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Franchising is the practice of using another firm's successful business model.

The word 'franchise' is of angloFrench derivation - from franc - meaning free, and is used both as a noun and as a (transitive) verb.[1] For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods that avoids the investments and liability of a chain. The franchisor's success depends on the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

What is a franchise? A franchise is a right granted to an individual or group to market a company's goods or services within a certain territory or location. Some examples of today's popular franchises are McDonald's, Subway, Domino's Pizza, and the UPS Store. There are many different types of franchises. Many people associate only fast food businesses with franchising. In fact, there are over 120 different types of franchise businesses available today, including automotive, cleaning & maintenance, health & fitness, financial services, and pet-related franchises, just to name a few.

How Franchising Works


If you are thinking about buying into a franchise system, it is important that you understand exactly how franchising works, what fees are involved, and what is expected of you from the franchise company. An individual who purchases and runs a franchise is called a "franchisee." The franchisee purchases a franchise from the "franchisor." The franchisee must follow certain rules and guidelines already established by the franchisor, and in most cases the franchisee must pay an ongoing franchise royalty fee, as well as an up-front, one-time franchise fee to the franchisor. Franchising has become one of the most popular ways of doing business in today's marketplace. In most states you cannot drive three blocks without seeing a nationally recognized franchise company.

The History of Franchising


Franchising began back in the 1850's when Isaac Singer invented the sewing machine. In order to distribute his machines outside of his geographical area, and also provide training to customers, Singer began selling licenses to entrepreneurs in different parts of the country. In 1955 Ray Kroc took over a small chain of food franchises and built it into today's most successful fast food franchise in the world, now known as McDonald's. McDonald's currently has the most franchise units worldwide of any franchise system. Today, franchising is helping thousands of individuals be their own boss and own and operate their own business. Franchising allows entrepreneurs to be in business for themselves, but not by themselves. There is usually a much higher likelihood of success when an individual opens a franchise as opposed to a mom and pop business, since a proven business formula is in place. The products, services, and business operations have already been established.
Types of Franchises There a four types of franchising opportunities available with varying levels of qualification requirements.

Single Franchise - This is the beginning level and common form of franchise participation. The Franchisee is awarded the exclusive rights to operate a single unit franchise in a specified geographic area. It could be a home-based business or have a physical location. The franchisee is typically a hands on operator of the business. Multi Unit Franchise - The franchisee owns and operates more than one franchise unit. Units may be in random areas of your choosing. The franchisee is typically less involved with each individual unit, but manages the multiple unit operations.

Area Development Franchising - The franchisee will own an exclusive territory and will agree to a development schedule for the number of units they must open and operate. There is typically a significant reduction in franchise fees and possibly ongoing royalties. Area Developer franchisees usually have managers for each unit. Master Franchising - Sometimes called a master or regional developer, a master franchisee has the exclusive franchise rights in his or her area (usually a metropolitan area or even an entire state). He acts as the business development partner for the franchise company in his specific territory or region, i.e., a state, counties or metropolitan area. The master, in addition to opening franchises, sub-franchises (selling a single unit and multi unit franchises), keeping a significant portion of the franchise fee as well as ongoing royalties from the franchisees within his or her area. There may also be additional income available from distribution of products through the franchisees in the area. The master essentially becomes a franchisor in his or her own area without having the costs of the trial and error the original franchisor went through. Absentee Investor - For the right kind of business, with the right employees running that business, it is possible to own a franchise business and not be directly involved in its day to day management. With this approach, you can keep your job and build equity and wealth toward your retirement years through business ownership.

According the International Franchise Association there are over 75 industry categories of franchises. The categories listed are an indication of the variety of the types of franchises available.

A
Accounting/Tax Services, Advertising/Direct Mail, Automotive Products & Services

B
Beverages Specialty, Business Brokers, Business Services, Business/Management Consulting

C
Check Cashing/Financials Services, Childrens Educational Services, Computer/Electronics/Internet Services, Construction Materials, Services and Remodeling

E
Educational Products & Services, Employment Services, Environmental & Restoration Services, Equipment Commercial Cleaning F Factoring - Accounts Receivables, Financial Services, Fitness & Nutrition, Food - Baked Goods/Donuts/Pastries, Food Candy/Popcorn/Snacks, Food Coffee, Food Deli/Sandwiches/Subs/Wraps, Food Ethnic, Food Ice Cream/Yogurt/Smoothies/Juice, Food Pizza, Food Restaurants, Food Specialty Franchise Consulting

H
Hair Salons, Beauty Care & Services, Health Aids & Personal Care Services, Home Furnishings- Retail, Sale & Rental, Home Inspection/Radon Detection, Hotels/Motels

I
Interior Decorating

J
Janitorial & Commercial Cleaning Services

L
Laundry & Dry Cleaning, Lawn, Garden, Agriculture, Logistics, Shipping, Warehousing

M
Maid & Residential Cleaning Services, Maintenance, Cleaning & Sanitation, Management Development & Training

O
Online Auction & Consignment

P
Packaging/Shipping/Mail Services, Painting Services, Pest Control Services, Pet Sales, Supplies & Services, Photography & Supplies, Pressure Washing & Restoration, Printing/Copying Services, Publications

R
Real Estate & Services, Retail - Home Interior, Retail Stores Specialty

S
Senior Care/Adult Care (Non-Medical), Signs & Graphics Services

T
Tanning Centers, Telecommunication Services, Training

W
Weight Control

Advantages & Benefits Of Being A Franchisor


The advantages and benefits of being a franchisor company outweigh many other business growth strategies. The list of advantages and benefits are phenomenal.

The ability to thoroughly leverage others assets. You can use the money, time, talents, contacts, ideas, and resources of others to expand. You can sell the business and still own it. And you can sell it over and over again. Immediate cash flow. No contingent liability. No additional real property or equipment leases. No manager or personnel procurement problems. Eliminates the day-to-day responsibility for direct management. Franchisors income is based on the franchisees gross sales not profitability. Gross sales are easier to monitor than profits. Profit and loss responsibility belongs to the franchisee. There is a long-term residual income. Expansion is not limited to your capital because the franchisees provide the capital for expansion. Collective buying power. More capital can be generated for advertising. Franchise fees can be used for research and development of new products and services for the franchise network. Cash flow from franchise fees can be used to open company owned franchises. The capital generated through franchising does not have to be repaid and can be used to sustain growth. A franchisor helps other ambitious individuals to succeed in their own businesses.

A franchisor company can be operated with a minimal number of employees since each franchise operation is staffed by employees of the franchise.

So you think you want to buy a franchise but youre not so sure it would be the right choice. After all, why should you spend a premium on a big name when you can just duplicate their efforts? Think again. There are a few good reasons why copycatting doesnt work, and in hard economic times, these reasons make even more sense. We cant say enough about the security factor of choosing to invest in a franchise as opposed to a new start up. Below are 5 advantages of franchising.

1. Branding
The first thing Franchises offer franchisees is a strategic identity that is not only effective, it has cumulative market impact. Corporate Brand Identities are proven. Mega-brands like McDonalds and Dunkin Donuts have literally spent millions on their brandings and logos and the franchisee gets to take full advantage. Most Franchisors have already survived decades in their respective industries and are easily identifiable to the public. A successful brand is one that is remembered, and Franchises have some of the most successful brand identities in the world.

2. Advertising
Advertising can be one of the biggest expenses for any new business and for good reason. You cant survive without effective advertising and effective advertising is expensive. These days, even if you have a prime location, if customers are unfamiliar with what you have to offer they wont come in. Franchises offer national advertising campaigns that are included in your franchise fee. This is a huge benefit when considering a franchise.

3. Name Recognition
People today want guarantees like never before and name/menu/brand recognition gives them that assurance. Everyone knows what to expect when they stop at your franchise because the majority of them are repeat customers even if its the first time in your store. You get to take advantage of the fact that a family from out-ofstate, for instance, who has previously enjoyed your franchises products and services, will think nothing of visiting your facility because of their past positive experiences. In fact, like an old friend, they are counting on you to be there.

4. Reputation
Next to Advertising and Branding, a Franchisee enjoys the protected reputation of the Franchisor. I say protected because there are designated legal departments that take care of the inevitable issues like lawsuits, accidents, and difficulties with employees. The reputation of the franchise is important enough, it is what breeds positive expectations that keep patrons loyal, but this benefit coupled with a built-in umbrella of legal protection is an incredible bonus and one you cannot get as an independent.

5. Support
Unless you were raised in the specific business you are trying to start, you will need special training. Franchise Head Quarters will train you in everything from the technology involved, to the accounting, to standing behind the counter and taking money. Ongoing and online support is always available as well as special alerts and continuing education. Franchisors want you to be successful and they make themselves available every step of the way. After all, they want to keep selling franchises and high success ratios keep potential franchisees coming.

DISADVANTAGES OF FRANCHISING
H IGHER L EGAL E XPENSE The necessity of preparing agreements, Uniform Franchise Offering Circulars (UFOCs) and related documents, and filing them in various states (with attached audited financials) represents a significant expense, although the year-to-year expenses are generally less than those initially incurred in setting up the structure and related documents. Basic documents, once prepared, can be filed in many states with generally minor changes. Additional legal (and possibly accounting) costs will be incurred if a separate legal entity is used for the franchising program. T E C H N I C A L L E G A L C O N S T R A IN T S - F R A N C H I S E A W A R D P R O C E S S Franchise laws are particularly technical in their application (for example, if a Franchisor provides only 9 days of pre-sale disclosure rather than the required 10, the Franchisee has an automatic rescission right, even though the missing day was not the cause of any loss.) For these reasons, an education program for franchising personnel (which we provide) and the assistance of an in-house legal compliance person is highly useful. T E C H N I C A L L E G A L C O N S T R A IN T S - R E G U L A T I O N O F T H E R E L A T I O N S H I P Franchise laws in a number of states regulate the circumstances in which a Franchisor may terminate or refuse to renew a franchise. While generally not preventing Franchisors from achieving termination or non-renewal, these laws do present a number of technical requirements that must be complied with. These requirements make inclusion of provisions for objective standards (for both system compliance and financial performance) for termination (and/or recovery of exclusive territories) particularly important. F RANCHISE M ARKETING C ONSTRAINTS Advertisements, brochures, flip charts, video tapes, etc. offering the franchise (but not retail advertisements) must be pre-cleared with state agencies and cannot contain earnings claims. Information regarding possible financial results for operating units can only be presented in a formal document attached to the UFOC. C ONTROL I SSUES As with dealerships, there may be quality control and related issues, at least as compared to companyowned operations. B USINESS R ELATIONSHIP I SSUES Perhaps more than with dealers, Franchisees typically view themselves as, to some degree, partners with the Franchisor in the development and possible success of the system. While most will agree that committee management doesnt work and that there needs to be one captain for the ship, a wise Franchisor will work with his Franchisees, probably with the help of a franchise advisory council, in charting strategic directions, implementing marketing plans, etc. A Franchisor must be psychologically comfortable working with Franchisees who will understandably take the view that if were going to be in on the landing, wed like to be in on the takeoff too. N EED TO D ELIVER P ERCEPTION ( AND R EALITY) OF C ONTINUED V ALUE Franchisees (perhaps more than dealers and particularly if they are being asked to pay royalties and/or marketing fund contributions throughout a long-term contract) can be expected, after some period, to feel that they know as much about running the business (at least on the retail level) as the Franchisor and will ask what their continued payments are buying them (What have you done for me lately?) Wise Franchisors anticipate the question by building value in the brand, updating systems and providing

continued operational and marketing benefits that give the Franchisee a superior position vis a vis the competition, making his or her leaving the system obviously a poor business decision. P OTENTIAL FOR L OSS OF F REEDOM Unless carefully designed, awards of exclusive territories may generate legal and other problems when a Franchisor seeks to expand through alternative channels of distribution (Internet, mail order, etc.), special venues (units in Wal-Mart, K-Mart, etc.), access different markets (non-automotive), co-branding opportunities, mergers with existing competitive chains, etc. Appropriate franchise agreement provisions, and proper education of Franchisees, and management of their expectations, can largely avoid these issues. F INDING Q UALIFIED F RANCHISEES As may be true with dealerships, but more importantly where the franchise relationship is long term, finding and educating (not just training) good Franchisees is vital. The ideal Franchisee combines entrepreneurial energy with the willingness to follow systems and act as a team player. Psychological testing and a detailed interview and training process are tools which many Franchisors use to select the right individuals. The question to be asked should be Is this the best candidate in Rochester? rather than Can this man fog a mirror held under his nose and produce a warm checkbook?
UNMANAGED GROWTH

Given franchisings demonstrated potential for rapid expansion (financed primarily by Franchisees), the potential downside is too rapid expansion, with the needs of the Franchisees outstripping the support capabilities of the Franchisor.

10 Steps to Buying the Right Franchise


Franchising is a safe way to start your own business. Just make sure you pick one the makes sense for you.

Recession, unemployment, tight credit, crashing stock market--we're in hard times and it's going to continue for a while. In spite of this, or maybe because of it, franchising is booming, with hundreds of thousands of people looking into franchise opportunities every day. Business ownership is the American Dream. Franchising remains one of the safest ways of becoming a business owner due to the time-tested training and support available from top franchises in more than 80 industry categories--a number than continues to grow. If you want to be your own boss, make sure you're finding the best franchise for you, which may be different than what you thought given the market conditions. Following are 10 steps to selecting a great franchise in the down market conditions expected for 2009. Step 1--Self-Evaluation Ask yourself what you really want to achieve by owning a business. Things like, what hours you want to work, what kinds of things are you good at and like to do, how much money can you afford to invest and what returns will you need to produce from the business? Also, give some thought to where you want to live and operate your business, as well as what your exit plans are in the future. Once you understand what's important to you, you'll be able to evaluate any franchise opportunity and know if it's a good match. Step 2--Financing These are not normal times. Given what's happened to our capital markets, you'll need to have a clear idea of how much money will be available to you. Unless you're sitting on a mountain of cash, start this process early on because the answers can be quite different from what they were just a few months ago. For more on funding, review my previous article, " 3 Sources of Franchise Financing ." Step 3--Evaluate industry categories Take a master list of franchise opportunities (the Entrepreneur Franchise 500 published each January is the most comprehensive) and review it. Don't bother with individual companies at this time, just focus on industry groups or categories. Based on your impression of each of these segments, ask yourself if it appears to meet the desired criteria you identified in Step 1. If it doesn't, cross it off. You'll end up with a list of possible industry segments. Step 4--Look for recession-resistant segments Take your list of possible industry segments and ask yourself a simple question: "Do I believe this is a business that will continue to do well regardless of the state of the economy?" This will be true of businesses like damage restoration, fast food, senior care or hair cutting, but it may not be true of others like optional expensive services businesses or upscale retail. Cross off industry segments if you believe that they're not recession resistant so you give yourself the best possible chance for a successful decision. Step 5--Start identifying individual franchise companies Once you've narrowed down the list, look at individual companies and pick one that you think is representative of the category. Try to select companies that will have territories available in your desired area. From this list of companies, pick a few that seem most interesting or attractive to you based on your criteria identified in Step 1. It's time to look at them in a little more detail. Step 6--Request preliminary information from franchisors After selecting a few companies that match with you, contact the companies and request basic franchise information. This might be on a website or in brochures, videos or other materials they may send you after you visit with one of their development staff. Review the preliminary information from each company to determine if, based on this further information, the company still appears to meet your criteria and is worth

spending more time on. From this point forward, your time commitment on each active investigation is going to increase dramatically, so be selective. Step 7--Study the FDD After your initial contacts and the submission of a qualification questionnaire, the franchisor will typically provide you with its Franchisor Disclosure Document (FDD), an FTC-mandated disclosure document. The FDD contains extensive information about the franchise, including the history of the executives, any litigation the company has experienced, the names and contact information for the current franchisees, and a copy of the franchise contract. Review this information carefully and get any questions you have answered before you proceed to the next step. Step 8--Call existing franchisees The best source of information for any franchise system is the existing franchisees. Contact franchisees and ask them all about the business, their lives as franchisees, and what they think of the company. This is a good tool for evaluating how well a franchisor supports its franchisees, whether the startup cost projections are realistic and how effective the provided marketing materials are. Step 9--Visit the franchisor Assuming everything else checks out, your second-to-last step is usually a visit to franchisor headquarters. This is a great time to get any final questions answered and to meet the people who will be helping you get your business up and running. Though this may seem like a formality, it's a vital check-and-balance to make sure you are completely comfortable and confident in the company you are about to enter into business with. Also, keep in mind that they will be carefully evaluating you as a potential franchisee at the same time, so this final judgment is a two-way street. Step 10--Make your decision Once you've completed the preceding nine steps, it's time to make your final decision. If you've carefully followed this process, you can be sure that you've made your choice for all of the right reasons, that this franchise opportunity does all of the following:

Matches your financial resources Provides you with the lifestyle you imagined Uses your particular skills and experience Provides a recession-resistant product or service Has a majority of happy and successful franchisees Employs an experienced and enthusiastic staff of personnel who will help you achieve your dreams of business ownership success