Franchising in 21st Century

Franchising
Franchising is a kind of licensing arrangement wherein a
business owner, known as the "franchisor," distributes or markets
a trademarked product or service through affiliated dealers, who
are known as "franchisees."
While these franchisees own their establishments, terms of
franchising agreements typically require them to share operational
responsibilities with the franchisor.
Over the past few decades, franchising has emerged as an integral
part of America's commercial landscape. Indeed, companies as
diverse as McDonald's, The Gap, and Jiffy Lube owe their
ubiquitous presence in the marketplace to the practice.
Department of Commerce figures indicate that franchises
exceeded $1 trillion in annual sales in the year.
The International Franchising Association (IFA) estimates that 40
percent of all U.S. retail sales took place in franchise outlets in the
early 2000s.
Business format franchises are the most popular of the franchise
types. Under this arrangement, the franchisee pays an initial fee
and an ongoing royalty to the franchisor in exchange for a proven
business operation and identity.
Benefits of this package include the franchisor's name and its
product line, marketing techniques, production and administration
systems, and operating procedures. A second option is to pursue a
product or trade name franchise in which the franchisee becomes
part of a franchisor's distribution network.

BENEFITS OF FRANCHISE OWNERSHIP

 Advertising and Promotion.
Many franchisors provide their franchisees with a wide range
of point-of-sale advertising materials, ranging from posters to
mobiles to brochures. Since such materials are often expensive to
produce, they would otherwise be beyond the reach of some
individual franchisees.
 Operations
Franchisors provide franchisees with a wide range of help in
the areas of administration and general operations. The
entrepreneur who becomes a franchise owner is instantly armed
with proven products and production systems; inventory systems;
financial and accounting systems; and human resources
guidelines.
 Buying Power
Franchisees are often able to fill inventory needs at discount
prices because of their alliance with the franchisor, which typically
has made arrangements to buy supplies at large-volume prices.
This is an increasingly great advantage because today one has to
compete with national chains, conglomerates, buying consortiums,
and other large franchises. The small-business person who
purchases in small quantities cannot easily compete in terms of
buying power. By becoming a franchisee, a business has the
collective buying power of the entire franchise system.
 Research and Development
Most small business owners are able to devote little time or
money to research and development efforts. Franchising, then,
can provide a huge lift in this regard, for many franchisors
maintain ongoing research and development systems to develop
new products and forecast market trends.
 Consulting Services
It is in the franchisor's best interests to do all it can to ensure
the success of all of its franchisees. As a result, the entrepreneur
who decides to become a franchisee can generally count on a wide
range of training and consulting services from the larger company.
Such services can be particularly helpful during the startup phase
of operations.

DRAWBACKS OF FRANCHISE OWNERSHIP

 Cost
The initial franchise fee, which in some cases is not
refundable, can be quite expensive. Some fees are only a few
thousand dollars, but others can require an up-front investment of
several hundred thousand dollars.
In addition, some franchisors require their franchisees to
pay them regular royalty fees—a percentage of their weekly or
monthly gross income—in exchange for permission to use their
name. Some franchisors also require their franchise owners to
help pay for their national advertising expenditures. Other costs
include insurance, initial inventory purchases, and other expenses
associated with equipping a new business.
 Limited Control
Franchisees are subject to many franchisor regulations
concerning various aspects of business operation and conduct. As
the Federal Trade Commission (FTC) acknowledged to prospective
franchisees in its Consumer Guide to Buying a Franchise, "these
controls may significantly restrict your ability to exercise your own
business judgment."
 Appearance
Many franchisors cultivate a certain readily recognizable
look to their outlets, for they know that such standards, when
applied consistently, contribute to national recognition of the
company name and its products and services.
Franchisees generally accept these regulations willingly, for
these standards of appearance in the areas of decor, design, and
uniforms have proven to be part of a winning formula elsewhere.
This is just as well, for the franchise owner who does wish to make
changes in his business's appearance often has little freedom to do
so.
SELECTING A FRANCHISE
It is imperative for prospective franchise owners to make an
intelligent, informed decision regarding franchise selection for
once a contract has been signed, the franchisee has committed
himself to the enterprise. But the selection process can be a
bewildering one for the unprepared entrepreneur. Franchise
opportunities are available in a wide array of industries, each of
which offers its own potential benefits and drawbacks. Moreover,
every franchisor has its own strengths and weaknesses. Several
business areas need to be investigated as part of any effective
franchise selection process.

 Analysis of Self
Prospective franchisees should also have an understanding of
their ultimate business and personal objectives before beginning
the search for an appropriate franchise. The entrepreneur who is
most interested in achieving financial security may not want to
look in an entirely different industry than entrepreneur who hopes
to land a franchise that will enable him or her to devote more time
to family life.
 Analysis of Industry and Market
Prospective franchise owners need to evaluate which industries
interested them. They also need to determine whether the
franchisor’s principal goods or services are in demand in
community in which he or she hopes to operate. Other industry-
wide factors, such as the cost of raw materials used and the
amount of industry competition, need to be weighed as well. The
latter issue is a particularly important one, for it can be a
fundamental factor in franchisee’s success or failure.
 Analysis of Franchisor
 Many experts also encourage prospective small business owners
to interview current and former franchisees associated with the
franchisor. Would-be franchisees can thus gain first-hand
information on great many business subjects, including: likely size
of total investment, hidden or unexpected costs, satisfaction with
franchisor performance (in training advertising, operating etc.),
franchisee background, and business trends in the industry.
Franchisee lists can be a valuable resources, but consultants
caution their clients to make certain that they receive a complete
list, rather than a list of selected franchisees who are compensated
by the franchisor for giving positive appraisals of the company.
Franchising Laws
A good many of the laws governing franchising are expressly
designed to protect prospective small business owners from
unscrupulous franchisors who misrepresent themselves.
Franchising experts commonly urge prospective franchisees to
enlist the help of attorney during the franchise selection process.
Indeed, since franchising is such a complicated business, many
entrepreneur secure an attorney’s services throughout the
process. Legal assistance is especially helpful when the time comes
to sign the franchise or license agreement, the document that lays
out the term of the partnership between a franchisee and a
franchisor.