordability reveals a prospective franchisee’s ability to pay for the franchise. This condition is as much an indication of the prospective franchisee as well as the actual cost of commencing a franchise. A franchise with a $50,000 start up cost might be affordable for some prospects but not for others. Therefore it is wise to choose a franchise fee that is reasonable to franchisees while allowing franchisors to cover the costs of starting.
Return on Investment
A franchised business must be profitable. At the same time it must allow enough profit after a royalty and other ongoing franchising expenses for the franchisees to earn a sufficient return on their investment of time and money. Return on investment must be calculated against investment to provide a consequential number. The franchise investment can be measured against other investments of equivalent risk that compete for the franchisee’s dollar. A good franchise system should allow for a ROI of at least 20 percent by the second to third year of operations.
Market movement and conditions
Market movement and conditions are paramount to long-term planning. Is the market growing or consolidating? How will those changes affect your business in the future? What impact will the Internet have? Will the franchisee’s products and services remain germane in the future? What are other franchised and non-franchised competitors doing? How will the competitive setting affect your franchisee’s likelihood of long-term success?
While franchising is a low-cost means of expanding a business, it does require varied amounts of capital to start. A franchisor needs the capital and resources to execute a franchise program. The assets required to initially begin operation as a franchise program will fluctuate depending on the extent of the expansion plan. If a company is looking to sell one or two franchised units, the necessary legal documentation may be completed at costs as low as $15,000. For franchisors targeting rapid expansion, however, start-up costs can run $100,000 or more. Once the costs of printing, audits, marketing, and personnel are considered, a franchisor may expect a budget of $250,000 or more to reach its development goals.
Obligation to relationships
Successful franchisors concentrate on building long-term relationships with their franchisees that are reciprocally rewarding. Not all franchise organizations understand the connection that exists between relationships and profits. Strong franchisee relationships facilitate the selling of franchises more effectively, introduce needed modifications into the system more easily, and encourage franchisees and their managers to provide a dependable level of products and services to their customers.
Strength of management
The single most important aspect contributing to the success of any franchise program is the strength of its management. The single most common contributor to the collapse of start-up franchisors is under-staffing or a lack of experience of management. Along with taking on new jobs duties which the franchisor may have little to no time, the franchisor needs to demonstrate expertise in fields in which he or she may have little or no experience. These areas include franchise marketing, obtaining leads, franchise sales, advertising management, training, and multi-unit operations management. A proper first step in the decision to franchise is an assessment of the question of whether or not a business concept is actually franchisable.