All About Franchising
Now that you are embarking upon the challenging yet rewarding journey of franchising and business ownership, you no doubt have some questions. Since this particular foray into business ownership is specific to franchises, it is prudent to understand all aspects of this fascinating business opportunity.
The concept of franchising, as it is known today, began with the American inventor, Isaac M. Singer. After Singer innovated the sewing machine, his attempts to make money from his work were halted by two factors. One was that potential customers had to be taught how to use the sewing machine before they would buy it and the other was that Singer did not have enough money to support a large machine manufacturing capacity. However, inspiration struck Singer once again. He realized that if he sold the rights to his business concept, he could use the money to expand his manufacturing and allow the enterprising spirit of others to sell and spread knowledge of his invention. And because each new business owner was self-financed, Singer could sidestep the costs of opening up large numbers of businesses on his own.
Although Singer’s methods were only marginally successful, his ideas were copied with greater success by many companies afterwards. Coca-Cola achieved success by utilizing Singer’s methods to distribute responsibility of manufacturing and distributing throughout many local environments. It didn’t take long before car companies and oil companies followed suit. The direct descendent to modern franchising began around 1919 with quick-service food companies. They collected fees in exchange for use of their name, logos, supplies, and operating principles. In conjunction with the emerging highway system in America, the streamlined franchising process soared.
The Many Flavors of Franchising
The concept of franchising comes in many shapes and flavors. They fall into three basic categories:
- Distributorships, in which the parent company grants the offeree the capacity to sell the parent company’s products. Car and heavy equipment manufacturers tend to use this model.
- Licensing Agreements, in which the parent company grants the offeree the capacity to sell the parent company’s products without imposing a particular business structure. Coca Cola employs a business model of this type where almost any business can house and operate a soda machine.
- Business format franchises, in which the parent company grants the offeree the rights to operate a duplicate business of the parent company. Most big franchise companies use this model such as McDonalds and Subway.
For our definition, franchising is a business format like the third example, in which the offeror of the franchise (known as the franchisor) and the offeree of the franchise (known as the franchisee) enter into a relationship whereby the franchisee is granted the rights to run a duplicate business operation in a designated territory. The franchisee usually pays ongoing fees for marketing funds and continued use of the business concept and name. The franchisee’s business also acts as an extension of the original concept, automatically spreading the services and name of the parent company.
Franchising can also be described as a combining of capabilities and resources in a partner-like manner. The franchisor contributes a successful business model, training, advice, and the tools necessary for success. The franchisee contributes the initial capital investment, willingness to learn, time, effort, and ongoing fees. The International Franchise Association defines a franchise as follows:
"a contractual relationship between the franchisor and the franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format or procedure owned by or controlled by the franchisor, and in which the franchisee has made or will make a substantial capital investment in his business from his own resources."
A System that Works
In 1979, Congress granted the Federal Trade Commission (FTC) the rights to regulate some aspects of franchising. Franchises must now disclose certain information to prospective franchisees which usually takes the form of a Uniform Franchise Offering Circular (UFOC ). Many states also have strict regulations regarding the sale and distribution of franchises.
Because franchisees are given a proven system to follow-selling goods and services that abide by the parent company’s standards—franchises are capable of providing consistent, quality goods and services more efficiently and over a wider area than most other forms of business. Research and statistics continually show that franchises have a far higher success rate than start-up businesses.