What is Franchising?
The concept of franchise businesses started with the Singer Sewing Machine Company in the 1850s. Isaac Singer had two problems that were keeping him from being successful. One, he didn’t have the capital to build a sales force and two, no one would buy a machine unless they were trained to use it. Singer’s solution was to charge a licensing fee to business people who would own rights to sell and train in certain geographical areas.
His licensing program was a huge success and was copied over the next several decades by many of America’s finest companies, such as Coca-Cola, KFC, McDonalds and Burger King to name a few. By the 50s and 60s franchising achieved almost mystical stature exploding from the confines of food and beverage to Dry Cleaners, Carpet Cleaners, Hotels, Rental Cars, Commercial Cleaning and the entire range of Automotive aftermarket.
How Big is Franchising Today?
A new franchise opens every 8 minutes of every business day and drives over 40% of all retail business. 1 in 12 businesses is a franchise. Annually, franchising accounts for over $2.1 Trillion dollars in sales, and employs over 8 Million people. Franchise opportunities are the most successful business opportunities on the planet with over 95% success rate and at the same time creating over 170,000 new jobs per year.
How Successful are Franchises?
The United States Chamber of Commerce found that 86% of franchises opened within the last six years were still under the same ownership and 97% of them were still open for business. Success rates for franchises are greater than 90%, making this the lowest failure rate of any type of business. The U.S. Department of Commerce shows that less than 5% of franchise businesses are closed each year while the U.S. Small Business Administration found that 62% of non-franchised businesses failed within the first 6 years of their existence.
Who Typically Invests in Franchise Opportunities?
The majority of franchise buyers according to the International Franchise Association are success oriented, people who are comfortable with long term commitments, have some business experience, and are willing to learn new skills and procedures. They have enough cash reserves for the franchise fee, startup costs, operating capital and family living expenses for the time period before a positive cash flow is reached. Ex-corporate managers are the largest group involved in franchising. Veterans transitioning out of service are the second largest group.
Why Should I Consider a Franchise?
A good franchise business has been tested! You’re investing into a company with a proven track record, established operating systems and a recognizable brand. The franchisor has done the hard work of developing the product or service and overall vision. Goof franchise companies provide training, structure, support, market expertise and they have a vested interest in your success! An unsuccessful franchisee is a black mark on the entire system and therefore, they want to make sure you are the right person for their franchise and their franchise is the right business model for you.
Start-up costs are predictable and you can verify actual experiences by talking to as many current franchisee’s as you would like. Some of the better franchises publish their financials. These are some of the reasons why over 90% of all franchisees are still in business after 5 years! Third party financing is available along with the opportunity to use your IRA or 401K without penalty.
What is an FDD (Franchise Disclosure Document)?
The Franchise Disclosure Document (FDD) is a document required by the Federal Trade Commission (FTC) to be given by every franchisor to every potential franchisee. It is a document to protect the potential franchisee from misrepresentation and misleading or false claims by a franchisor. It contains 23 sections and must be updated and submitted to the FTC for review annually.
Why should I pay royalties?
Royalties are the magic that makes franchising work. What would it cost you to hire a management, marketing, advertising and customer support team? What would you need to invest for ongoing training and support? The answer is… a lot more than the typical owner would or could afford to spend! You certainly couldn’t hire this group or their expertise and support for under 10% of gross sales. The wonder of royalties is that instead of the individual owner footing the entire bill to run his or her business the expense is shared with all of the franchisees within the organization. Royalties also are what keeps the franchise brand growing.