1. What Is Franchising?

Franchising is a method of distributing products or services.

At least two levels of people are involved in a franchise system: (1) the franchisor, who lends his trademark or trade name and a business system; and (2) the franchisee (that’s you!), who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.

Technically, the actual contract binding the two parties is the franchise, but that term is often used to mean the actual business that the franchisee operates.

McDonalds is both the largest and most well known franchise operation.

2. How Does A Franchise Come About?

Let us take an example. We have a store owned by an individual with a particular idea, let us say he makes Jelly Pizzas.

If the business idea is successful, the owner may decide to open a second and then a third store and take on more  employees for the day-to-day running of the stores.

At that point, if the entrepreneur still wants to expand but decides they do not want to open the additional stores themselves, they can franchise the Jelly Pizzas, the store name and the business systems to another entrepreneur known as the franchisee.

In return, the entrepreneur may ask for an initial fee and then also for a continuing royalty payment based on a percentage of that franchisee’s sales.

The business is now franchised.

3. How Popular Is Franchising?

The answer may come as a bit of a surprise, but very popular doesn’t come close.

There are more than 900,000 business establishments in all domestic franchise systems in the USA (either owned by franchisors and franchisees).

One in every twelve businesses is a franchise, with a new franchise opening once every 8 minutes of every working day.

Franchises employ more than 18 million people, with total revenue close to $881 billion, and a payroll of $279 billion.

That’s over 40% of retail sales in the US.

These establishments account for significant percentage of all establishments in many important lines of business: 56.3% in quick service restaurants, 18.2% in lodging, 14.2% in retail food, and 13.1% in table or full service restaurants.

4. What Are The Major Growth Industries For Franchising?

Growth areas in franchising reflect major changes in the general economy with more service and technology opportunities appearing.
With more women entering the work force, and as a larger percentage of the population grows older, growth areas in franchising are also responding to these changes.

The industry categories in franchising that are expected to continue to experience rapid growth are the service-related fields such as home repair and remodeling, carpet cleaning, household furnishings, and various other maintenance and cleaning services.

Business support services will continue to take advantage of the general downturn in the economy as companies cut back on staffing levels and outsource more work.

Accounting, mail processing, advertising services, package wrapping and shipping, personnel and temporary help services, and printing and copying services; automotive repairs and services such as quick-lube and tune-up; and other areas such as environmental services, hair salons, health aids and services, computers, clothing, children’s services, educational products and services, and telecommunications services all look strong.

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.

5. What Types Of Business Are Particularly Well Suited To Franchising?

The simple answer is virtually every business type you can think of.

The International Franchise Association now lists more than 75 different categories of franchises. Typically, you would think of fast food and restaurants first when thinking of franchising, but franchising covers the spectrum from almost A to Z.

Advertising and direct mail to construction to dating services to home inspection to security systems to video sales and rentals. Printing and copying services, maid services, computer services, cleaners, lawn care services, real estate, hotels and motels, and travel agencies are all excellent examples of successful applications of franchising within established industries.

6. What Are The Important Factors To Consider Before Deciding On A Franchise?

Among the points which the IFA recommends for investigation are:

a. The type of experience required to be successful in the franchised business

b. A complete understanding of the business

c. The hours and personal commitment necessary to run the business

d. Who the franchisor is, what its track record has been, and the business experience of its officers and directors

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

j. How many franchisees have left the system during the past few years?

k. The financial condition of the franchisor and its system

l. Engage an attorney to examine the contracts and UFOC (document of offer).  It is important to work with an attorney who understands franchising, especially antitrust and trademark laws, the Federal Trade Commission Franchise Rule, and applicable state laws.

m. Ask a competent accountant to examine your anticipated expenses, your financing needs, and your prospects for achieving your desired level of profitability before you sign any agreement.

Summary

Franchising is becoming ever more popular as more and more people look to throw off the shackles and start their own business.

Getting good information to make an educated decision is one of the first steps you need to take on the steps to buying your own business, and you have started down that path already.

Remember, knowledge is power and you are accumulating new knowledge at an amazing rate. By reading these articles and carrying out your research you are placing yourself in the top 5% of entrepreneurs.

Feel good about that? You should!

This article was written by Brian K Fitzgibbon CPA.

Brian is an experienced accountant and small business consultant. He runs his own business, lectures extensively on small business topics and has checked out and valued many hundreds of small businesses for buyers.

Brian is also the author of the highly acclaimed and invaluable
"How To Value A Business And Buy It Without Fear"
A do-it-yourself guide for first-time and experienced buyers alike.

To download a FREE Chapter from Brian's book please follow this link: "HowToValueBusiness.com"

April 6th, 2009 | Tags: buy a business, buying a business tips, franchises, franchising | Category: articles | Subscribe to comments | Leave a comment | Trackback URL  |