Franchising allows companies to operate under a successful business name for a fee. The concept evolved from German beer companies charging for the right to transport their beer. Franchisors maintain control over products and services to maintain brand consistency. Potential franchisees should carefully examine constraints and ensure they have the necessary administrative capacity and aptitude for the specific franchise. When investigating specific franchise systems, potential buyers should consider several factors, including what is included in the franchise fee and projections for capital needed and when the investor can recoup their initial investment.
The term franchise comes from a French word meaning “freedom”. Politically, a franchise is the freedom to participate in government, usually through the right to vote. In business, franchising systems are business models in which a company with a successful product or business system allows other companies the right, or freedom, to operate under its business name for a fee. The original business that sells the right is called the franchisor; the person or company that buys the right is called the franchisee.
It is difficult to find a consensus on the origin of franchising systems, although they seem to have evolved in the 19th century from methods employed by German beer companies that charged companies a fee for the right to transport their beer. In 1850, Isaac Singer invented his treadle sewing machine, the first machine suitable for home use. To raise money for marketing and manufacturing, Singer sold land rights to individuals and companies who marketed the machines and taught buyers how to use them. This early form of franchising allowed his company to expand into the international market just five years later, when he opened a factory in Paris, France.
Franchise systems expanded rapidly in the mid-20th century. Inspired by the phenomenal success of Ray Kroc and the McDonald’s hamburger chain, franchising opportunities have exploded. Fast food, car repairs, dry cleaning, carpet cleaners, family restaurants and travel agencies were just some of the options available. The growth was so rapid that, in some cases, franchisors became so involved with selling the franchise opportunity that they tended to neglect franchisees after contracts were signed. In 1979, the Federal Trade Commission (FTC) in the United States issued a franchise rule that established minimum disclosure requirements for franchise sales.
In most franchise systems, the franchisor maintains a great deal of control over the products and services offered by the franchisee in order to maintain brand consistency and the reputation of its trademark or product. For example, the franchisor often has very strict terms governing marketing, product quality, building design, and operating practices. An entrepreneur should carefully examine the constraints of potential franchise systems to ensure that he or she can work comfortably within those constraints.
An investor needs to be aware that buying a franchise from a successful company does not necessarily guarantee its own success. The buyer must ensure that he has the necessary administrative capacity to run a business, as well as the necessary aptitude for the specific franchise he chooses. If he lacks mechanical aptitude, for example, he may want to stay away from franchise systems that specialize in car repair or maintenance. He must also ensure that the parent company’s success is not the result of regional problems, that the company has the resources to provide adequate support, and that its local area has not reached a saturation point for this type of business.
When investigating specific franchise systems, a potential buyer should consider several factors. He must know exactly what is included in the franchise fee; for example, training, operations manuals, guidance on site selection and territorial rights. The franchisor should be able to provide projections of how much capital the investor needs, how long it will take for the new franchise to open, and when the investor can reasonably expect to recoup their initial investment. It is also important to know how many other franchise offices will be sold in the same area and if there are ongoing franchise fees.
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