Franchising has been around in one form or another since man first began to engage
in commercial enterprise. It has evolved from a simple grant of a right or privilege in
the middle ages to the sophisticated business format franchise concept of today.
There are more than 3,000 different franchise opportunities available for Hispanics in
the U.S. today, with investments ranging from $20,000 to over $200,000.
Unfortunately, the cards have become stacked against a new small business making it big
- or making it at all. An endless stream of problems makes competition from large,
sophisticated chains just too intense. So most new start-ups end as failures. Franchising
levels the playing field. The U.S. Department of Commerce statistics show that in 1998
one-third of all U.S. retail sales were through franchised establishments. This figure is
expected to mushroom to over 50 percent by the end of this year.
What is a Franchise?
What exactly is a franchise? A franchise is a business arrangement where the
developer/owner (the franchiser) of a business concept grants others (the franchisees) the
licensed right to own and operate a businesses based on the franchiser's business concept,
using its trademark.
The franchiser helps the franchisee start his or her business, providing training,
assistance with site selection, site development and ordering inventory, advertising and
marketing support. For this, the franchisee pays an initial franchise fee, ongoing royalty
fees, advertising fees and other fees to the franchiser. And the franchisee needs to raise
the money to start the franchise and must manage its ongoing operation. The fees,
projected start-up costs, and other requirements for the franchisee are described in the
Uniform Franchise Offering Circular (UFOC).
The Federal Trade Commission requires all franchisers to submit a UFOC to all potential
franchisees before receiving money. It provides detailed information on the franchise
companyits history, information about the officers, litigation history, audited
financial statements, the franchise agreement, and a current list of franchises with
owners names and telephone numbers. The UFOC should provide enough information so that the
prospective franchisee can make an informed decision.
Types of Franchises
There are a number of different types of franchising. The type that developed early on was
the product franchise, in which a manufacturer grants a franchisee the right to sell it's
products. . Another is the name and process franchise. This format allows the franchisee
to use a special process or recipe, and to use the franchiser's name. Kentucky Fried
Chicken and One Hour Martinizing are examples.
Today, franchising constitutes the business format mode, in which the franchiser not
only grants the right to use its name and sell its products or services but also transfers
the total way of doing business that it has developed, including its operating, marketing,
and training systems, management methods, as well as technical expertise to the
franchisee. The franchiser also trains the new franchisee extensively up front and
provides ongoing training and support.
While McDonalds, H&R Block, 7-Eleven and Radio Shack are familiar names, franchises
are now available in a wide range of fields. The list of 3,500-plus companies that span
150 different categories includes such favorites as automotive, beauty and health,
business services, fast food, home improvement, hotels and motels, printing, publishing,
retail, sports, travel, video and more.
Regrettably too many over-eager, first-time franchise investors leap in without
understanding the in's and out's of a franchise relationship or the background of the
industry or company they have selected. If the potential franchisees don't know what
they're getting in to, or pick a marginal company, it may be years before they begin to
see any return on their investments. Or they can lose their investments entirely.
Fortunately, proper planning, research and investigation can reduce these risks.
A recent Gallup Poll of franchisees found that over 94 percent considered themselves
successful and that over 75 percent would buy their franchise again if they had it to do
over. The same poll also found that the average pre-tax gross income was $124,290.
Benefits of Franchising
Franchising's primary benefit is risk minimization. Starting a new business is risky. Most
studies show that over 90 percent fail within three years. The primary reason that the
failure rate is so high is because the owners have to go through the learning curve of
operating that specific type business. Franchising reduces that curve substantially.
Another reason to buy a franchise is that a franchise investment can be thoroughly
researched before any significant expenditures are made. Existing franchisees offer a
wealth of information about the business so that new franchisees can try the business on
before they buy to make sure it's a good fit for them.
Franchisers sell a defined, proven business format or method of operation, offering a
product or service that has sold successfully. An independent business is based on both an
untried idea and operation.
The experience of the franchiser's management team increases the potential for success.
This experience is often conveyed through formal instruction and on-the-job training.
Franchisees can often buy lower-cost goods and supplies through the franchiser,
resulting from the group purchasing power of all the franchises.
Established franchisers offer national or regional name recognition. While this may not
be true with a new franchiser, the benefit of starting with one is the potential to grow
as its business and name recognition grow.
Franchising provides a uniform system of operation, so that consumers receive uniform
quality, efficiently and cost-effectively. A uniform system brings with it the advantages
of mass purchasing power, brand identification, and customer loyalty, capitalizing on the
A franchiser also provides management assistance, including accounting procedures,
personnel and facility management. An individual with experience in these areas may not be
familiar with how to apply them in a new business. The franchiser helps a franchisee
overcome this lack of experience.
Franchisors help franchisees develop a business plan. Many elements of the plan are
standard operating procedures established by the franchisor. The most difficult part of a
new business is its start-up, since even experienced managers lack the knowledge to set up
a new business.
One of the biggest benefits to franchising is marketing. The franchiser can prepare and
pay for the development of professional advertising campaigns. Regional or national
marketing done by the franchiser benefits all franchisees. In addition, the franchiser can
provide advice about how to develop effective marketing programs for a local area through
a cooperative marketing fund, to which the franchisees contribute a percentage of their
It's possible to receive assistance in financing a new franchise through the
franchiser, who often makes arrangements with a lending institution to lend money to a
franchisee. The franchisee must still accept responsibility for the loan, but the
franchiser's involvement usually increases the likelihood that a loan will be approved.
A franchiser also provides training for the franchisee. This is especially important if
the concept is complex. The best training combines classroom or one-on-one training at the
franchiser's facility with field training at the franchisee's place of business.
Finally, franchising has found a solid economic niche that caters to specialized needs.
Many American consumers no longer want a muffler installed by a service station, a
hamburger from a diner, a pizza from someone who won't deliver it within 30 minutes or
their hair cut by a local barber. Specialists, it seems, "do it better," and the
franchise industry is only too willing help.