Many established national and international companies have chosen to franchise their business due to the fact that franchising provides the opportunity for maximum market penetration with minimum financial risk to the Franchisor. At the same time, a franchise system permits the Franchisor to maintain comprehensive control over the individual franchise locations thereby protecting the reputation and system of the Franchisor. Franchisees benefit by investing in a proven system of operation that eliminates many of the pitfalls associated with starting a business.
The SBA defines a franchise as “a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchisor or that meet the franchisor’s quality standards.”
Franchising is a $2.3 trillion industry that is responsible for creating 21 million jobs. Franchising has proven to be an extremely successful expansion method for all types of businesses. Now more than ever, individuals who desire to own their own business are turning to franchising rather than attempting to start a business on their own. They seek to minimize their risk by purchasing a proven system of operation that enables the franchisee to operate a profitable, successful business much sooner than with a traditional start-up.
When franchising a business, the most widely used model is called a “business format” franchise. Starting a franchise under this model involves the “Franchisor” granting a “Franchisee” the right to market goods and/or services in a specified territory using the Franchisor’s trade name and system of operation in exchange for payment of a franchise (“licensing”) fee and usually, ongoing royalties that are normally based on a percentage of the Franchisee’s gross sales from the franchise business. The Franchisor dictates processes and procedures franchisees must follow to start a franchise location and during the operation of the business. To assist Franchisees in starting a franchise, Franchisors provide various types of support, which may include site selection assistance, initial training, design and construction assistance, approved sources of supply for equipment, fixtures and furnishings, and advertising and marketing programs.
When considering whether to franchise your business, it is important to recognize that franchising offers tremendous advantages over the high capital costs associated with internal expansion and the infrastructure and employee issues that often accompany this expansion method. The problems associated with managing, recruiting, training and retaining a qualified work force as well as the responsibilities for the day-to-day operations of individual locations are dramatically reduced under a franchise system. Additional benefits of franchising a business include significant cost savings that can be achieved by the Franchisor and franchisees from volume purchasing and shared advertising and marketing expenses.
The benefits to a Franchisor in having an “owner” rather than an employee operating additional locations cannot be understated. A franchisee is much more motivated than an employee to ensure that the business grows and operates efficiently and profitably. This solves a major problem experienced by most companies related to hiring and retaining qualified and motivated employees when expanding the company’s operation. As previously stated, under a franchise system, day-to-day operation of the franchise business is the responsibility of the franchisee. Consequently, the Franchisor is freed to focus on overall business development, including processes and procedures, additional product and/or service development, advertising and marketing, franchise training and communication, and providing administrative and/or technical support to franchisees.
Franchising a business requires compliance with laws and regulations dictated by the FTC and individual states. For companies serious about developing and growing a successful franchise operation, it is advisable to work with qualified franchise professionals with the experience and expertise required to properly establish the franchise operation.
Steve Vandegrift is President of FranSource International, Inc., a full-service franchise development and consulting firm founded in 1997. FranSource works with both startup and existing franchisors, providing the comprehensive assistance and support required to develop, operate, and grow a successful franchise operation. Please feel free to email Steve at steve@fransource.com with your comments and questions.
