You’ve seen the slogans:
“Be in business for yourself, but not by yourself.”
“When you succeed, we succeed.”
“We’ve been successfully putting people like you in business for 16 years!”
“Be your own boss; we’ll help you get there.”
You want to be your own boss and run your own business. However, you’re not sure where to start, what resources you need, how to market products and services, how to hire and train employees etc.
You’ve heard about franchising, but aren’t sure if a franchise opportunity could be the right choice for you. You’re in the right place – this page will give you an overview of what franchising is, and give you a better foundation of knowledge to base your decision on.
Below you will find the following:
- A brief look at the origin of franchising
- A definition of franchising
- A description of the forms of franchising
- An overview of the kinds of franchise agreements available
- A brief description of the franchise disclosure document
- An overview of the impact franchising has on daily life
- A short look at the economic impact franchising has in the United States
The Origin of Franchising
Commonly when people think about the beginnings of franchising, the company that comes to mind is McDonald’s, but franchising has older roots than the fast food giant.
Isaac Singer, the inventor of the sewing machine in 1858, is credited with starting the modern-day franchise concept. After successfully inventing the machine, Singer was seeking to distribute his new product outside of his immediate area, and also wanted to provide training to customers on the proper way of using them. As a result, he began selling licenses to entrepreneurs in different parts of the country – the predecessor of the current franchise agreement.
According to the International Franchise Association (IFA), franchising is defined as an agreement or license between two legally independent parties which gives:
- A person or group of people (the franchisee) the right to market a product or service using the trademark or trade name of another business (the franchisor)
- The franchisee the right to market a product or service using the operating methods of the franchisor
- The franchisee the obligation to pay the franchisor fees for these rights
- The franchisor the obligation to provide rights and support to franchisees
Franchising can be described as a pooling of resources and capabilities. The franchisor contributes the know-how and experience while franchisees contribute supplementary capital investment, sweat equity, and additional local market knowledge. Franchising is a comprehensive business relationship, not just a buyer-seller relationship. There is considerable interdependence between the franchisor and the franchisee throughout the entire relationship.
While it’s true that the most popular franchise businesses have outgrown their modest beginnings and are now huge entities, the vast majority of franchise businesses are truly small businesses – with most having fewer than 100 total units. Furthermore, even the large-scale franchise operators are made up of smaller master franchisees who own several outlets individually, along with true small business owners who own one, or just a few, franchised businesses.
Franchise Business Models
The two most popular, and common, forms of franchising are product distribution and business format.
In product distribution franchises, franchisees sell or distribute the franchisor’s products through a supplier-dealer relationship. The franchisor licenses its trademark and logo to the franchisees but typically does not provide them with an entire system for running their business. Dealers are a common form of product distribution franchises. The industries where you most often find this type of franchising are DVD kiosks, soft drinks, automobiles, and gasoline. Some well-known product distribution franchises include:
- The Coca-Cola Company
- Goodyear Tires
- BMW (or any car manufacturer)
In business format franchises, the franchisor licenses their brand to a franchisee for use with a predetermined way of conducting business. Franchisees, after they have signed the franchise agreement, are given access to not only a franchisor’s product and/or service, but also their trademark(s), and their complete method for conducting the business itself. This method includes items such as training, computer systems, marketing plans, operations manuals, and more. Most franchises available are business format opportunities.
Despite its popular association with food, business format franchising is extremely diverse and not confined to a narrow range of business segments. Name an industry and there’s likely a franchise in it. Some well-known business format franchises include:
- The UPS Store
- Great Clips
- Jenny Craig
- Sylvan Learning
- Comfort Inn
- Jiffy Lube