What Is a Franchise?
Franchising is, in a word, a license. It is a system for independently owned businesses to share a common brand, distribute products and services, and expand. It’s a contractual relationship between a brand owner (the franchisor) and an independent local business owner (the franchisee).
For example, Bright Star Care doesn’t “franchise” medical and non-medical home care assistance, FASTSIGNS does not franchise printing, Wetzel’s Pretzels does not franchise pretzel shops and Dat Dog does not franchise hotdogs, sausages, and beer. What each “franchises” is a system that delivers quality branded products and services to consumers. And they do so through a network of independently owned and operated businesses that deliver a consistent customer experience.
“Dat Dog is an experience,” says Bill DiPaola, president and COO of Dat Dog, based in New Orleans. “It is more than simply the great food and expansive assortment of craft beers that make us successful and that will make our franchisees successful. It is our commitment to community, married with the fun and ‘zany’ culture of Dat Dog, that brings our customers back and that is the approach we expect our franchisees to take in each of their restaurants.”
A franchise occurs when a franchisor licenses its trade name and intellectual property — the brand and its operating methods (its system of doing business) — to a person or group who agrees to operate their business to the franchise system’s brand standards. The franchisor defines the brand promise it wants delivered to consumers, provides the franchisee with initial and continuing support, and then ensures compliance by the franchisee on how it delivers on that brand promise. The magic of franchising is that consistent brand standards can be achieved at each location without the franchisor being involved in the day-to-day management of the franchisee’s business.
In exchange, the franchisee pays an initial franchise fee to join the system and a continuing fee known as a royalty to remain a part of the franchise system.
The effects of franchising on modern business
Consumers have grown accustomed to the consistency that comes from shopping at branded locations. From the comfort of knowing exactly what you will find when you check into a Courtyard by Marriott, to the quality of the chicken at a Popeye’s Louisiana Kitchen or a haircut at Sport Clips, people know what they will get when they purchase under a franchisor’s brand. The number of companies and industries bringing goods and services to consumers through franchising is growing, limited only by the imagination of the people who understand its potential application.
The size and impact that franchising has had on the economy in the United States is often unrecognized. According to the Franchise Education and Research Foundation, business-format franchising in 2017 is projected to generated close to 8 million jobs in the U.S., accounting for over $700 billion in economic output and over $425 billion in gross domestic product from more than 744,000 establishments. In a recent survey, more than 76 percent of American consumers favorably viewed shopping at a locally owned franchise business in their neighborhood. That’s the power of franchising today.
The success of franchising for business owners
Franchising creates opportunities for business ownership to create personal wealth and generates local jobs. It also consistently delivers products and services on a global basis to the brand standards established by the franchisor.
As you explore becoming a franchisee or a franchisor, be wary of statistics that talk about the “success rate” in franchising. As late as 2000, the International Franchise Association published statistics that claimed that franchisees had a success rate of 95 percent — versus a failure rate of 85 percent for nonfranchised startups in their first five years in business. Those statistics turned out to be inaccurate and misleading.
The IFA has frequently reminded franchisors to not use those out-of-date and misleading statistics, but unfortunately, some franchisors, franchise brokers, and franchise-packaging firms (one-stop shops that offer “cookie-cutter” franchise advice) continue to use them to attract potential franchisees. What should be important is how well a franchise system is doing, and it is irrelevant in choosing any franchise opportunity whether or not franchising in general is doing well. You should be very wary of working with anyone who still uses invalid claims of franchise industry success statistics.
Franchising can be a very effective method of getting into business, but that depends on how carefully the franchise system is structured and supported. Even in highly successful franchise systems, locations can fail for a host of reasons. It is up to prospective franchisees to conduct a proper examination of every franchise opportunity that interests them.