Business franchise

On the other end of the deal, by licensing out its business methods and pledging support to franchisees, the franchisor allows itself the opportunity to expand into areas it may have had difficulty expanding to without the extra money and manpower.

Business franchise

What is franchising? Find all you need to know here.

Franchising is a major force in the business world. Consider this…
There are over 745,000 franchise locations in the United States.
There are approximately 3,800 franchise systems operating in the United States, as of the beginning of 2019.
Over the past few years, 250 to 300 businesses annually have developed their concept into a franchise.
Franchises employ about eight million Americans directly.
About 13,000 to 20,000 prospects invest in new franchises yearly, according to Franchise Performance Group and FRANdata.

Franchising is a form of marketing and distribution in which the owner of a business system (the franchisor) grants to an individual or group of individuals (the franchisee) the right to run a business selling a product or providing a service using the franchisor’s business system.

Franchisees are also given permission to use the franchisor’s branding, trademarks, and identifying marks under specified guidelines. It is important for anyone deciding to start a business by becoming a franchisee to remember that in franchising the franchisee is bound to a partnership agreement with the franchisor for a defined period of time (some exceptions do exist).

Franchising as we know it today is widely believed to have originated with Isaac Singer in the 1850s. After Singer invented his sewing machine he encountered two main problems when introducing it to the marketplace. The first was that customers needed to be taught how to use the new invention before they would buy it. The second was that Singer did not have enough capital to manufacture his machine in large numbers.

In response, Singer, along with business partners, came up with the idea of selling the rights to sell the sewing machines as well as train those who bought one to local business people across the country (and eventually internationally).

Once he employed this system, Singer’s enterprise expanded rapidly. The royalties earned from the license rights helped offset manufacturing costs and, because each franchise was self-financed, Singer Manufacturing Company was able to tap into the entrepreneurial attributes and local market knowledge of the franchisees to help Singer become more successful than he could have by himself.

The tipping point for franchising came in the 1950s. In 1954, Ray Kroc, a successful business man from Illinois, saw the potential in franchising a successful southern California hamburger stand owned by a couple of brothers. This restaurant chain, McDonald’s, is perhaps the most well-known example of franchising in the world. Kroc has drawn comparisons to auto maker Henry Ford for bringing an assembly line-like concept to the fast food industry through his belief that customers of McDonald’s should have an idea of what to expect wherever in the world they may be.

When asked, the majority of people when asked for a commonly known franchise would name a fast food franchise most often. However, franchising is extremely diverse. Name a product or service from ATMs to yogurt and there’s likely a franchise industry for it.

While franchising is a staple of the American business landscape, the merits of franchising have not been ignored abroad. It is steadily increasing its footprint in numerous other countries. This is especially true in emerging markets such as China, India, Russia, Brazil and the Middle East among others.

Elements of the franchise model has also been woven into the fabric several other industries. For example, Coca-Cola was able to expand throughout the United States by shifting the burden of manufacturing, storing and distributing its product to local business people who acquired bottling rights. Car manufacturers who had been spending enormous amounts of capital tooling their assembly lines found they could develop retail distribution networks using capital provided by independent dealers. Oil companies such as Standard Oil and Texaco also started granting franchises to convenience stores and repair mechanics across the U.S. to efficiently expand their reach.

No business method or industry sector can guarantee success, and franchising is no exception. If a franchise system has a proven product or service with a well-recognized brand combined with hard-working, well-financed franchisees, the chances of success are very high — but never a 100 percent given. If, on the other hand, the franchise system is under-funded with an ill-conceived business plan that has not been tested properly, and franchisees have been poorly recruited or trained, failure is likely.

Due diligence is key in making the right decision for you. Seek the advice of seasoned franchise professionals and ask questions until you are confident in your decision. Remember, it is your investment that is at stake. More information about finding the most profitable franchise for you can be found here.

Understanding Franchises

When a business wants to increase its market share or geographical reach at a low cost, it may franchise its product and brand name. A franchise is a joint venture between a franchisor and a franchisee. The franchisor is the original business. It sells the right to use its name and idea. The franchisee buys this right to sell the franchisor’s goods or services under an existing business model and trademark.

Franchises are a popular way for entrepreneurs to start a business, especially when entering a highly competitive industry such as fast food. One big advantage to purchasing a franchise is you have access to an established company’s brand name. You won’t need to spend resources getting your name and product out to customers.

The franchise business model has a storied history in the United States. The concept dates to the mid-19th century, when two companies—the McCormick Harvesting Machine Company and the I.M. Singer Company—developed organizational, marketing, and distribution systems recognized as the forerunners to franchising. These novel business structures were developed in response to high-volume production and allowed McCormick and Singer to sell their reapers and sewing machines to an expanding domestic market.

The earliest food and hospitality franchises were developed in the 1920s and 1930s. A&W Root Beer launched franchise operations in 1925. Howard Johnson Restaurants opened its first outlet in 1935, expanding rapidly and paving way for the restaurant chains and franchises that define the American fast-food industry until this day.

There are more than 785,000 franchise establishments in the U.S., which contribute almost $500 billion to the economy. In the food sector, franchises included recognizable brands such as McDonald’s, Taco Bell, Dairy Queen, Denny’s, Jimmy John’s Gourmet Sandwiches, and Dunkin’ Donuts. Other popular franchises include Hampton by Hilton and Day’s Inn, as well as 7-Eleven and Anytime Fitness.

Before buying into a franchise, investors should carefully read the Franchise Disclosure Document, which franchisors are required to provide. This document contains information about franchise fees, expenses, performance expectations, and other key operating details.


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