NOTE: To get your own copy of this and other useful publications about
franchising, contact the International Franchise Association, 1350 New York Avenue, NW, Suite 900, Washington, DC 20005-4709. (202)628-8000.
FRANCHISE 21 QUESTIONS
1. What is Franchising?
Franchising is a method of distributing products or services. At least two levels of people are involved in the franchise system: the (1) franchisor, who lends his trademark or trade name, and his business system to the (2) franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system. Technically, the contract binding the two parties is the franchise, but that term is often used to mean the actual business that the franchisee buys from the franchisor.
2. How Does a Franchised Chain Start?
Imagine a store owned by an individual with a particular concept. If the business is successful, the owner may develop a second or third store and hire employees for the day-to-day operation. At that point, if the entrepreneur still wants to expand but prefers not to own and operate additional stores himself, he may decide to 'franchise' his store name and business system to an independent business person -- a franchisee. In return, he may ask for an initial fee and/or a continuing royalty payment based on a percentage of that franchise's sales. The business is now franchised.
3. When I visit a store in my area, for example a well-known fast food restaurant, how can I tell whether that restaurant is owned by the Franchisor or a Franchisee?
It's difficult to tell just by visiting the restaurant. Many companies have stores that are owned and operated by franchisees but also have stores that are company-operated. So it's entirely possible that of two stores with the same name, one may be owned by a franchisee and the other owned by the company. In either case, the products, services and quality should be the same.
4. How Widespread is Franchising?
The answer may surprise you According to an industry survey, "Franchising in the Economy," franchising companies and their franchisees accounted for more than $678.8 billion in the sale of retail goods and services in 1989, or more than one-third of all U.S. retail sales. Franchising employees over 8 million people in more than half a million outlets. A new franchise outlet opens somewhere in the U.S. every 17 minutes.
5. Where do Franchise Sales Come From?
Most franchise sales are still by product and trade name franchise chains--automobile and truck dealerships, gasoline service stations, and soft drink bottlers. In 1989, business format franchise sales were $192.4 billion; sales by product and trade name franchises $486.3 billion. Growth in the trademark and production sector of franchising has been slowing in recent years, however, while the number of outlets and total sales of "business format" franchises are expected to continue to grow and even increase their growth rate.
6. What is "Business Format" Franchising?
In business format franchising, the franchisor prescribes for the franchisee a complete plan, or format, for managing and operating his establishment. The plan provides step-by-step procedures for every aspect of the business and, anticipating most management problems, provides a complete matrix for management decisions confronted by the franchisees. Sales by business format franchisors increased steadily throughout the '80s. The 1990 projected growth rate is 10.8 percent---more than four times the rate of the GNP.
7. What are Major Growth Industries in "Business Format" Franchising?
As we become a more service-oriented economy, as more women enter the workforce, and as a larger percentage of the population grows older, growth areas in franchising are responding to these changes. The industry categories in franchising that are expected to continue to experience rapid growth for the '90s are service-related fields such as maid services, home repair and remodeling, carpet cleaning, household furnishing, and various other maintenance and cleaning services; all business support services including accounting, mail processing, advertising services package wrapping and shipping and personal services; automotive repairs and services such as
quick-lube and tune-up; and other areas such as weight control centers, hair salons, temporary help services, printing and copying services, medical centers, computers and clothing.
While it is important to consider industry growth before investing in a franchise, it is more important to analyze an individual franchise company's track record, keeping in mind that quick growth does not always spell success. A franchise organization that grows too quickly might not have a service team in place to support all of the units properly. Overall, long range trends indicate a steady, solid growth in business format franchising. Some will fall by the wayside, as is natural in any business, but others may well be the 'household name' franchise success stories of tomorrow.
8. Specifically, what kinds of businesses lend themselves to franchising?
Virtually every business form you can imagine. The International Franchise Association now lists more than 60 different industry categories to describe its members. Printing and copying service and real estate are excellent examples of successfully applying franchising to established industries. In 1989, there were 6,449 printing and copying franchises in business. In 1974, there were only 1,069.
9. Is the 'Look Alike' Characteristic of Franchises a Disadvantage? Don't Consumers Want Variety?
The increasingly mobile American consumer has come to depend on and appreciate the consistent quality of franchised products and services. Today, no matter where they go, people expect and want the same quality, which is why consumers so often stop at franchised establishments. The ability to easily recognize a franchised store, restaurant or hotel from the outside guarantees there will be no surprise or disappointments on the inside. Quite simply , the public knows what to expect and likes it that way.
10. What should I consider before Buying a Franchise?
Among the points which IFA recommends for investigation are:
a) the type of experience required in the franchise business.
b) a complete description of the business
c) the ours and personal commitment necessary to run the business
d) who the franchisor is, what his track record has been, and the business
experience of the officers and directors of the company
e) how other franchisees in the same system are doing
f) how much it's going to cost to get into the franchise
g) how much you're going to pay for the continuing right to operate the
business
h) if there are any products or services you must buy from the franchisor and how and by whom they are supplied
i) the terms and conditions under which the franchise relationship can be terminated or renewed, and how many have left the system during the past few years.
j) the financial condition of the company and its system.
Additionally, INVESTIGATE BEFORE INVESTING, published by IFA, is very useful for those considering a franchise purchase. Equally important, IFA recommends that you engage an attorney to examine the contract. It is important to work with an attorney who understands franchising, especially the antitrust laws, the trademark laws, the Federal Trade Commission Franchise Rule, and any applicable state laws. It is also recommended that you ask a competent accountant to examine the terms of the franchise agreement and franchise prospectus, or offering, before you sign any agreement.
11. What is the Federal Trade Commission Franchise Rule?
It's a federal regulation which requires every franchisor to prepare an extensive disclosure document and to give a copy to any pros
