In franchising, there are two groups involved. The International Franchise Association describes them as the franchisor, who lends the trademark, trade name, and business system, and the franchisee, who wants to open the new unit. The franchisee will pay a royalty and often an initial fee for the right to do business under the franchisor's name and system. According to the association, the term "franchise" technically refers to the contract binding the franchisor and the franchisee, but that term is often used to mean the actual business that the franchisee buys from the franchisor.
Fast food units can be owned either by the franchisor or the franchisee, and you usually cannot tell the difference just by walking in the door of a restaurant. Whether you eat at a Wendy's, McDonald's, or Burger King that is owned by the company or by a franchisee, the products, services, and quality should be the same.
How Franchising Works
When you buy a franchise, you are buying the name, the company's proven system for success, and its support, not only in getting your unit open but also in handling any difficulties that you may encounter in doing business. The franchisor gives one-on-one help in such areas as advertising, purchasing, inventory control, and personnel management.
Franchising really does work. For example, Carl's Jr., a well-known fast food hamburger chain on the West Coast, has been in operation for over 43 years. The company owned all of its 350 stores in 1985 when a decision was made to break with tradition and start franchising. Today, the company is growing rapidly and is in the process of opening 600 new units before 1990.
New companies like the Spaghetti Shop, which opened its first fast food Italian restaurant in 1985, also benefit through franchising. After opening his second store, Jim Teaters began to franchise. Franchising is helping the Spaghetti Shop to grow without the added cost of building new stores and the expense of hiring workers for each unit.
You may wonder how a franchised fast food chain really gets started. Take Jim Teaters, for example. He opened one Spaghetti Shop, and it was so successful that he opened a second store and hired employees to work the day-to-day operations at both stores. At that point, Teaters decided that he wanted to continue expanding but not to own and operate additional stores himself. So he decided to share his store name and business system with an independent business person, a franchisee. In return, Teaters may ask for an initial fee and/or a continuing royalty payment based on a percentage of that franchisee's sales. The business is now franchised.
Don't think that successful franchising is automatic or easy. Franchising takes a lot of planning and skill, along with considerable financial risk. If you fail in your effort to start a franchised chain, you could lose all your investment along with your core business. Most new franchising companies even operate at a loss for the first two years. During those years, you need to have money for support staff and other operating expenses. One of your expenses will be for lawyers since the franchising laws are different in every state. Because of all the groundwork that needs to be done in franchising your own new idea, many people elect to purchase a franchise from a company that is already established.
What to Consider Before Buying a Franchise
Although becoming a franchisee may appeal to you, you must also consider the disadvantages. The firm imposes strict controls that regulate such things as the quality of the product or service, which hampers independent thinking and full control of the business by the individual. The individual must also make a large capital investment in real estate and equipment since he or she is usually the owner of the franchise. And the individual must be careful not to become too dependent on the firm. The franchisee should look to the franchisor only when assistance is needed.
The International Franchise Association (IFA)
This association was established in 1960 to build and maintain a favorable economic and regulatory climate for franchising. It is the only association serving as the national representative for franchising in the United States and is increasingly becoming a major force in the area of international franchising.
The International Franchise Association recommends that a person interested in franchising investigate the following points before buying a franchise:
- the type of experience required in the franchised business
- a complete description of the business
- the hours and personal commitment necessary to run the business
- who the franchisor is, what the company's track record has been, and the business experience of officers and directors of the company
- how other franchisees in the same system are doing
- what it will cost to get into the franchise
- how much the franchisee must pay for the continuing right to operate the business
- if there are any products or services the franchisee must buy from the franchisor and how and by whom they are supplied
- the terms and conditions under which the franchise relationship can be terminated, and how many have been terminated during the past few years
- the financial condition of the company and its system
Important franchising Facts
Dr. G. Strozier, director of communications of the International Franchise Association, says that franchised sales of goods and services reached an estimated $599 billion in 1987 and were expected to reach in excess of $640 billion in 1988. Retail sales from franchise establishments comprised 33 percent of all U.S. retail sales in 1987 and were expected to increase to 34 percent in 1988. The increase is expected to continue and be around 50 percent by the year 2000. Between 1984 and 1986, franchising created one million new jobs. By the end of 1988, franchising is expected to directly employ over 7.3 million people.
International franchising news is just as good. American franchising overseas is growing. McDonald's, Kentucky Fried Chicken, and Burger King are busily introducing fast food around the world, especially in Europe and Asia. In 1971, there were 156 franchising companies operating 3,365 outlets in foreign countries. By the end of 1985, the numbers had jumped to 342 companies with 30,188 units in foreign markets-an increase of nearly 120 percent in franchisors and a nine fold increase in outlets.