History of Franchising
The word franchise is rooted in the French word “franchir” meaning to free. This privilege of freedom is at the core of the possibilities that can be realized through franchising.
From about 100 franchising companies in 1950 to approximately 2,500 franchising companies today – in the U.S. alone – franchising continues to grow, with the total number of franchised business units now surpassing 900,000. A report from Price Waterhouse Coopers found that franchised businesses are responsible for:
- $2.3 trillion in total economic output
- 11.4% of the U.S. private sector economy
- 1/3 of all retail sales in the U.S.
15% of all private sector jobs
In the United States, franchising has demonstrated an ability to flourish regardless of economic factors and the outlook for franchising in the coming years and beyond is ripe for continued growth. As the population grows, so does their need for a wide variety of products and services, almost all of which fit into the franchise arena. Currently there are over 200 types of businesses that are franchising and the U.S. Department of Commerce predicts that by 2010 one out of every two businesses will operate under some form of franchise system!
Who Should Franchise?
Franchising is not for everyone. Every business is unique. How long you have been in business and whether you have multiple locations are considerations when franchising, but they are not the primary criteria. We reduce the answer down to a simple formula that we find works well when evaluating a business owner’s readiness to franchise.
Do you have a proven track record of growth and profitability?
People buy franchises to learn from those who are successful. Growth and profitability are the standards that franchisees buy into. As a matter of fact, the first question a franchisee prospect usually asks is, “How much can I make?” If you’re not profitable, why would someone else want to buy your franchise? Depending on your situation, it may make sense to continue focusing on increasing your profitability before franchising.
Does your business have broad consumer appeal?
Not every business has the same appeal everywhere. Have you determined the market for your business and are these markets available for growth outside of your area? If your business is geared toward your local college campus, will it have the same appeal at other campuses? If you are providing a business service, do businesses in other regions have the same needs? Not every franchise needs to grow nationally to be successful, but they do need to have at least a regional appeal or a specific market appeal. Is your market segment large enough for your business to flourish on a regional or national scale?
Is it easy to replicate or duplicate?
A key to successful franchising is having a proven system in place and being able to teach others this system. Through hard-work you have created something unique, but to take the next step in franchising you must be able to teach it to others. Is your operation complex? Does it require a large number of employees to manage day-to-day? Are there specials skills or licenses required? Answering these questions will help you determine whether you have the ability to duplicate your operation, which is critical to the success of future franchisees.
Corporate vs Franchising
It might be time to grow your business if:
- Customers are asking if you plan to open a location in their area
- Customers are asking you about franchising your business
- You are having success and are considering opening an additional company store
- You see other businesses expanding and think “that could be me”
Once you have given consideration to expanding, the next step is determining the best method to grow your business. Corporate growth can require considerable effort and time, not to mention the financial and human resources needed to grow a business. Lastly, expansion through franchising is built on the efforts of your franchise owners, who are qualified people having the desire, finances, and commitment to successfully grow your business with you. This overcomes the traditional obstacles of your growth. Consider the role of the Franchisor and Franchisee in opening a new location, as well as the requirements of corporate growth.
In many cases, the financial rewards of franchising exceed those of adding an additional location. As an example, consider our case study of a fictional cookie company. The owners, who we will call Roman and Isabella, have decided to expand their business because of the success of their current store, and are deciding between franchising and opening an additional corporate store. Based on the experience of operating their current business, Roman and Isabella estimate that an additional corporate store will have:
|Expected year 1 revenue||$458,000|
|Total Lease Liability
(1,600 Sq.Ft. @ $30 per Sq.Ft. x5 years)
Roman and Isabella have also carefully studied the financial performance of cookie franchises currently operating in the market and learned that the franchisors generate revenue in the following ways:
|Franchise Fees per unit||$25,000|
|Average Royalties (% of sales)||6%|
|Average Food Rebates and Additional Revenue||1%|
Roman and Isabella have learned from International Franchise Association (IFA) statistics that the median sales for a first year franchisor is between four to six franchises, so they believe they can sell five franchises in the first year. The owners estimate that based on the staggered openings of the franchises throughout the course of the year, the average annual revenue generated per franchise will be $300,000 in year one. Finally, Roman and Isabella know that they are capable of supporting the opening of the five franchise locations with their current infrastructure and will not incur any incremental cost increases.
|Year 1 Revenue||$458,000|
|Investment & Liability|
|Total Lease Liability:||$240,000|
|Total Investment & Liability:||$408,000|
|Cash Flow Generated:||$45,800|
Our example makes the assumption that five franchises will be sold in year one based on current IFA statistics, which results in $125,000 in franchise fees and $105,000 in royalties and rebates per year from franchises sold in the first year alone. More importantly, the royalties and rebates become a continuous stream of income over the term of the franchise agreement. Based on a franchise agreement lasting ten years, that equates to $1.05 million in royalties over the life of the term for just these franchises. And when you consider the additional franchise sales in each following year, you quickly see how franchising your business can become very lucrative.
As a business owner you have developed a proven system. You have faced the challenges of starting the business and created and refined the strategies and procedures responsible for its success. You know how to market your business, where to buy your products, who to hire, how to train employees and how to make your pizzas, cloths, dog baskets, or widgets better than everyone else. Many of these have been learned through hard, exhaustive and expensive mistakes – mistakes which you now know not to repeat. This experience is invaluable!
Franchisees benefit from the lessons you have learned, enabling them to open their business faster and less expensively. Being a part of your system allows franchisees to integrate your methods for generating sales and operating the business thus increasing their likelihood of success. Sharing these valuable experiences with your Franchisees is what allows them to be in business “FOR themselves and not BY themselves.”
As the franchisor, you benefit from having franchisees that will help you overcome and conquer the three biggest obstacles to expansion: money, time and people.
- Money. Franchising allows you to use other people’s money to grow your business. The cost of expansion is shifted to the franchisees, as they bear the financial obligation of opening the business, purchasing inventory, providing personal guarantees on leases, managing employees and providing the working capital. In most cases, the cost for a complete franchise startup program and first year marketing expenses is less than the cost of opening one additional company owned location. The best part is that franchising provides you with a perpetual, residual revenue stream in the form of royalties, rebates and supplies that will continue to reward you well into the future.
- Time. Competition is quick to move on market opportunities. Franchising provides a vehicle for growing your business quickly, whether your intent is to grow locally, regionally, nationally or internationally. The best part is that you will continue to grow and expand as long as there are available territories and people that want to purchase the product or service that your program offers.
- People. As an owner, you understand that good employees are hard to find. You also know that dealing with personnel and human resource issues consumes time that could otherwise be spent expanding your business. So why not build your business around other owners – people that care about the business as much as you do? Remember while this is your concept and your business model, the individual franchised businesses belong to the franchisees. They own it. They work it. They are financially and emotionally invested in it.
One of the main advantages of operating in a franchise system is that you have control over the entire system of franchisees. What many business owners don’t consider when opening additional company-owned units is that they can’t be in two places at once. Because your franchisees are financially invested owners who are required to operate within the parameters outlined in the franchise agreement, you have greater control than if you opened additional units and relied on managers to operate them.
We understand operations, marketing and advertising – but most importantly we understand cash flow and the cash requirements necessary to expand your business. With that in mind, we will tailor your Franchise Program to meet your specific needs and budget. In most cases, we can have you ready to begin selling franchises in as little as 90 days, so you can quickly begin experiencing the financial rewards of franchising. We also offer extended payment terms to meet the cash flow demands of any business owner.
It would be great if you had all your procedures in place. In reality, most of the companies that we work with are so involved in the day-to-day operation of the business that they don’t have time to put what is in their head on paper. Our disciplined approach and experience enables us document your business procedures and processes in an organized, coherent format.
Our Free Business Evaluation & Consultation will evaluate if your business is ready to be franchised. It will cost you about 60 minutes of your time to find out if you are ready. In our experience, for each business that we see that works as a franchise opportunity, there are two others that don’t.
We will need your focus to develop your franchise program and your future franchisees will need your focus to assist them as they operate their businesses. We know from experience that growing and operating corporate locations while attempting to franchise can have a negative impact. It takes your focus away from the franchise system and has the potential to cause both you and your franchisees to suffer from the lack of attention.
There is no one answer to this question. If your business has been profitable and will generate a return on a franchisee’s investment after deducting a royalty, then you very well may be ready to begin franchising. As a rule of thumb, you should have been in business for one year with a solid financial track record so that potential franchisees can better evaluate the opportunity. But there are also exceptions to this rule, as proven by current franchisors who have sold hundreds of units despite starting their franchise program within the first year of their business’s operation. Consequently, we feel that having proven business results and a successful business model are more important factors than your time in business. Our Free Business Evaluation & Consultation can help answer this question.
No. Franchising is a gradual growth process and your initial franchisees can usually be supported with your existing staff. However, you will eventually need to expand your support staff. How quickly and how many support staff you will add will be based upon where you plan on growing and how fast you intend to grow. As part of your franchise business plan, we will model the stages of the business cycle and show when you will need to add staff and which staff you will need as your system grows. This analysis also details the incremental costs of the new positions.
Simply stated, franchising allows you to use other people’s money and time to grow your business. In addition, royalty payments from your franchisees create a guaranteed revenue stream for the life of the franchise agreements. Powerful!
Franchising is not complicated provided you have the right team supporting you. Our initial two-day client startup meeting will help us to understand your business model and provide the basis for your franchise program. Following that two-day meeting, you will have weekly contact with our team to review information related to the different components of the franchise program. The operations manual is usually the most time-consuming aspect. Depending on how well documented your systems are, the completion of this piece may require a few months in order to avoid disruption to your daily business operations.