What is franchising?
Franchising is a form of marketing and distribution in which the franchisor grants to an individual or group of individuals (the franchisee) the right to run a business selling a product or providing a service under the franchisor's business format. The franchisee is also given permission to use the franchisor's branding and identifying marks under guidelines. It is important for anyone deciding to start a business by becoming a franchisee to remember that in franchising the franchisee is bound to a partnership agreement with the franchisor for a defined period of time (some exceptions do exist).
Franchising as we know it today originated with Isaac Singer in the 1850s. After he had invented his sewing machine, Singer encountered two main problems when he took it to the marketplace. The first was that customers needed to be taught how to use the new invention before they would buy it. The second was that Singer did not have enough capital to manufacture his machine in large numbers.
In response, Singer, along with other principals, came up with the idea of selling the rights to local business people across the country (and eventually internationally) to sell the sewing machines as well as train those who bought one. Once he embarked on this venture, Singer’s enterprise expanded rapidly. The royalties earned from the license rights helped offset manufacturing costs and, because each franchise was self-financed, Singer Manufacturing Company was able to tap into the entrepreneurial attributes of the franchisees to help Singer become more successful than he could have by himself.
Since the modern-day concept of franchising was introduced to the business world, it has steadily grown. Consider these statistics…
- In the United States, roughly one of every 12 businesses is a franchise, and hiring within this business sector has outpaced the national average in recent years.
- The number of workers employed by franchises now exceeds the number of workers employed in major industries such as durables manufacturing, finance, insurance, and real estate.
- It’s estimated that franchising provides nearly 18 million jobs and contributes over 2.1 trillion dollars to the economy.
The tipping point for franchising came in the 1950s. In 1954, Ray Kroc, a successful business man from Illinois, saw the potential in franchising a successful southern California hamburger stand owned by a couple of brothers. This restaurant chain is known around the world as McDonald’s, perhaps the most well-known example of franchising. Kroc has been compared to Henry Ford for bringing an assembly line-like concept to the fast food industry through his belief that customers of McDonald’s should have an idea of what to expect wherever in the world they may be.
When asked, the majority of people when asked for a commonly known franchise would name a fast food franchise most often. However, franchising is extremely diverse. Name a product or service from ATMs to yogurt and there’s likely a franchise industry for it.
While franchising is a staple of the American business landscape, the merits of franchising have not been ignored abroad. It is steadily increasing its footprint in numerous other countries. This is especially true in emerging markets such as China, India, Russia, Brazil and the Middle East among others.
The franchise model has also been woven into the fabric several other industries. For example, Coca-Cola was able to expand throughout the United States by shifting the burden of manufacturing, storing and distributing its product to local business people who acquired bottling rights. Car manufacturers who had been spending enormous amounts of capital tooling their assembly lines found they could develop retail distribution networks using capital provided by independent dealers. Oil companies such as Standard Oil and Texaco granted franchises to convenience stores and repair mechanics across the U.S.
The Myth of Guaranteed Success
No business method or industry sector can guarantee success, and franchising is no exception. If a franchise system has a proven product or service with a well-recognized brand combined with hard-working, well-financed franchisees, the chances of success are very high – but never a 100 percent given. If, on the other hand, the franchise system is under-funded with an ill-conceived business plan that has not been tested properly, and franchisees have been poorly recruited or trained, failure is likely.
Due diligence is key in making the right decision for you. Seek the advice of seasoned franchise professionals and ask the questions until you are confident in your decision. Remember, it is your investment that is at stake. More information about finding the most profitable franchise for you can be found here.