Let's play a word association game. When I say "franchise," you think ___________.
Many of you are saying "McDonald's." Certainly, McDonald's is the model for franchising's success in America. When you hear the word "franchise", many of you think of restaurants, and while it is true that the food service industry makes up a large portion of the franchise marketplace, franchising has made its way into nearly every sector of the economy. As a business model, franchising has extended into over 70 different industries. Currently, according to a recent PriceWaterhouseCoopers's study on the impact of franchising, franchising accounts for 14% of private sector employment in the United States. Why then is franchising so confusing when it accounts for such a large part of the U.S. economy?
At several points during my career as a franchise consultant and also helping businesses explore expansion, I have had entrepreneurs come to me looking to find a way not to franchise by calling their expansion strategy something else, a license, a partnership, or a joint venture. For these entrepreneurs, it is often just a misunderstanding of what franchising is that leads to the confusion. They see it perhaps as being a negative, and feel that franchising is only for certain kinds of businesses. Sometimes, the requirements of being a franchisor appear from the outside to be too cumbersome. In reality, it is usually easier legally to be a franchisor than to latch onto a business opportunity where each state would require different legal documents. I often have to tell these business owners that the fact of the matter is that, if three specific conditions exist, it doesn't matter what you call it; it's a franchise.
The franchising business model in a nutshell:
Franchising is a method of business expansion whereby a business owner allows someone to market products or services under their name and trademark and in strict adherence to a system he/she prescribes. In return, the franchisee, as that person (or organization) is called, pays a fee and, usually, an ongoing royalty. Moreover, the franchisee pays all of the costs of getting into his or her own business.
There are three basic elements to being a franchise.
- 1. The Name - You allow someone the use of your name or trademark.
- 2. The System - You require them to operate their business, using your prescribed system.
- 3. Payment of a Fee - In return for the use of the name and system of operation, they pay you a fee or royalty.
By having these three elements items in place makes your business a franchise, and you are then required to follow the federal guidelines of having a Uniform Franchise Offering Circular.
A licensing arrangement is typically where you allow someone the use of your name for a payment of a fee.
A business opportunity is when you give someone a system of operation for the payment of a fee.
In these three elements, you have a very powerful combination. As a person looking into starting a business, owning a franchise gives you an established name, a proven system of operation, and a coach or mentor who as the franchisor is tied to your success. This gives you a huge advantage over starting a business from scratch. As a business looking to expand, franchising provides you with capital for expansion through the franchise buyers, motivated managers who have a vested interest in the success of your operations, as they have invested their capital into them. It is easy to see why so many companies have used franchise expansion to grow.
Just because your expansion program is a franchise, doesn't mean that you have to call it a franchise, as long as you comply with all of the franchise laws and regulations. We have had clients at Francorp who, for marketing reasons, may refer to their business relationships as a License. For example, we have clients offering franchises to the medical community. We feel that doctors may not be receptive to owning a franchise; so we refer to it as a License program but still follow all of the requirements of franchising, such as the legal documents and selling requirements. This enables the company to expand with the controls needed that a franchise program provides, while still keeping medical professionals (whose visions of a franchise involve flipping burgers) happy that they are Licensees or member partners of the program.
It's these three key elements (name, system, and fee) that make franchising so successful, as it makes everyone more involved in the success of the organization. It is the epitome of a "win-win situation."