A franchise is a continuing relationship between a franchisor and a franchisee in which the franchisor's knowledge, image, success, manufacturing, and marketing techniques are supplied to the franchisee for a consideration. This consideration usually consists of a high “up-front" fee, and a significant royalty percentage, which generally require a fairly long time to recover.
About 10% of the 20 million U. S. businesses operate under some kind of franchise agreement. About 3,000 companies sell franchises to on the order of 25,000 new buyers each year, or about one every 20 minutes.
Franchises account for over a third of all retail sales. Franchising offers those who lack business experience (but do not lack capital) a business with a good probability of success. It is a ready-made business, with all the incentives of a small business combined with the management skills of a large one. It is a way to be “in business for yourself, not by yourself. "
Franchises take many forms. Some are simply trade-name licensing arrangements, such as TrueValue Hardware, where the franchisee is provided product access and participation in an advertising cooperative. Some trade name licenses, particularly in skin-care products, are part of a multi-level marketing system, where a franchisee can designate sub-franchisees and benefit from their efforts.
Others might be distributorships, or manufacturer's representative arrangements, such as automobile dealerships, or gasoline stations. It could be Jane's Cadillac, or Fred's Texaco; the product is supplied by the franchisor, but the franchisee has a fair amount of latitude in how the business is located, designed and run. The franchisor will frequently specify showroom requirements and inventory level criteria, and could grant either exclusive or non-exclusive franchise areas. The most familiar type of franchise, however, is probably the “total concept" store such as McDonald's. Pay your franchise fee, and they will “roll out" a store for you to operate.
The advantages can be considerable. The franchise fee buys instant product recognition built and maintained by sophisticated advertising and marketing programs. The franchisor's management experience and depth assists the franchisee by providing employee guidelines, policies and procedures, operating experience, and sometimes even financial assistance. They provide proven methods for determining promising locations, and a successful store design and equipment configuration. Centralized purchasing gives large-buyer “clout" to each location.
The large initial cost can be difficult to raise. The highly structured environment can be more limiting than it is reassuring. Continuing royalty costs take a significant portion of profits. Several small business periodicals evaluate and rank franchise opportunities. There are now several franchise “matchmaking" firms who can assist in the evaluation process.
How do you choose among all the available franchises? Most prefer a business that complements their interests or builds on their experience. Even if you hire someone to manage the business, expect to spend a lot of time with the operation.
Is the name well known? If not, what are you paying for? Is the fee structure reasonable, and all costs clearly described? Is the franchisor professional? Evaluate them on the clarity of the agreement, and how well your rights are protected, the strength of their training and support program, and their commitment to your success. Be sure to talk to current franchisees about their experiences. Beware of a franchisor committed to a rate of growth that exceeds their ability to manage; they may not be sufficiently interested in the sales they have already made.
Is a franchise a sure path to instant riches? Is it the only hope for independent firms in today's market? Can Jerry's Quick Oil Change compete with SpeeDee or Jiffy? Does the franchise deliver business that we might not have gotten anyway? Is it really entrepreneurship; did I go into business or did my money?
John B.Vinturella, Ph.D . has almost 40 years experience as a management and strategic consultant, entrepreneur, author, and college professor. For 20 of those years, Dr. Vinturella was owner/president of a distribution company that he founded. He is a principal in business opportunity sites jbv.com and muddledconcept.com , and maintains business and political blogs.