Benefits Outweigh Risks in Franchising

Franchising has been around in one form or another since man first began to engage in commercial enterprise. It has evolved from a simple grant of a right or privilege in the middle ages to the sophisticated business format franchise concept of today.

There are more than 5,000 different franchise opportunities available in the U.S. today, with investments ranging from $20,000 to over $200,000.

Unfortunately, the cards have become stacked against a new small business making it big - or making it at all. An endless stream of problems makes competition from large, sophisticated chains just too intense. So most new start-ups end as failures. Franchising levels the playing field. The U.S. Department of Commerce statistics show that in 1998 one-third of all U.S. retail sales were through franchised establishments. This figure is expected to mushroom to over 50 percent by the end of this year.

What is a Franchise? What exactly is a franchise? A franchise is a business arrangement where the developer/owner (the franchiser) of a business concept grants others (the franchisees) the licensed right to own and operate a businesses based on the franchiser's business concept, using its trademark.

The franchiser helps the franchisee start his or her business, providing training, assistance with site selection, site development and ordering inventory, advertising and marketing support. For this, the franchisee pays an initial franchise fee, ongoing royalty fees, advertising fees and other fees to the franchiser. 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 Uniform Franchise Offering Circular (UFOC).

The Federal Trade Commission requires all franchisers to submit a UFOC 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 UFOC should provide enough information so that the prospective franchisee can make an informed decision.

Types of Franchises There are a number of different types of franchising. The type that developed early on was the product franchise, in which a manufacturer grants a franchisee the right to sell it's products. . Another is the name and process franchise. This format allows the franchisee to use a special process or recipe, and to use the franchiser's name. Kentucky Fried Chicken and One Hour Martinizing are examples.

Today, franchising constitutes the business format mode, in which the franchiser not only grants the right to use its name and sell its products or services but also transfers the total way of doing business that it has developed, including its operating, marketing, and training systems, management methods, as well as technical expertise to the franchisee. The franchiser also trains the new franchisee extensively up front and provides ongoing training and support.

While McDonalds, H&R Block, 7-Eleven and Radio Shack are familiar names, franchises are now available in a wide range of fields. The list of 5,000-plus companies that span 150 different categories includes such favorites as automotive, beauty and health, business services, fast food, home improvement, hotels and motels, printing, publishing, retail, sports, travel, video and more.

Regrettably too many over-eager, first-time franchise investors leap in without understanding the in's and out's of a franchise relationship or the background of the industry or company they have selected. If the potential franchisees don't know what they're getting in to, or pick a marginal company, it may be years before they begin to see any return on their investments. Or they can lose their investments entirely. Fortunately, proper planning, research and investigation can reduce these risks.

A recent Gallup Poll of franchisees found that over 94 percent considered themselves successful and that over 75 percent would buy their franchise again if they had it to do over. The same poll also found that the average pre-tax gross income was $124,290.

Benefits of Franchising 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.

Franchisers 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 franchiser's management team increases the potential for success. This experience is often conveyed through formal instruction and on-the-job training.

Franchisees can often buy lower-cost goods and supplies through the franchiser, resulting from the group purchasing power of all the franchises.

Established franchisers offer national or regional name recognition. While this may not be true with a new franchiser, the benefit of starting with one is the potential to grow as its business and name recognition grow. 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 franchiser also provides management assistance, including accounting procedures, personnel and facility management. An individual with experience in these areas may not be familiar with how to apply them in a new business. The franchiser 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 franchiser can prepare and pay for the development of professional advertising campaigns. Regional or national marketing done by the franchiser benefits all franchisees. In addition, the franchiser 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.

It's possible to receive assistance in financing a new franchise through the franchiser, who often makes arrangements with a lending institution to lend money to a franchisee. The franchisee must still accept responsibility for the loan, but the franchiser's involvement usually increases the likelihood that a loan will be approved.

A franchiser 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 franchiser's facility 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 hair cut by a local barber. Specialists, it seems, "do it better," and the franchise industry is only too willing help.