In a sense, the franchise business model whose primary purpose is risk minimization. Every study ever done on the success rate of new (non-franchise) business startups concludes the same thing. Starting up a new non-franchised business has a much higher failure rate than starting a franchised business. 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.
Unfortunately, the market place is not very tolerant of the inexperienced neophyte trying to learn how to operate a new business. If you can’t compete in the market place, you get eaten by the sharks very quickly, you go bust, you lose money, your credit, your home, your reputation and sometimes even your family. Failing in business can be a horrible experience. Unfortunately this happens to thousands of poor souls every year in the U.S., and it is so unnecessary. Unless you have considerable experience in the specific type business that you are considering going into, it is very probable that you will fail.
Business format franchising is as close as you are going to come in today’s market place to a guarantee of success. All the studies done have found that franchise new business startups rarely fail and when they do it is typically because the franchisee did not stick to the franchiser’s systems. In all human endeavor, there is involved, a learning process. This learning process requires going through a series of trial and error encounters wherein knowledge is gained by trying and failing, trying and failing, again and again, and eventually trying and succeeding. This process is generally called the learning curve.
In the context of franchising, the franchiser has already gone through the learning curve and has learned the secrets of success for the specific business. In business format franchising all that has been learned by going through the curve is transferred to the franchisee. This is fundamentally why you buy a franchise, to minimize risk and give yourself the best possible chance to succeed.
Another reason why it is prudent to buy a franchise is that a franchise investment can be thoroughly researched before any significant expenditures are made. With a new business startup (non-franchise) you are always operating in the dark. No matter how much research you do it is very difficult to get a handle on so many aspects of the new business. With a franchise the franchiser is a wealth of information about the business from how to prepare a pro forma to the best personality traits for the business. But the most important information comes from the existing franchisees.
With a good systematic approach you can get answers to nearly all the really key questions. Such as, do you feel that you were properly trained, how long did it take before you reached break even, what is your annual return on investment, how do you feel about the day to day duties of the business, and if you had it to do over, would you do it again? You can in a very real sense try the business on before you buy to make sure it is a good fit for you.
Another very important reason to buy a franchise is intertwined into its basic nature. Franchising inherently leads to rapid growth, because the franchisees provide the expansion capital. There are few restraints to growth in franchising. As a franchise system expands into hundreds of units many positive things begin to happen. The name begins to become well known because people see it everywhere. Most people associate size with success. The bigger the franchise the better it must be.
The large number of units enables the franchise to advertise heavily, which tends to increase sales. A synergy begins to be created in which success begets success. The franchise begins to squeeze out competition through its sheer size. The franchise can buy products in large quantity at significant discounts, which it passes on to the franchisees. The synergy just grows and grows.
In summary, the primary reason you should buy a franchise as opposed to starting up a non-franchise new business, is to minimize risk and enhance your chances of success. Also, when conducting your franchise due diligence, keep in mind the free services of FranFinders expert franchise consultants.
Wednesday, February 29, 2012
Wednesday, February 22, 2012
The Upside of Franchise Ownership
The following benefits provide a good rationale for going into business by purchasing a franchise business. These must be balanced by the costs or disadvantages.
Lower Risks. Most business experts agree that a franchise operation has a lower risk of failure than an independent business. The statistics on this vary depending on the definition of failure. Whatever statistics are used, they consistently suggest that a franchise is more likely to succeed than are independent businesses.
Established product or service. A franchisor offers a product or service that has sold successfully. An independent business is based on both an untried idea and operation. Three factors will help you predict the potential success of a franchise. The first is the number of franchises that are in operation. The second predictor is how long the franchisor and its franchisees have been in operation. A third factor is the number of franchises that have failed, including those bought back by the franchisor.
Experience of franchisor. The experience of the franchisor's management team increases the potential for success. This experience is often conveyed through formal instruction and on-the-job training.
Group purchasing power. It is often possible to obtain lower-cost goods and supplies through the franchisor. Lower costs result from the group purchasing power of all franchises. To protect this benefit, most franchise agreements restrict the franchisee from purchasing goods and supplies through other sources.
Name recognition. Established franchisors can offer national or regional name recognition. This may not be true with a new franchisor. However, a benefit of starting with a new franchisor is the potential to grow as its business and name recognition grow.
Efficiency in operation. Franchisors discover operating and management efficiencies that benefit new franchisees. Operational standards set in place by the franchisor also control quality and uniformity among franchisees.
Management assistance. A franchisor provides management assistance to a franchisee. This includes accounting procedures, personnel management, facility management, etc. An individual with experience in these areas may not be familiar with how to apply them in a new business. The franchisor helps a franchisee overcome this lack of experience.
Business plan. Most franchisors help franchisees develop a business plan. Many elements of the plan are standard operating procedures established by the franchisor. Other parts of the plan are customized to the needs of the franchisee.
Start-up assistance. The most difficult aspect of a new business is its start-up. Few experienced managers know about how to set up a new business because they only do it a few times. However, a franchisor has a great deal of experience accumulated from helping its franchisees with start-up. This experience will help reduce mistakes that are costly in both money and time.
Marketing assistance. A franchisor typically offers several marketing advantages. The franchisor can prepare and pay for the development of professional advertising campaigns. Regional or national marketing done by the franchisor benefits all franchisees. In addition, the franchisor can provide advice about how to develop effective marketing programs for a local area. This benefit usually has a cost because many franchisors require franchisees to contribute a percentage of their gross income to a co-operative marketing fund.
Assistance in financing. It is possible to receive assistance in financing a new franchise through the franchisor. A franchisor will often make arrangements with a lending institution to lend money to a franchisee. Lending institutions find that such arrangements can be quite profitable and relatively safe because of the high success rate of franchise operations. The franchisee must still accept personal responsibility for the loan, but the franchisor's involvement usually increases the likelihood that a loan will be approved.
Proven system of operation. An attractive feature of most franchises is that they have a proven system of operation. This system has been developed and refined by the franchisor. A franchisor with many franchisees will typically have a highly refined system based on the entire experience of all these operations.
When conducting your franchise due diligence, keep in mind the free services of FranFinders expert franchise consultants.
Lower Risks. Most business experts agree that a franchise operation has a lower risk of failure than an independent business. The statistics on this vary depending on the definition of failure. Whatever statistics are used, they consistently suggest that a franchise is more likely to succeed than are independent businesses.
Established product or service. A franchisor offers a product or service that has sold successfully. An independent business is based on both an untried idea and operation. Three factors will help you predict the potential success of a franchise. The first is the number of franchises that are in operation. The second predictor is how long the franchisor and its franchisees have been in operation. A third factor is the number of franchises that have failed, including those bought back by the franchisor.
Experience of franchisor. The experience of the franchisor's management team increases the potential for success. This experience is often conveyed through formal instruction and on-the-job training.
Group purchasing power. It is often possible to obtain lower-cost goods and supplies through the franchisor. Lower costs result from the group purchasing power of all franchises. To protect this benefit, most franchise agreements restrict the franchisee from purchasing goods and supplies through other sources.
Name recognition. Established franchisors can offer national or regional name recognition. This may not be true with a new franchisor. However, a benefit of starting with a new franchisor is the potential to grow as its business and name recognition grow.
Efficiency in operation. Franchisors discover operating and management efficiencies that benefit new franchisees. Operational standards set in place by the franchisor also control quality and uniformity among franchisees.
Management assistance. A franchisor provides management assistance to a franchisee. This includes accounting procedures, personnel management, facility management, etc. An individual with experience in these areas may not be familiar with how to apply them in a new business. The franchisor helps a franchisee overcome this lack of experience.
Business plan. Most franchisors help franchisees develop a business plan. Many elements of the plan are standard operating procedures established by the franchisor. Other parts of the plan are customized to the needs of the franchisee.
Start-up assistance. The most difficult aspect of a new business is its start-up. Few experienced managers know about how to set up a new business because they only do it a few times. However, a franchisor has a great deal of experience accumulated from helping its franchisees with start-up. This experience will help reduce mistakes that are costly in both money and time.
Marketing assistance. A franchisor typically offers several marketing advantages. The franchisor can prepare and pay for the development of professional advertising campaigns. Regional or national marketing done by the franchisor benefits all franchisees. In addition, the franchisor can provide advice about how to develop effective marketing programs for a local area. This benefit usually has a cost because many franchisors require franchisees to contribute a percentage of their gross income to a co-operative marketing fund.
Assistance in financing. It is possible to receive assistance in financing a new franchise through the franchisor. A franchisor will often make arrangements with a lending institution to lend money to a franchisee. Lending institutions find that such arrangements can be quite profitable and relatively safe because of the high success rate of franchise operations. The franchisee must still accept personal responsibility for the loan, but the franchisor's involvement usually increases the likelihood that a loan will be approved.
Proven system of operation. An attractive feature of most franchises is that they have a proven system of operation. This system has been developed and refined by the franchisor. A franchisor with many franchisees will typically have a highly refined system based on the entire experience of all these operations.
When conducting your franchise due diligence, keep in mind the free services of FranFinders expert franchise consultants.
Wednesday, February 15, 2012
What's Ahead for Franchising?
The growth of the franchise business is inevitable, because of the inescapable logic of the underlying concept. Franchising clearly offers aspiring, new business owners the best possible chance of succeeding with the least risk. Within a decade or less, franchising will comprise over 50% of the retail economy, will employ millions of people, and will enable hundreds of thousands to realize the American dream of successful business ownership.
As the U.S. and world economies grow with the ever increasing populations, and the move toward free market economies, new franchise concepts will come on the scene and the solid, well managed existing franchise companies will continue to grow.
There is a move toward better protection of franchisee rights and over time this will push more franchisers towards structuring their relationships with their franchisees in a totally win/win manner. Most franchise agreements in today's market are written strongly in the favor of the franchiser. Franchising is evolving; it's getting better conceptually and in reality. There are greater opportunities for wealth creation among both franchisees and franchisers today then ever before.
The future of franchising is as bright as the sun and if you want to take the big step and go into business for yourself or if you have an existing business that you want to optimize, then you should look closely at franchising as the vehicle to take you to where you want to be in the 21st century. By utilizing the free services of a FranFinders expert franchise consultant, you will be on your way to the future.
As the U.S. and world economies grow with the ever increasing populations, and the move toward free market economies, new franchise concepts will come on the scene and the solid, well managed existing franchise companies will continue to grow.
There is a move toward better protection of franchisee rights and over time this will push more franchisers towards structuring their relationships with their franchisees in a totally win/win manner. Most franchise agreements in today's market are written strongly in the favor of the franchiser. Franchising is evolving; it's getting better conceptually and in reality. There are greater opportunities for wealth creation among both franchisees and franchisers today then ever before.
The future of franchising is as bright as the sun and if you want to take the big step and go into business for yourself or if you have an existing business that you want to optimize, then you should look closely at franchising as the vehicle to take you to where you want to be in the 21st century. By utilizing the free services of a FranFinders expert franchise consultant, you will be on your way to the future.
Wednesday, February 8, 2012
The Birth of Franchising
The word Franchise comes from old French meaning privilege or freedom. In the middle ages a franchise was a privilege or a right. In those days, the local sovereign or lord would grant the right to hold markets or fairs, to operate the local ferry or to hunt on his land. This concept extended to the Kings granting a franchise for all manner of commercial activities such as building roads and the brewing of ale. In essence the king was giving someone the right to a monopoly for a certain type of commercial activity. Over time the regulations governing franchises became a part of European Common Law.
Over the centuries the franchising concept has evolved as the economies of the nations of the world have evolved. In the 1840’s in Germany certain major ale brewers granted franchises to certain taverns, giving those taverns the exclusive right to sell their ale. This was the beginning of the concept of franchising as we know it today.
The first American franchise business is reputed to be the Singer Sewing Center, developed by Isaac Singer in 1858. After Singer invented the sewing machine, he encountered two significant obstacles in bringing it to market. Consumers had to be taught how to use the new invention before they would buy, and Singer lacked the capital to manufacture his machine on a mass basis. Once Singer seized upon the idea of selling the rights to local business people to sell his machine and train users, his enterprise expanded rapidly. Fees for the license rights helped fund his manufacturing, and because each franchisee was self-financed, Singer was spared the expense of hiring each center’s manager. Singer had written franchise contracts, which were the forerunners of modern franchise agreements.
In the 1880’s cities began to grant monopoly franchises to streetcar companies and utilities for water, sewerage, gas and later electricity.
Around the turn of the century, the oil refinery companies and the automobile manufacturers began to grant the right to sell their products. At this stage in the evolution of franchising it was essentially just the granting of the right to distribute and sell a manufacturer’s products.
Business format franchising, which is the dominant mode of franchising today came onto the economic scene after World War II with the return of the millions of US servicemen and women and the subsequent baby boom. The baby boom is still driving the economy and will continue to do so into the next century. There was an overwhelming need for all types of products and services, and franchising was the ideal business model for the rapid expansion of the hotel/motel and fast food industries.
During the explosion of the 60’s and 70’s there were many abuses in franchising. There were a number of totally fraudulent franchise companies that literally took peoples money and ran, and there were a number of companies that were undercapitalized and poorly managed which went bankrupt, leaving a trail of failed franchisees who had lost everything.
It became clear that the franchise industry had to change in order to remain a viable business concept. On the industry side, The International Franchise Association was created with the specific intent of uplifting the entire industry. The IFA holds training in all aspects of franchising which greatly enhances the professionalism of the industry. Members of the IFA are required to adhere to the IFA’s Code of Ethics which set a high standard. The IFA works closely with the U.S. Congress and the Federal Trade Commission on improving how the industry relates to the franchisees.
On the government regulatory side, the Federal Trade Commission, in 1978, required that all franchisers submit to all potential franchisees a disclosure document called the Uniform Offering Circular or UFOC, before receiving monies. The UFOC provides very detailed information on the franchise company, such as its history, information about the officers, litigation history, audited financial statements, the franchise agreement, which is the contract between the franchiser and franchisee and a current list of franchises with owners names and telephone numbers. The intent of the UFOC is that it provides enough information so that the prospective franchisee can make an informed decision. The FTC doesn’t actually review the UFOC unless there is a complaint and it decides to conduct an investigation.
Recently, in 2007 the FTC updated and modernized the Franchise Law. Most importantly is the replacement of the UFOC with the Federal Disclosure Document or FDD.
Franchise consultants have been involved with helping prospective business owners find a franchise that meet personal goals for that last 3 decades.
Over the centuries the franchising concept has evolved as the economies of the nations of the world have evolved. In the 1840’s in Germany certain major ale brewers granted franchises to certain taverns, giving those taverns the exclusive right to sell their ale. This was the beginning of the concept of franchising as we know it today.
The first American franchise business is reputed to be the Singer Sewing Center, developed by Isaac Singer in 1858. After Singer invented the sewing machine, he encountered two significant obstacles in bringing it to market. Consumers had to be taught how to use the new invention before they would buy, and Singer lacked the capital to manufacture his machine on a mass basis. Once Singer seized upon the idea of selling the rights to local business people to sell his machine and train users, his enterprise expanded rapidly. Fees for the license rights helped fund his manufacturing, and because each franchisee was self-financed, Singer was spared the expense of hiring each center’s manager. Singer had written franchise contracts, which were the forerunners of modern franchise agreements.
In the 1880’s cities began to grant monopoly franchises to streetcar companies and utilities for water, sewerage, gas and later electricity.
Around the turn of the century, the oil refinery companies and the automobile manufacturers began to grant the right to sell their products. At this stage in the evolution of franchising it was essentially just the granting of the right to distribute and sell a manufacturer’s products.
Business format franchising, which is the dominant mode of franchising today came onto the economic scene after World War II with the return of the millions of US servicemen and women and the subsequent baby boom. The baby boom is still driving the economy and will continue to do so into the next century. There was an overwhelming need for all types of products and services, and franchising was the ideal business model for the rapid expansion of the hotel/motel and fast food industries.
During the explosion of the 60’s and 70’s there were many abuses in franchising. There were a number of totally fraudulent franchise companies that literally took peoples money and ran, and there were a number of companies that were undercapitalized and poorly managed which went bankrupt, leaving a trail of failed franchisees who had lost everything.
It became clear that the franchise industry had to change in order to remain a viable business concept. On the industry side, The International Franchise Association was created with the specific intent of uplifting the entire industry. The IFA holds training in all aspects of franchising which greatly enhances the professionalism of the industry. Members of the IFA are required to adhere to the IFA’s Code of Ethics which set a high standard. The IFA works closely with the U.S. Congress and the Federal Trade Commission on improving how the industry relates to the franchisees.
On the government regulatory side, the Federal Trade Commission, in 1978, required that all franchisers submit to all potential franchisees a disclosure document called the Uniform Offering Circular or UFOC, before receiving monies. The UFOC provides very detailed information on the franchise company, such as its history, information about the officers, litigation history, audited financial statements, the franchise agreement, which is the contract between the franchiser and franchisee and a current list of franchises with owners names and telephone numbers. The intent of the UFOC is that it provides enough information so that the prospective franchisee can make an informed decision. The FTC doesn’t actually review the UFOC unless there is a complaint and it decides to conduct an investigation.
Recently, in 2007 the FTC updated and modernized the Franchise Law. Most importantly is the replacement of the UFOC with the Federal Disclosure Document or FDD.
Franchise consultants have been involved with helping prospective business owners find a franchise that meet personal goals for that last 3 decades.
Wednesday, February 1, 2012
Franchise Statistics
Franchise Statistics
By using the aid of a professional franchise consultant, you will able to understand how these franchise statistics may impact your search for a business.
Source: U.S. Dept. of Commerce
- Franchise businesses account for nearly 50% of all retail sales in the United States.
- Franchise businesses employ more than 14 million Americans
- There are an estimated 5,000 franchise companies operating in the U.S. doing business through nearly 500,000 retail outlets.
- Seventy-Five industries use franchising to distribute goods and services to consumers.
- 1 out of every 12 business is a franchised business.
- Total sales by franchised businesses is approaching 2-trillion dollars.
- A U.S. Department of Commerce study conducted from 1971 to 1997 showed that during that time less than 5% franchise businesses were closed each year.
- A 1999 study by The United States Chamber of Commerce found that 86% of franchises opened within the last five years were still under the same ownership and 97% of them were still open for business.
- Compare that to a U.S. Small Business Administration study conducted from 1978 to 1998, which found that 62% of non franchised businesses closed within the first 6 years of their existence due to failure, bankruptcy, etc.
- A new franchised business is opened every 8 minutes of every business day.
- In 2000, the median gross annual income, before taxes, of franchisees was in the $75,000 to $124,000 range, with over 30% of franchisees earning over $150,000 per year.
- According to the February, 2005 article by the NFIB, 1 of 4 small businesses with employees have their primary location at home. 85% of small firms are operated by owner-managers.
- From January, 2000 to December, 2004 the index that tracks the performance of the top 50 franchisors increased 34.5% compared to a drop of 20.1% in the S&P 500 during the same period.
By using the aid of a professional franchise consultant, you will able to understand how these franchise statistics may impact your search for a business.
Source: U.S. Dept. of Commerce
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