Definition: A continuing relationship in which a franchisor provides a licensed privilege to the franchisee to do business and offers assistance in organizing, training, merchandising, marketing and managing in return for a monetary consideration. Franchising is a form of business by which the owner (franchisor) of a product, service or method obtains distribution through affiliated dealers (franchisees).
Like being married, franchising is about the relationship that the franchisor establishes with its franchisees. A business (the franchisor) licenses its business name (the brand, Hand " Stone or Meineke) and its proven operating methods (the recipe it has figured out that works) to an individual or group (the franchisee) who agrees to operate according to the terms of a contract (the franchising agreement).
The franchisor—provides the it’s franchisee partner with leadership and support and gives system guidance so that the brand is uniformly portrayed in the public eye.
There are costs and fees for this for this support and guidance in the form of an initial fee and a continuing fee (a royalty) which is typically based on the gross revenues of the franchisee.
According to the most recent IFA forecast:
The number of franchise establishments in the United States will increase by 1.4 percent in 2013, just short of the 1.5 percent growth in 2012, from 746,828 to 757,055 (an increase of 10,227).
The number of jobs in franchise establishments will increase 2.0 percent in 2013 (following a gain of 2.1 percent in 2012) from 8.1 million to 8.262 million (an increase of 162,000).
The output of franchise establishments in nominal dollars in 2013 will increase 4.3 percent (following a 4.9 percent increase in 2012) from $769 billion to $802 billion (an increase of $33 billion).
The gross domestic product (GDP) of the franchise sector is projected to increase 4.1 percent in 2013 (following a 4.6 percent increase in 2012) from $454 billion to $472 billion (an increase of $18 billion). This is approximately 3.4 percent of U.S. GDP in nominal dollars.
When you buy a franchise, you are purchasing the time and money that Franchisors have invested into developing and supporting their systems and brands.
Having a system is like having a recipe to follow. If you know what the inputs are, you should be able to forecast the output. The importance of a system is nicely articulated in The E-Myth Revisited by Michael Gerber. The E-Myth Revisited discusses the importance of developing a system for running your business and the processes instrumental for offering your products or services to your customers with predictable results. Gerber dives into the history of McDonalds and how Ray Kroc took the McDonald brothers tasty staple and turned it into a billion dollar business mostly because he understood the power of a systematic approach for selling hamburgers. Gerber also builds on the premise the entrepreneurs should not work in their business, but on it.
The best franchisors know how to run a replicable business and can do so with a methodology that ensures that only the best results are constant, then you can outlast and survive your competition. Otherwise, you may be doomed to a slow and painful death.
Brands are psychology and science brought together to convey a uniform quality, credibility and experience. Brands are valuable. Many companies put the value of their brand on their balance sheet. It has been said that people don’t have -relationships with products but they are loyal to brands. Brands can inspire millions of people to join a community. Think of the people you may have seen who have a Harley Davidson tattoo. They identify so much with the premise of the brand that they are literally willing to brand themselves. Brands can rally people for or against something. Brands can activate a passionate group of people to do something like changing the world. Does this seem valuable to you? It should. This is the most important asset that a franchisor owns and the great franchisors want to ensure that their customers are satisfied each and every time they shop at a franchised location. It is their reputation.
A good franchise should have a great brand premise.
Think of the franchisor like the parent. It’s role is to give you good guidance and support and keep you from getting into trouble. A franchisor will typically offer the following assistance to a franchisee:
• Financial assistance. Not all franchisors offer financial assistance but some do have financing programs available to franchisees.
• Location selection. Some franchisors will help franchisees select a location for their franchise or may select the location, not allowing the franchisee to choose at all. The benefit of the franchisor selecting the location is that they have experience choosing locations that are successful.
• Training/operations manual. In order to run your business the franchisor provides a detailed operations manual that includes instructions for carrying out their operating system. It establishes the rules, standards and specifications of the franchise and forces the franchisor to organize and define specific job responsibilities and tasks. The manual contains information about the roles of employees in the business; the main processes and protocol; performance and management standards. Before you can open your franchise you may need intensive training about the operating system and business as a whole. Training can take place at the corporate headquarters, so you may need to factor in travel expenses, at your franchise outlet or a combination. Most franchisors offer periodic training and seminars.
• Advertising. Most franchisors initiate advertising efforts, either on a national or local level or both. These initiatives can be in the form of TV and radio commercials, direct mail campaigns and public and media relations efforts. Some franchisors require franchisees to pay into a fund to cover these costs or will offer a co-op arrangement where the costs are split.
• Support. Most franchisors offer ongoing support such administrative (e.g., human resources and accounting) and/or technical support. Many large franchisors have hotlines that franchisees can call for support.
Being part of an established and well-managed franchise system can be rewarding, profitable and provide a level of safety that may not be available to non-franchised independent businesses. As a franchisee, you promise to run your business in the manner that the franchisor dictates. The security of following a tested system has costs and the franchise agreement will spell out that the franchisee will:
• pay the franchisor an initial franchisee fee, not for any product, service or specific assistance, but merely for the privilege of obtaining the franchise and the associated rights, and for the right to obtain the franchisor's know-how to enable the franchisee to operate that business in the most profitable fashion;
• pay the franchisor a continuing royalty in return for the franchisor's continuing assistance and for the on-going privilege of using the franchisor's know-how, systems and methods; at all times conduct the franchised business in strict compliance with the franchisor's standards, procedures, policies and specifications, and to adhere to all such requirements throughout the life of the franchise relationship;
• use the franchisor's name, trademark and service mark; adhere to the franchisor's standard bookkeeping specifications and to submit to the franchisor required reports;
• undergo and successfully complete the franchisor's training program; not divulge to a third party any confidential information, knowledge or know-how conveyed to the franchisee by the franchisor;
• purchase all required products, supplies, and materials only from suppliers designated or approved in writing by the franchisor, or from the franchisor itself;
• not relocate the franchise without first informing the franchisor and, perhaps, procuring the franchisor's approval;
• comply with all employee hiring and training requirements; consent to inspections by franchisor to determine compliance with franchisor's policies and procedures;
• discontinue, upon termination or expiration of the franchise, use of the franchisor's name, trademark and service mark; cease operating or doing business under any name or in any manner which might cause the public to believe that a franchise relationship with the franchisor still exists; and immediately and forever cease using, in any manner, franchisor's trade secrets, procedures, techniques, systems, standards, specifications, and services.