As a New Year begins, now is a great time to brush up on basic facts about franchising. Whether you’ve vowed to buy a franchise in 2008, or already own a franchise and just want to make sure you have your facts straight, here’s your opportunity to learn the basics.
Starting with a real basic: What is franchising?
Franchising is a way of distributing products or services. There are at least two levels of people involved in the franchise system. The franchisor, who lends his business system or trade name, and the franchisee, who pays an initial fee and a royalty fee for the right to use the name and business system of the franchisor. Often, the franchisor will provide full training and support to their franchisees as well.
Franchise history – How it all began.
The word “franchise” comes from old French, meaning privilege or freedom. There are multiple versions of how franchising began. The first story states that in an effort to collect taxes, governments would select certain people to gather fees within a given geographical area. These “collectors” kept a portion of the payments they gathered and then remitted the balance to the Pope. Others say franchising began when the local sovereign bestowed the privilege to hold fairs and trade freely. Basically, this was an endorsement of a monopoly on commercial ventures. This practice took place throughout the Middle Ages and eventually became part of European Common Law. Franchising continued to develop throughout history. In the 1840’s, German ale brewers granted exclusive rights to certain taverns to sell their brew. Then, in 1851, the Singer sewing machine company granted limited distributorships for their famous sewing machines. The format, language, and contractual agreements from the Singer sewing machine company’s first distributorships are still used as a model for franchising documents today.
The growth and success enjoyed by those involved with franchising.
Sales by franchises account for more than 40 percent of sales by all U.S. businesses. There are over 1,500 franchise companies operating domestically through more than 320,000 retail units. This creates annual retail sales of over $1 trillion across 75 industries that use franchising as a business expansion and product distribution model. Growth rates for the franchise industry are driven by both new franchise sales and retail sales at the local level. Historically, the industry has maintained significant growth rate increases. The trend in rising growth rates has continued and is expected to only increase with time.
Industry analysts estimate that franchising employs more than 8 million people and that a new franchise opens up every 8 minutes somewhere in the U.S. Also, approximately 1 out of every 12 retail businesses is a franchised business. (Statistics provided by the International Franchise Association)
Burgers, burgers, burgers… Not the only franchise concept available!
When many people think of franchises, they think of hamburgers, fries, and subs. The reality is that just about every business model you can think of, from golf cruise companies to home cleaning companies and from homemade ice cream stores to direct mail companies can be franchises. Use Franchise Solutions’ Franchise Finder tool to identify businesses that match your industry category of interest and investment level. There are choices to match every need, from the classic retail business model to work at home, part-time opportunities.
What business isn’t suitable for franchising? Very few! There are over 75 industries that contribute to the franchising community. From fast food to advertising and sign companies to hotels, the list is limitless and the opportunities to own the perfect business are plentiful. Visit Franchise Solutions today to find your perfect business in the right industry.
Why buy a franchise? What can they offer that an original business cannot offer you?
Buying a franchise means you are buying into a functioning and proven business model. There is a significantly lower rate of failure for franchisees than for entrepreneurs with original business concepts. Almost 80% of new business start-ups fail each year, but with a franchise you will be buying into a proven and successful concept. Additionally, many franchises profit because the items/services they sell already have a name and reputation behind them.
How do franchisors make money?
Typically, the franchisor sells the right to a franchise for an initial flat fee called the “franchise fee”. The franchisor does not usually make a profit from the franchise fee, but in reality this fee is used to offset the costs associated with getting you set-up and started in your own business, from advertising to training. This fee is in addition to the actual costs associated with opening a franchise unit in one’s local market. Once you’re in business, the franchisor will often receive ongoing payments, such as royalty fees, taken as a percentage of sales. Many franchsiors will also sell supplies and services to their franchises.
Why do franchisees have such a high rate of success?
A franchise’s business system should provide a formula for operating a successful business. Typically, operating strategies have been systemized and optimized by the time the company is franchised and the company should be able to help franchisees with any challenges that occur. According to the SBA, businesses typically fail because of a lack of management skills. With hard work, you and your franchisor should be able to avoid and overcome any problems that occur. In surveys, nine out of ten franchise owners stated that their business was at least somewhat successful.
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If you’re ready to welcome the New Year in by making the life-changing decision to become a franchisee, or if you simply want to learn more about franchising, continue exploring Franchise Solutions today!