What Is Franchising?
A franchise business is a business in which the owner(s), or “franchisor”, sell the rights to use their service mark (trademarks), business logo, trade dress, and business systems of operations to independent third party operators called “franchisees”. The franchisor “sublicenses” the use of the trademark along with proprietary techniques often referred to as their business system. The sublicensee of these is referred to as the franchisee. The franchisee through the franchise agreement agrees to pay an initial franchise fee and ongoing fees referred to as royalties for the right under the franchise agreement to do business using the franchisor’s trademark, and proprietary operating system.
While the definition of a franchise may differ at the state level, under the Federal Trade Commission (“the FTC Franchise Rule”), which defines franchising throughout the United States, a business relationship qualifies as a franchise if three criteria are met: 1. The Franchisor licenses its trademarks, service marks, trade name, logo, or other proprietary marks to the franchisee. 2. The Franchisor has “significant operating control” or “significant operating assistance” over the franchisee’s business. 3. The Franchisee makes a payment to the franchisor of at least $500 (annually adjusted) either before or within six months of opening the business.
Do you have a proven track record of growth and profitability?
People buy franchises to learn from those who are successful. Growth and profitability are the standards that franchisees buy into. As a matter of fact, the first question a franchisee prospect usually asks is, “How much can I make?” If you’re not profitable, why would someone else want to buy your franchise? Depending on your situation, it may make sense to continue focusing on increasing your profitability before franchising.
Does your business have broad consumer appeal?
Not every business has the same appeal everywhere. Have you determined the market for your business and are these markets available for growth outside of your area? If your business is geared toward your local college campus, will it have the same appeal at other campuses? If you are providing a business service, do businesses in other regions have the same needs? Not every Franchise needs to grow nationally to be successful, but they do need to have at least a regional appeal or a specific market appeal. Is your market segment large enough for your business to flourish on a regional or national scale?
Is It Easy To Replicate Or Duplicate?
Is your business repeatable? A key to successful franchising is having a proven system in place and being able to teach others this system. Through hard-work and considerable expense, you have created something successful, but to take the next step in franchising you must be able to teach it to others through the Initial Training Program. Is your operation complex? Does it require a large number of employees to manage day-to-day? Are there special skills or licenses required? Answering these questions will help you determine whether you have the ability to duplicate your operation, which is critical to the success of future franchisees.
What is the role of the Franchisor?
It is important to understand that not every business should be franchised. It is equally important that, when you decide to become a franchisor, you do so in a way that maximizes the unique character of your business. Each element of your franchise system should be developed in a way that supports your Franchisees so that they can deliver consistently to your Brand Promise.
What is a Franchise Fee?
The Franchise Fee (also referred to as the “Initial Franchise Fee”) is the payment made by a Franchisee to the Franchisor for joining the franchise system.
What is a Royalty Fee?
A royalty fee is an ongoing fee that the franchisee pays to the franchisor. This fee is usually paid monthly or quarterly, and is typically calculated as a percentage of gross sales. These payments are collected by the franchisor to fund the franchisor entity’s actions, which include both corporate and franchise-related expenses. The ongoing royalty payments are how the franchisor makes its money, which it uses to support its franchisees and further build the business. Additionally, administrative costs of running the franchisor’s headquarters and staff are generally funded from the royalty payments. Lastly, the franchisor’s efforts to further expand and develop the brand through recruiting and bringing in new franchisees to the system is in part funded by royalties.
What is a Zor(s) = Franchisor (s)?
A Zor is the business that has chosen to expand via franchising; it means the franchisor; that is, the company that has created this unique opportunity. The word “franchisor” is sometimes spelled “franchiser” following the British spelling.
What is a Zee(s) = Franchisee (s)?
Zees are the people who choose to invest in a franchise to become business owners. They enter a business relationship with a franchising company that entitles them to use the intellectual property of the franchisor for the term of the agreement in exchange for their investment.
What attributes do successful franchisors share some common?
They are motivated to share their experience and know-how with their franchisees. They are committed to their franchisees’ success. They provide their franchisees with the tools needed to operate their businesses to brand standards. They are focused on ensuring that each franchisee operates to system standards. Great franchisors have all made their share of mistakes, and have survived them. It is their hands-on knowledge of the business they are franchising that is of the greatest value to franchisees. Franchisees benefit from the franchisor’s proven experience, which hopefully allows franchisees to avoid some of the minefields that plague many start-up businesses. Great franchisors provide initial training to new franchisees and their management, and also provide support in the training of members of the franchisee’s staff. Great franchise systems provide their franchisees with a library of systems manuals, field consulting, consumer marketing and other support, and provide each franchisee with the tools needed to operate their businesses to system standards.
Great franchisors have all made their share of mistakes, and have survived them. It is their hands-on knowledge of the business they are franchising that is of the greatest value to franchisees. Franchisees benefit from the franchisor’s proven experience, which hopefully allows franchisees to avoid some of the minefields that plague many start-up businesses. Great franchisors provide initial training to new franchisees and their management, and also provide support in the training of members of the franchisee’s staff. Great franchise systems provide their franchisees with a library of systems manuals, field consulting, consumer marketing and other support, and provide each franchisee with the tools needed to operate their businesses to system standards.
The International Franchise Association (IFA) released its annual Economic Outlook Report detailing the franchise industry’s projected economic forecast for 2020. The Report offers an in-depth look into franchising’s growth trend from 2016 to 2019, as well as a state outlook for all 50 states and Washington D.C. Conducted by FRANdata, the Report forecasts how the franchise industry is expected to continue riding the economic boom in 2020, despite growing uncertainty around the economy. “The franchise industry is responsible for creating tens of thousands of opportunities for small business ownership across the country and millions of jobs for Americans,” said Robert Cresanti, IFA’s President & CEO. The International Franchise Association (IFA)
“The franchise industry continues to pride itself on its positive impacts on communities across America. We are very excited to showcase these opportunities in our annual Economic Outlook Report. Locally-owned franchises are America’s hidden small businesses and this new report demonstrates their impact nationwide, and in every state,” continued Cresanti.
Some quick stats highlighted in the report:
- Franchise industry forecasted to add 232,000 jobs in 2020, growing total employees to 8.67 million
- The number of franchised businesses in the U.S. is forecasted to grow by 1.5% this year, to a total of 785,316 establishments
- Overall GDP contribution by the franchise industry is forecasted to grow by 4.6%, to $494.96 billion
More quick franchise stats in general:
- $2.3 trillion in total economic output
- 11.4% of U.S. private sector economy
- 1/3 of all United States retail sales
- 15% of all private sector jobs
- 781,991 franchised establishments
- Estimated employment in franchised businesses of 8.8 million people
- Economic output of $890 Billion
- Economic output represents 3% of total US Gross Domestic Product (GDP)
- Additionally, it has been previously estimated that franchising represents over 300 different business lines
Franchise Your Business Today. The Stanwood Group, LLC provides franchise development services to launch and establish a franchise system as well as ongoing consultation. Please contact us for a free consultation at (610) 660-7773 and learn if franchising is an appropriate vehicle for expanding your business. For over 20 years our management has gained substantial expertise in assisting companies with strong unit economics and good concepts to use franchising as a growth vehicle for your business. We have worked with over 150 franchisors in the retail and service businesses sector, and have considerable expertise in identifying those business model structures that have potential to scale through franchising. We will help you and your attorney analyze whether franchising is the appropriate growth strategy for you and your business.