Introduction To Franchising

The business model of franchising has been called one of the greatest ever developed. Its popularity has to do with its proven track record of success, and the relative ease in which people can become franchise business owners.  Franchising contributes a sizeable amount of dollars to the U.S. economy, and some of the data that I’ll be sharing with you here will bear that out.

franchise

It used to be that folks would graduate from college, land a well-paying corporate job, and move up the ranks in the company until it was time to retire. Those were the days…. Today, people are graduating and landing corporate jobs, but they’re finding themselves out of that job 4 years later.    (According to the Bureau of Labor Statistics, the median number of years that wage and salary workers had been with their current employer was 4.4 as of January 2010.) Is it any wonder that we’re seeing more and more people take a serious look at other career alternatives, including franchise ownership?

What is a franchise?

A franchise typically involves the granting by one party (a franchisor) to another party (a franchisee) the right to carry on a particular name or trade mark, according to an identified system, usually within a territory or at a location, for an agreed upon term. The franchisee is granted a franchise license to use the franchise company’s trademarks, systems, signage, software, and other proprietary tools and systems in accordance with the guidelines in the franchise contract.

Not only must you run the business according to the operations manual and the franchise contract, but you must pay them an upfront franchise fee (license fee), and ongoing royalties. The average franchisee fee ranges from $25,000 -$35,000, although some franchise fees can go well over $100,000, as in the case of what’s called a Master Franchise. In a Master Franchise, like Jan-Pro Cleaning Systems, one buys the rights to an entire area, and it’s usually based on population.

The royalties are usually based on a % of gross sales. Royalties range anywhere from 4%, like over at Batteries Plus, a retail storefront type of franchise, all the way up to 9% as in the case of MRINetwork, an executive recruiting franchise. Some franchisors like Fantastic Sam’s, a hair salon franchise, charge a flat monthly royalty fee.

In addition to royalties, franchisees usually pay into a national monthly advertising/marketing fund, which amounts to 1-2% of gross sales.

How big is franchising, as an industry?

According to a report put out by the IFA (International Franchise Association), franchising is huge. As of 2005;

  • There were 909,253 franchised business establishments in the United States.
  • Franchised businesses provided more than 11 million jobs, or 8.1 percent of the national private-sector workforce.
  • Franchised businesses supplied an annual payroll of $278.6 billion, or 5.3 percent of all private-sector payrolls in the United States.
  • Franchised businesses produce goods and services worth $880.9 billion per year, or 4.4 percent of private-sector output in the United States.

(Go to the IFA website to see the full report.)

Differences Between a Franchise Opportunity And a Business Opportunity

They’re both really “business opportunities.”

  • A franchise business provides a detailed, step-by-step, business “blueprint.” There are very specific rules that must be followed, including the use of approved signage, and marketing materials, hours of operation, etc. Franchisors also provide ongoing support to their franchisees. Franchising is also highly regulated, and there are a lot of things that a franchisor must do to legally set it up.
  • A non-franchise business opportunity also provides a “blueprint,” but it’s usually not as detailed.  There just aren’t as many rules, when compared to a franchise. The actual contract that you’re given to review prior to signing a business opportunity type of business may be one to two pages in length. Franchise contracts are 20 to 40 pages long. A good example of a business opportunity would be a mall kiosk type of business. The kiosk owner is provides with a pre-packaged set-up including the actual kiosk, the inventory, and preferred methods to make sales. In addition, there are no ongoing royalties, as with a franchise. Most of the time, pure business opportunities have a much lower investment than a franchise business. One reason for this is that once someone buys a business opportunity, the support provided by the business opportunity seller is very limited in most cases, as opposed to a franchisor, who must invest in an infrastructure that can handle the ongoing needs and contractual obligations of its franchisees.
18 Comments ▼

Joel Libava - Franchise Expert


Joel Libava Joel Libava is the Franchise Expert for Small Business Trends. Joel, The Franchise King®, equips today’s prospective franchise owners with time-tested, proven techniques designed to increase odds of success. He does this through one-on-one coaching, and gobs of useful content that can be found on places like Small Business Trends, SBA.Gov, and his award-winning franchise blog, The Franchise King Blog . He’s been featured in Entrepreneur® magazine, and is frequently called upon by national media outlets and publications for his no-spin insights into the world of franchising.

18 Reactions

  1. Joel, good blog. I have been in business for 40 yrs. We should share blogs. See my blog at busadvise@blogspot.com. maybe we could write a column on each blog.I have financed franchises for many years. I am a commercial finance broker.I once had a hot dog franchise in Orlando, Coneys world famous hot dogs.I got a lot of info from your blog, thanks
    John Grimaldi

  2. Thanks a lot, John.

    I’ll take a look, for sure.

    The Franchise King®

  3. Great information. I work for a development agent of a major franchise and this gives a clear picture of a franchise. It is also interesting as I work with some franchisees that love the model and others that want it to be more like a business opportunity. Thanks for the work you do.

  4. Thanks lot for popping in and commenting, Guy!

    The Franchise King®

  5. Thanks for this excellent overview, Joel. It’s always important to start with an introduction that gives you an overview of a topic. Then everything else you learn falls into place.

    And congratulations on your new book, Become a Franchise Owner! I just got my copy from the publisher — and it’s quite an accomplishment.

    - Anita

  6. Anita,

    As you know, I’m very grateful to you, (and always will be) for taking a shot on me–several years ago.

    I’ll keep my no-spin information on franchising coming, (along with some opinion) on your very powerful and highly influential small business website. Okay?

    As for the book, I meant what I said in the acknowledgement section :)

    The Franchise King®

  7. Hi – looking for info (books, websites, opinions) that would assist would-be franchisee such as myself – including ways to evaluate franchisors, etc. – and to get a good idea of expected levels of business expertise, commitment of resources (time, money, etc.) and net worth for franchisees and expected amount of guidance from from franchisors. Thanks…

  8. Great information, thank you. There is so much to consider when investing in a franchise and when determining what industry you’d like to pursue.

    Fantastic Sams Salon Franchise site has a great Franchise Assessment Guide that would be very valuable, along with this article and other resources, to help them with different considerations.

    Check out the Guide Here: http://www.fantasticsamsfranchises.com/download-fantastic-sams-franchise-kit.php

  9. Thanks for explaining franchising thoroughly.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>



Compare your business to the industry - Try our new tool