How Franchising Works

Franchising 101

By LEANNE BEATTIE

There's no doubt about it: franchising is big business. Walk down any street and you're bound to see the same familiar names wherever you go. Franchising of all types is the pillar of the U.S. economy, generating more than $1 trillion dollars each year in retail sales. One out of every three retail dollars spent in the United States is spent on a franchised business and franchises employ one out of every 16 people in the workforce.

In shaky economic times, the growth of franchise systems explodes. Driven by the fear of losing their jobs or the uncertainty of how the economy will affect their chances of advancement, people begin to look for ways to take control of their future. For many, buying a franchise is the best way to guarantee their independence while ensuring that they will never have to worry about getting laid off again.

Franchising can be described as a relationship between a company doing the franchising (the franchisor) and an independent businessperson (the franchisee), in which the businessperson receives a limited "license" to sell the products and services of the other company. In many cases this includes the identity, imagery and operating techniques of the company doing the franchising.

In exchange for a franchisee's money and conformity, the franchisor agrees to provide an extensive range of support designed to increase sales and bring greater profitability. It sounds simple, but the business of franchising is filled with myths.

Common Franchising Myths

Myth # 1: Buying a Franchise Guarantees Success, No Matter How Bad the Economy Is

A franchise usually comes with a set of proven systems and brand names. Therefore, many people think that buying a franchise is a secure way to start a business-instant success, without all the risks of starting a new business from scratch. This is not necessarily true, however.

The reality? Some franchise concepts are better able to ride out poor economic times than others but there are no guarantees that a franchise will succeed. As with any type of business endeavor, certain conditions can cause a franchise to fail even if the whole world recognizes its name.

When considering a franchise opportunity, it's easy to get caught up in the hype. Glossy marketing materials and slick salespeople paint a picture of success, but don't always give potential franchisees enough nitty-gritty details about what it's like to actually run the business on a day-to-day basis, especially when times are tough.

Myth # 2: Owning a Franchise is Easy

This is simply not true. While the franchisor will provide the necessary training to start the business and give ongoing support, the franchisee must be prepared to put in very long hours to operate the business. Most franchises don't lend themselves well to absentee management, so the owner has to be there every day, mopping the floors, taking orders and dealing with unhappy customers.

Forty-hour work weeks are also a myth, especially in the start-up phase of the business-60 or 70 hours a week is more realistic. You might believe that by owning your own business, you'll be able to work less and take more holidays. Unfortunately, the opposite is true. Long hours are the norm, with many franchise owners working seven days a week until their business is up and running smoothly.

Myth # 3: A Franchise is Profitable Right from the Start

If you're thinking of buying a franchise as a "get rich quick" scheme, think again. Many people assume that not only do franchises always succeed, but that they're money machines right from the start. This is definitely not the case, as it usually takes a minimum of one year to develop a profitable business.

As an independent business owner, you are totally responsible for your mistakes too-there's always a risk of failure or less-than-anticipated financial return. Unfortunately, you can't blame the franchisor for all your business problems, even though you're paying them royalty fees for their expertise.

Myth # 4: If I Own a Franchise, I Am My Own Boss

Owning a franchise doesn't really make you your own boss; you are accountable to the franchise company at all times-they are your boss, so to speak. If you think that you'll be able to put your own plans into place once you're up and running, you're mistaken. And you're putting your license agreement at risk whenever you don't adhere to the official guidelines.

One of the major benefits of buying a franchise is that the franchisor provides you with a proven operating technique; following this system is essential for a franchisee's success. It goes without saying that if you're going to buy a franchise, you're going to have to do things their way and play by the rules of your licensing agreement-you can't turn around and do your own thing. If you want independence, you're better off starting an original company from scratch.

The Franchise Reality

The American consumer has come to expect consistent quality wherever they travel and a franchised product or service delivers this. No matter where a consumer goes, they expect to receive the same degree of quality, which is why they visit a franchise in the first place. The ability to easily recognize a franchise means that there will be no surprises or disappointments-quite simply, the consumer knows the business already, whether they are in New York City, Los Angeles or any stop in between.

Buying a franchise is easier than starting a brand new business, but in exchange for the security, training and marketing power of the franchise trademark, you must be willing to give up some of your independence. If you are the type of person who likes to make all of your decisions on your own, a franchise may not be right for you. As a franchise owner you must comply with every procedure developed by the franchising company.

Franchising Trends

Much of the recent success in franchising can be traced to two definite demographic trends: People are living longer and feeling rushed or pressed for time. Whether they are looking for senior or child care, cleaning help around the house or someone to prepare a quick meal when they get home from work, today's consumers have the money to spend on any product or service that can simplify their ever-increasingly complicated lives.

Another important trend in franchising is the increase in owning multiple units. For franchisors, it's better to have 10 franchisees each with 10 units than 100 franchisees with a single unit. Many franchises are actively looking for people who can open several locations, rather than just one or two. Having fewer franchisees simplifies things for the franchising company but it also limits the type of person who can get involved in the first place-basically, you have to already be successful with the financial resources available to support the multi-million dollar bank loan necessary to fund the endeavor.

Good News

The future of franchising appears to be very rosy and ripe for further development. Corporate jobs are questionable, raises aren't in the budget and job security is non-existent. Combine this with an aging population with money to burn and two-income families pressed for time and you have a recipe for franchise success.

All successful businesses require dedication and hard work-you must be prepared to make that commitment before you buy into any franchise. If you do your due diligence and research an opportunity carefully first, buying a franchise is a great idea in the current down market. And the new franchisee is smart, savvy and well-informed, which will continue to strengthen the franchise industry in the coming years.

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