Franchising has been around in one form or another for many years. There are more than 3,000 different franchise opportunities available in the United States. So once you have made a decision about an industry, you then need to assess your own personal skills and determine if you want to undertake a business on your own, or follow a proven formula.
What exactly is a franchise?
A franchise is a business arrangement where the developer/owner (the franchisor) of a business concept grants others (the franchisees) the licensed right to own and operate a business based on the franchiser's business concept, using its trademark.
The franchisor helps the franchisee start his or her business, providing training, assistance with site selection, site development, technology, advertising and marketing support. For this, the franchisee pays an initial franchise fee, ongoing royalty fees, advertising fees and other fees to the franchisor. 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 Franchise Disclosure Document (FDD).
The Federal Trade Commission requires all franchisors to submit an FDD to all potential franchisees before receiving money. It provides detailed information on the franchise company – its 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 FDD should provide enough information so that the prospective franchisee can make an informed decision.
Primary Benefit
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.
Franchisors 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 franchisor's management team increases the potential for success. This experience is often conveyed through formal instruction and on-the-job training.
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 proven format.
A franchisor also provides management assistance, including accounting procedures, personnel and regulatory management. An individual with experience in these areas may not be familiar with how to apply them in a new business. The franchisor 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 franchisor can prepare and pay for the development of professional advertising campaigns. Regional or national marketing done by the franchisor benefits all franchisees. In addition, the franchisor 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 gross income.
A franchisor 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 franchisor's location 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 home care from an uninsured and unqualified caregiver.