Franchise 101

Franchising History 

The word franchise originally meant freedom.  It was the right granted by a king to conduct specific business in the kingdom for a fee. Generally, a person received a monopoly to construct a road that would be used to charge tolls or for hunting. The principle of a franchise is an important part of European law.  Today the government often grants exclusive rights to private companies to provide services like electricity, water, gas, and transportation.   

Around a hundred and seventy years ago, a manufacturer made deals with specific enterprises to allow them to sell a product exclusively. The first American company to implement this concept was Singer Sewing in 1858. Before people bought a machine, they needed to understand how to use them. Rather than developing a large sales presence around the country, Singer licensed exclusive rights to sell their machines to businesses. Each business paid a licensing fee in return for the exclusive right to market in a specific location. This allowed for faster expansion than if Singer had opened up the nation by its own resources. 

In the early 20th century, oil companies granted the right to sell gasoline, like Standard Oil. After World War II, franchising took off largely in the food and hotel industry as a way to entice investors to put up capital to grow the business. In the 1960’s and 1970’s many abuses occurred when some firms were thinly veiled scams. This led to a Federal Trade Commission decision in 1978 requiring all franchisors to provide complete information in writing to prospective franchisees.  

Today, you receive information on a company’s history, litigation, parent company financial information, and franchise agreement that you would sign. 

Some states require a franchisee to register before soliciting or selling franchises. Franchisors need to keep up with state requirements. A franchise consultant will be able to help you keep current with state regulations for any registered business.  Even if a business is not registered, a franchise consultant will research the franchise not available in your state and save you time. 

Today, franchising has evolved into many businesses to offer a pathway to success for thousands of business owners. 

A Franchise Brings Marketing Expertise  

I have worked with many business owners whose number one issue was, “I need more customers.”  The process involves determining your Unique Sales Proposition, your target customer, and your price point.    Many businesses fail, not because the owner doesn’t work hard or the product doesn’t meet a market demand; but because the owner does not grasp how to advertise and market the product.  

Becoming a franchise owner connects you with marketing helps that have already proved successful.  A good franchisor will bring four key elements to the business. 

First, they should have sound research on demographics, potential customer base, and competition. Before franchisors sell a unit, they should understand whether or not the market potential is solid. This avoids costly mistakes. Often a business owner will have a good idea, open shop, and later learn that the customer base was not sufficient to support the business.  

Second, the franchisor understands how to reach the customer base. They have already demonstrated an ability to get customer calls or to bring customers through the door. When you connect with a franchisor, you receive a proven model that you can follow to generate customers and sales. 

Third, the franchisor is able to provide you with advertising copy to reproduce as flyers, direct mail, newspaper advertisements, or other useable advertising tools. Effective advertising needs to be carefully designed and tested.  This is time consuming and costly. As a franchisee, you gain the benefit of this creative work and research. 

Fourth, the franchisor will help you know the best ways to advertise. You have a wide choice that includes newspaper, TV, radio, direct mail, flyers, and coupon books. The home office will direct you to the best places to effectively invest your advertising money in ways that will target your best prospects. 

When you talk with a prospective franchisor, ask how they market; what ad campaigns they run; and how they will help support you in growing sales.

If you don’t have extensive marketing experience and want to start a business, consider a franchising model that provides the critical marketing support you need for success. 

A Franchise Brings a Successful Business Model 

Many business owners have an idea of how their business should run and how customers should be served. I have worked with many business owners who have struggled to create just the right business model needed for success. For some, they just need a few tweaks; others require major surgery. 

A key benefit that a franchise offers is a proven business model.  It has a demonstrated model of doing business that others have also successfully implemented. 

I prefer to recommend a franchisor who has already started 50 or more units with different owners and consistent successes. This demonstrates an ability to pass on the business model to other owners. Good franchisors provide effective training that allows you to understand every aspect of the business model. 

When talking with a franchiser, ask specific questions.  How does the model work?  Why is the model successful?  How would they train you to replicate the model successfully?   

An effective business model is one of the most important factors to consider before buying a franchise.  Select a model with a proven track record.  Their success can be yours as well. 

Proven Start-up Franchises May Be Your Best Opportunity

Many people want a franchise they know well. Dunkin Doughnuts has 5,200 locations in 36 states.  It is well known and most locations are successful. However, if you want to explore Dunkin Doughnuts; you need to demonstrate a minimum net worth of $1.5 million. With their huge success, they have the ability to set the bar high to buy into their franchise.  They demand high net worth plus management experience. 

Other start-up franchises may have a great idea, opened a few company-owned locations, and started to sell their first few franchises to independent operators.  However, they have not demonstrated an ability to effectively transfer the business model and marketing plan to others. Operating your first twelve units is an entirely different proposition than running 50 or more with success. 

Often, the sweet spot for success is the franchisor that has been in business five years and expanded successfully to between 50 and 200 units. These companies have proven their model over time and demonstrated that they can launch independent owners on the road to success. You can usually get excellent territories that haven’t been gobbled up by others.  In addition, the company is still small enough that they will focus on making sure you are a success. If Dunkin Doughnuts loses one store out of 5,000, it has little impact on operations.  But to a newer company with 80 locations, each one is precious. 

While there are exceptions, these solid start-up franchises usually present the best opportunities. A franchise consultant can steer you to the opportunity that hits this sweet spot.  

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