Frequently Asked Questions about Franchising

What is Franchising?

Franchising is a method of distributing products and services. At least two levels of people are involved in the 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 franchiser’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 franchise operates.

How does a Franchised 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 B 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.

What is “Business Format” Franchising?

In business format franchising, the franchisor prescribes for the franchisee a complete plan, or format, for managing and operating the establishment. The plan provides step-by-step procedures for major aspects of the business and, anticipating most management problems, provides a complete matrix for management decisions confronted by the franchisee. The major advantage of buying a business format franchise is that the “system”, the means for distributing goods and or services, has been developed, tested, and associated with the trademark. As a result, rapid expansion of a successful retail concept can occur more quickly than through company-owned expansion.

What are the major growth industries in ‘business format’ franchising?

As the economy becomes more service and technology orientated, as more women enter the work force, and as a larger percentage of the population grows older, growth areas in franchising are responding to these changes. The industry categories in franchising that are expected to continue to experience rapid growth for the start of the new century are service-related fields such as home repair and remodeling, carpet cleaning, household furnishings, and various other maintenance and cleaning services; all business support services including accounting, mail processing, advertising services; automotive repairs and services such as quick-lube and tune-up; and other areas such as environmental services, hair salons, health aids and services, computers, clothing, children’s services, educational products and services, and telecommunications services.

While it is important to consider industry growth before investing into a franchise, it is more important to analyze an individual franchise company’s track record, keeping in mind that quick growth does not always spell success. A franchise organisation that grows too quickly might not have a service team in place to support all the units properly. Overall, long range trends indicate a steady, solid growth in business format franchising. Some fall by the wayside, as is natural with any business, by others may well be the ‘household name’ franchise success stories of tomorrow.

Specifically, what kinds of businesses lend themselves to franchising?

Virtually every business form you can imagine. The International Franchise Organisation now lists more than 75 different categories to describe its members. Typically, you would think of fast food and restaurants first when thinking of franchising, but franchising covers the spectrum from almost A to Z from advertising/direct mail to construction to dating services to home inspection to security services to video sales and rentals. Printing and copying services, maid services, computer services, cleaners, lawn care services, real estate, hotel and motels, and travel agencies are excellent examples of successfully applying franchising to established industries.

Are the ‘Look-Alike’ characteristics of franchises a disadvantage? Don’t consumers want variety?

Increasingly, mobile consumers have 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 shop 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 should I consider before buying a franchise?

Among the points which IFA recommends for investigation are:

      a.    the type of experience required in the franchise business;

b.    a complete understanding of the business;

c.     the hours and personal commitment necessary to run the business;

d.    who the franchisor is, what the track record has been, and the business experience of its  officers and directors;

e.    how other franchisees in the same system are doing;

f.      how much it’s going to cost to get into the franchise

g.     how much you’re going to pay for the continuing right to operate the business;

h.     if there are any products or services you must buy from the franchisor and how and by whom they are supplied;

i.      the terms and conditions under which the franchise relationship can be terminated or renewed, and how many franchisees have left the system during the past few years;

j.      the financial condition of the franchisor and its system

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 $20,000 and $30,000.

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 and products and services? The right answers to these questions help determine your potential success as a franchisee.

When I visit a store in my area, for example, a well-known fast food restaurant, how can I tell whether that restaurant is operated by the franchisor or a franchisee?

It’s difficult to tell just by visiting the restaurant. However, if it is a franchise, these should be some signage in the restaurant which indicates that the restaurant is independently owned and operated. Many companies have stores that operated by the franchisees but also have stores that are company owned and operated. So it’s entirely possible that of two stores with the same name, one may be operated by a franchisee and the other operated by the company. In either case, the products, services, and the quality should be the same.

How widespread is Franchising?

The answer may surprise you. In 2000, most analysts estimated that franchising companies and their franchisees accounted for $1 trillion in annual U.S. retail sales from 320,000 franchised small businesses in 75 industries. Moreover, franchising is said to account more than 40 percent of all U.S. retail sales. Industry analysts estimate that franchising employs more than 8 million people, a new franchise outlet opens somewhere in the U.S. every 8 minutes, and that approximately 1 out of every 12 retail business establishments is a franchised business.

How do you explain the success rate for franchised business?

“Success” is a subjective term. A September and October 1997 Gallup Organization study on current franchise owners and attitudes towards their franchise experience revealed that more than nine of ten franchise owners stated that they considered their franchise to be somewhat or very successful. Two of three respondents said that would not have been successful if they tried to open the same business on their own. The franchising system is designed to provide a formula for operating a successful business. Unavoidable business mistakes have been worked out of the system through experience and the franchisor is available to assist when new challengers arise. The Small Business Administration says most business fail from lack of management skills. With a franchised business, your franchisor should be eager to help you overcome problems. Your hard work and the franchisor’s expertise spell a strong partnership.

How Can I Be Sure I Won’t Lose Money?

No one can be 100% sure. Although reports indicate that 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 b the franchisor. Then, too, all successful businesses require a lot of dedication and plain, hard work. You must be prepared to make that commitment.

Why should I be concerned whether a company is a member of the International Franchise Association?

Companies that belong to IFA must meet certain membership requirements. They must have a satisfactory financial condition and comply with all applicable franchise laws. In addition, all members must agree to abide by the Code of Ethics. IFA members are kept abreast of every change in franchising laws. IFA provides continuing educational programs for members on how to conduct their businesses. They receive the latest information about topics such as improving relationships with franchisees, use of technology, public relations, marketing, advertising, field operations, networking B and things a company with an eye to the future must know and implement to compete in the market place. IFA members are committed to the future… to learning… to succeeding.

Are there any current trends in Franchising?

Among the most important trends in franchising today are the internationalization of franchising, the emergence of women and minorities in franchising, and the increased use of technology. All of these have profound and positive effects on franchising and make it an even more dynamic method of doing business today.