1. what was the first-ever franchise?

Ale brewers in Germany granted the exclusive privilege – which is what ‘franchise’ translates as in archaic French – to certain taverns to sell their ale in the 1840s.

But it was the Singer Sewing Machine Company, which started granting distribution franchises in 1850, that was the precursor for the modern Franchise.

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2. what is Franchising?

The term 'franchising' has been used to describe many different forms of business relationships, including licensing, distributor and agency arrangements. The more popular use of the term has arisen from the development of what is called 'business format franchising.'

Business format franchising is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a predetermined basis.
The principle is simple - some companies choose to grow, not by developing in the conventional way, but by granting a license to others to sell their product or service. There are clear advantages to this:

• You don't have to come up with a new idea - someone else has had it and tested it, too!
  
• Larger, well-established franchise operations will often have national advertising campaigns and a solid trading name .
  
• Good franchisors will offer comprehensive training programmes in sales and indeed all business skills.
  
• Good franchisors can also help secure funding for your investment as well as e.g. discounted bulk-buy supplies for outlets when you are in operation .
  
• If aware that you are running a franchise, customers will also understand that you will be offering the best possible value for money and service - although you run your 'own show', you are part of a much larger organisation.

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3. Franchising: what's it all about?

Put very simply, franchising is a way of expanding an existing business through the licensing of its business model and brand to an individual entrepreneur. The entrepreneur then owns a separate franchise business, which they can develop along certain guidelines.

How so?
Someone – the franchisee – pays the business operator – the franchisor – a fee for the privilege of using its brand, and for selling its products or services. This provides the franchisee with a tried and tested business.
The franchisor sees an expansion of its operation, while the franchisee has a robust business that they can grow as they see fit.
The franchisor takes some sort of management fee, usually a percentage of revenues, however it is the franchisee’s business.

So why should a franchisee take the risk in putting up the capital, while the franchisor sits back and siphons off revenue?

That’s precisely the point – a franchise actually poses less risk. Nine out of 10 franchises survive their first year, and the same proportion say they make a profit; 90% of start-ups fail within the first three years.

But what makes a franchise so much safer?

You have the use of a ready-made, well-established brand; instantly you are bequeathed public trust in the products you sell or services that you are licensed to render.

How does the franchisee know how to operate the business in the way the franchisor wants?

This is why good franchisors will train them in business skills and sales techniques – so they can represent their brand as well as the franchisor has done.
Having the know-how of an established and authoritative industry player behind franchisees gives them a major advantage over the start-up operator.
To protect the quality and consistency of the products or services associated with the brand, a franchisee also has to sign a legal agreement at the outset.
Called a franchise agreement, this stipulates certain practices and standards of behavior they have to adhere to, and sets parameters defining how far they can stray from brand standards, such as décor, food ingredients or opening times – generally not very much. This legal document usually covers a minimum period of around five years.

So the franchisee sacrifices creative freedom and part of the profit, but knows that at least he or she is going to make a profit… ?

Yes – savings are made elsewhere that can offset the money taken by the franchisor. The franchisor will usually pay for all the advertising and marketing.
And if it is a huge, international brand such as Subway or Gold’s Gym then you know you are guaranteed a seriously heavyweight marketing budget behind you.

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4. Are you suited to franchising?

Yes, if you...

• …wish to minimise risk – this might be because you are conscious of supporting your family, for instance;
  
• …have a desire to make a profit that outstrips your need for entrepreneurial freedom;
  
• …are limited in the capital you can raise yourself or from banks for a start-up;
  
• …wish to avoid two years of struggle keeping a start-up afloat, and establishing the brand image as well as the right products and services;
  
• …do not wish to do your own marketing;
  
• …want to avoid the hassle of finding a profitable location for your business; and
  
• …want to expand your business rapidly.

And do not mind…

• …missing out on the challenge of finding the right product or service mix;
  
• …sacrificing creative freedom in forging your own brand;
  
• …missing out the challenge of identifying and targeting markets – and adapting your brand, product range/services and marketing strategies to suit the market;
  
• …being powerless, to a degree, to influence your own fortunes, depending instead on the performance of the franchisor and other franchisees;
  
• …losing a percentage of your revenues to the franchisor;
  
• …being prevented from working in the same industry for competitors after the expiry or sale of your franchise; and
  
• …generally missing out on the joy of seeing your own business grow from a vulnerable sapling to a strong oak with an extensive network of roots.

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5. How Franchisees Are Selected?

Working as a franchisee for a franchise means that you are working in partnership with another business. Different franchises look for different qualities in their franchisees. Certain franchise opportunities also provide a greater level of support. Therefore, there are certain qualities every franchisee should possess.
But each franchisor will expect certain other attributes and skills on top of these, depending on the demands of the industry in question. For instance, the ability to absorb technical know-how is crucial for a Prontaprint franchise, while people management is important in a labour-intensive environment, such as in offices or domestic cleaning businesses.
Selecting the right franchisee goes beyond merely selecting the right person to be a franchisee: the franchisor must also find the right person for the right business.
The qualities that you must possess to be a good franchisee fall into the following broad categories:

• Health;
  
• Financial resources;
  
• Experience;
  
• Competence;
  
• Management skills;
  
• Independence;
  
• Integrity; and last, (but by no means least)
  
• Compatibility.

Handling pressure

Someone that might be interested in buying a franchise, it is likely that you have little or no experience in running a business. Running a business in the modern world is increasingly complicated – so the franchisor will want to know that you can cope with the pressures that goes with it.

The physical strain involved in working long hours can be exacerbated if running a franchise entails considerable physical activity, such as lifting or carrying heavy loads, or being on one’s feet all day. You therefore need to be sound in body and mind – although that alone will not be enough.

You should not be prone to illness if you are to be a franchisee. One of the principal reasons companies franchise is that franchisees tend to be more dedicated. This is because they own, not manage the business, and have invested their own.

Franchisors do not, therefore, take kindly to a franchisee that is frequently away from the business due to ill health, and take account of applicants’ health in the selection process. A small number of well-advised franchisors will require you to undergo an independent health check before being accepted.

Most prospective franchisees have no previous experience in the trade or business of the franchise for which they apply, and this will not hold you back. On the contrary, this is seen by most franchisors as a positive factor. This is because it makes training you that much easier.

Indeed, many franchisors exclude applicants with previous experience in their sector. This is because they want their franchisee to do things the franchisor's way and not in the way they may have learned elsewhere.

Thus, a number of quick-print franchisors will not grant franchises to applicants who have been involved in the printing industry before – not because they would necessarily make bad printers, but because they may not make good franchisees. The problem is an obvious one: it is very difficult to ‘un-train’ a person.

The franchisor is not arguing that the applicant's way of doing things is wrong, but merely that it is the franchisor's methods make a particular franchise more successful than its competitors. Franchisors prefer applicants with an open mind and, as it were, a clean slate on which a franchisor can imprint its system.

Independence versus compliance

A consensus exists among franchisors that you need a certain degree of independence if you are to succeed as a franchisee. You must be ‘programmable’, but certainly not a drone. If you are too independent you will soon find yourself at odds with the franchisor, challenging a tried and tested system. But an ability to exercise judgment without reference to the franchisor is important, too. Franchisees lacking self-reliance and initiative will be too dependent upon the franchisor's support and will effectively become more like an employee of the franchisor than an owner. You must strike the balance between the two extremes to be successful.
Profiling franchisees according to certain selection criteria is good business practice. But franchisors come in all shapes and sizes, some are more mature than others, some have deeper pockets than others, etc.

The received wisdom in the UK has always been that franchisors don’t sell franchises; prospective franchisees buy them. That would be all well and good if time were infinite, franchisors’ strategy for growth elastic and the supply of competent franchisees plentiful.

In the real world, of course, franchisors have to grapple with real issues.

Established franchisors with a well-known brand will attract franchisees easily, but relatively unknown franchisors or start-ups have a tougher time. What drives a franchisor in the early stages is the need to get as many franchisees up and running in the shortest amount of time possible. This way the franchisor can achieve the critical mass necessary for further growth.

This is why franchisors at the initial stages of franchising often break the golden rule that says “do not do special deals with franchisees”. This is where things start going wrong.

Uniformity and equality

You should be wary of any franchisor willing to cut a deal. The whole ethos of franchising is uniformity – so treating franchisees equally is a cornerstone of managing a franchised network. If you succeed in wringing concessions from a franchisor, you may be pleased with yourself in the short term.

But eventually you are likely to come across another franchisee within the same network who has struck a better deal with the franchisor.

Franchisors and franchisees that negotiate concessions sow the seeds of their own destruction. Soon enough the network is full of disgruntled franchisees that will complain of discrimination and favouritism. As with any family, in a franchise network there should be no room for favourites.

You might choose a small franchise network based on an assumption that you will receive better support because there are fewer franchisees clamouring for attention. This is not necessarily the case – it is not the size of the franchise that is decisive, but the ratio of support staff to franchisees and the efficiency of the franchisor. Of course, small businesses can often be less unwieldy than larger ones, but be mindful that, as the network grows, access to the franchisor might become more difficult without a corresponding growth in training and support infrastructure.

If it is too easy to join a franchise, then quality is being compromised and a price will have to be paid. Generally, the more stringent the criteria, the better the quality of the network. Franchisors clearly have to walk a tightrope between satisfying their rollout programme and recruiting the right calibre of franchisee.

There is no adequate substitute for speaking to as many franchisees as you can to assess the quality of the franchisor. Do not be afraid of judging the franchisor on quality in a similar way that the franchisor will judge you.

Franchisors with the least rigorous selection criteria use the ‘mirror test’: the franchisor places a mirror under a prospective franchisee’s nose, and if condensation appears the franchisee is alive and breathing, and as long as they have their cheque book on them then bingo – he is selected!

The mirror test satisfies the first (in part at least) and second criteria listed at the beginning of this article, health and finances respectively. As for the rest, it is pot luck. If it doesn’t work out he can always sell another franchise – but for the franchisee it could spell financial disaster.

The moral of the story is that selection is a two-way process: as well as establishing that you have the right profile to be a franchisee, you must ensure that a franchisor is the right one for you –in the long-term as well as the short-term.

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6. What Factors Should I Consider when Selecting a Franchise?

Like any other investment, purchasing a franchise is a risk. When selecting a franchise, carefully consider a number of factors, such as the demand for the products or services, likely competition, the franchisor's background, and the level of support you will receive.

Demand
Is there a demand for the franchisor's products or services in your community? Is the demand seasonal? For example, lawn and garden care or swimming pool maintenance may be profitable only in the spring or summer. Is there likely to be a continuing demand for the products or services in the future? Is the demand likely to be temporary, such as selling a fad food item? Does the product or service generate repeat business?

Competition
What is the level of competition, nationally and in your community? How many franchised and company-owned outlets does the franchisor have in your area? How many competing companies sell the same or similar products or services? Are these competing companies well established, with wide name recognition in your community? Do they offer the same goods and services at the same or lower price?

Your Ability to Operate the Business
Sometimes, franchise systems fail. Will you be able to operate your outlet even if the franchisor goes out of business? Will you need the franchisor's ongoing training, advertising, or other assistance to succeed? Will you have access to the same or other suppliers? Could you conduct the business alone if you must lay off personnel to cut costs?

Name Recognition
A primary reason for purchasing a franchise is the right to associate with the company's name. The more widely recognized the name, the more likely it will draw customers who know its products or services. Therefore, before purchasing a franchise, consider:

• The company's name and how widely recognized it is. -- If it has a registered trademark.
• How long the franchisor has been in operation.
• If the company has a reputation for quality products or services.
• If consumers have filed complaints against the franchise with the Better Business Bureau or a local consumer protection agency.

Training and Support Services
Another reason for purchasing a franchise is to obtain support from the franchisor. What training and ongoing support does the franchisor provide? How does their training compare with the training for typical workers in the industry? Could you compete with others who have more formal training? What backgrounds do the current franchise owners have? Do they have prior technical backgrounds or special training that helps them succeed? Do you have a similar background?

Franchisor's Experience
Many franchisors operate well-established companies with years of experience both in selling goods or services and in managing a franchise system. Some franchisors started by operating their own business. There is no guarantee, however, that a successful entrepreneur can successfully manage a franchise system.

Carefully consider how long the franchisor has managed a franchise system. Do you feel comfortable with the franchisor's expertise? If franchisors have little experience in managing a chain of franchises, their promises of guidance, training, and other support may be unreliable.

Growth
A growing franchise system increases the franchisor's name recognition and may enable you to attract customers. Growth alone does not ensure successful franchisees; a company that grows too quickly may not be able to support its franchisees with all the promised support services. Make sure the franchisor has sufficient financial assets and staff to support the franchisees.

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7. How Can I Evaluate My Potential To Become a Successful Franchisee?

Perhaps your most important step in evaluating a franchise opportunity is examining your own skills, abilities and experience. The ideal franchisee is a creative, outgoing person who is eager to succeed, but not so independent that he or she resents other people's advice. You must be able to balance your entrepreneurial initiative with a willingness to comply with the business formulas used by the franchiser. Remember, a successful partnership between a franchisee and franchiser involves a mutual understanding of each other's values and achievements.

Determine exactly what you want out of life and what you are willing to sacrifice to achieve your goals. Be honest, rigorous and specific. Ask yourself: Am I qualified for this field.

• Physically?
• By experience?
• By education?
• By learning capacity?
• Financially?

Ask yourself how this decision will affect your family. Do they understand the risks and sacrifices required, and will they support your efforts? Beginning a franchise business is a major decision that does not ensure easy success. However, an informed commitment of time, energy and money by you and your family can lead to an exciting and profitable venture.

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8. How does a franchised chain start?

Imagine a store owned by an individual with a particular concept. If the business is successful, the owner may develop a second or third store and hire employees for the day-to-day operations. At that point, if the entrepreneur still wants to expand but prefers not to operate additional stores himself or herself, he or she may decide to “franchise” the store name and business system to an independent business person known as a franchisee. In return, the entrepreneur may ask for an initial fee and/or a continuing royalty payment based on a percentage of that franchisee's sales. The business is now franchised.

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9. When i visit a store in my area, for example, a well-known fast food restaurant, how can i tell whether that restaurant is operated by the franchisor or a franchisee?

It's difficult to tell just by visiting the restaurant. However, if it is a franchise, there should be some signage in the restaurant which indicates that the restaurant is independently owned and operated. Many companies have stores that are operated by franchisees but also have stores that are company owned and operated. So it's entirely possible that of two stores with the same name, one may be operated by a franchisee and the other operated by the company. In either case, the products, services, and quality should be the same.

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10. How widespread is franchising?

The answer may surprise you. By 2001, there were 767,483 business establishments in all domestic franchise systems (either owned by franchisors and franchisees), which employed almost 10 million people, with direct output close to $625 billion, and a payroll of $230 billion. These establishments account for significant percentage of all establishments in many important lines of business: 56.3% in quick service restaurants, 18.2% in lodging, 14.2% in retail food, and 13.1% in table/full service restaurants.

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11. What is "business format" franchising?

In business format franchising, the franchisor prescribes for the franchisee a complete plan, or format, for managing and operating the establishment. The plan provides step-by-step procedures for major aspects of the business and, anticipating most management problems, provides a complete matrix for management decisions confronted by the franchisees. The major advantage of buying a business format franchise is that the “system,” the means for distributing goods and or services, has been developed, tested, and associated with the trademark. As a result, rapid expansion of a successful retail concept can occur more quickly than through company-owned expansion.*

Sales by business format franchisors continued to increase steadily throughout the 1990s and into the 21st century. In 2001, comparing business format franchising to product distribution franchising, business format franchising had about 4.3 times as many establishments, employed 4 times as many workers, generated 2.5 times the payroll, and produced nearly 3 times as much output.

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12. What are the major growth industries in "business format" franchising ?

As the economy becomes more service and technology oriented, as more women enter the work force, and as a larger percentage of the population grows older, growth areas in franchising are responding to these changes. The industry categories in franchising that are expected to continue to experience rapid growth for the start of the new century are service-related fields such as home repair and remodeling, carpet cleaning, household furnishings, and various other maintenance and cleaning services; business support services including accounting, mail processing, advertising services, package wrapping and shipping, personnel and temporary help services, and printing and copying services; automotive repairs and services such as quick-lube and tune-up; and other areas such as environmental services, hair salons, health aids and services, computers, clothing, children's services, educational products and services, and telecommunications services.

While it is important to consider industry growth before investing in a franchise, it is more important to analyze an individual franchise company's track record, keeping in mind that quick growth does not always spell success. A franchise organization that grows too quickly might not have a service team in place to support all of the units properly. Overall, long range trends indicate a steady, solid growth in business format franchising. Some will fall by the wayside, as is natural with any business, but others may well be the “household name” franchise success stories of tomorrow.

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13. Specifically, what kinds of businesses lend themselves to franchising ?

Virtually every business form you can imagine. The International Franchise Association now lists more than 75 different categories to describe its members. Typically, you would think of fast food and restaurants first when thinking of franchising, but franchising covers the spectrum from almost A to Z, from advertising/direct mail to construction to dating services to home inspection to security systems to video sales and rentals. Printing and copying services, maid services, computer services, cleaners, lawn care services, real estate, hotels and motels, and travel agencies are excellent examples of successfully applying franchising to established industries.

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14. What should I consider before buying a franchise?

Among the points which IFA recommends for investigation are:

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15. How can i be sure that the information provided in the disclosure document is truthful and accurate?

Even though inaccuracy and misrepresentation carry civil and sometimes severe criminal penalties, there is no way to be absolutely sure. The disclosure document makes fraud and deception less likely. However, because the franchisor has -- under penalty of law -- answered in written (or electronic) form a variety of very important questions you can use to judge the offer, IFA recommends that you carefully consider the information provided and evaluate the materials, including the history and reputation of the company and its officers, with the assistance of your lawyer and accountant. Also, be absolutely sure you talk to a substantial number of others who have already obtained franchises from the company you're considering, and ask them to verify any information you question. Learn if they are “satisfied customers” of the franchisor.

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16. If i want to buy a franchise, what should i do to get started?

The first thing to do is to identify companies offering franchises. IFA's Franchise Opportunities Guide gives a comprehensive list of franchise companies in more than 75 kinds of businesses. The Guide, which costs $25.00 (including shipping and handling), is available by mailing a request and check or money order to IFA Publications, P.O. Box 1020, Sewickley, PA 15143. Orders may also be placed by calling 1-800-543-1038, or visiting IFA’s online bookstore at www.franchise.org, where you can find other relevant sources to assist in your decision to buy a franchise. The Guide is also available online at the IFA website – www.franchise.org.

You should contact the companies directly, and “shop wisely.” “Shopping wisely” requires that you determine how much you can afford to invest and where to obtain financing. Careful investigation prior to purchasing a franchise also necessitates understanding the UFOC. You need to examine what the franchise relationship entails. For instance, you need to inquire into the training and support provided, assistance in finding and developing a location, and the sources of inventory and supplies. You should research the companies’ growth and prospects for future growth. You should also seek advice from professionals and business people you respect. By shopping wisely, you can make an informed decision on whether to purchase the franchise.

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17. Would i make a successful franchisee?

A successful franchisee should be suited to the industry of which he or she is a part, suited to the particular franchise company, and suited to the franchise system generally. Important questions to ask yourself include: Am I suited to the industry physically and by experience, education, learning capacity, temperament and financial ability? What type of work is most appealing to me; for example, do I enjoy working with food, mechanical things, people, real estate, books and recordings, sporting goods, etc.? Am I prepared to work hard and take financial risks? Do my advisors, family, and friends think I am adaptable and trainable? How do I react to controls? Am I a loner - resenting authority and restraints, or can I accept guidance and direction happily? If I prefer to act as a passive investor in the franchise, will the company accept this? How do I personally feel about the company's image and products and services? The right answers to these types of questions help determine your potential success as a franchisee.

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18. How can i be sure i won't lose money?

No one can be 100 percent sure. Although the majority of franchisees are satisfied, successful business people, some do suffer financial losses. That's why you must be particularly wary of any company which "guarantees" profit or certain success. If you hear a claim about a company that sounds too good to be true, it probably is. Investigation of all earnings claims made by a franchisor is especially important. But, regardless of earnings claims, you must recognize that your success can come only through hard work. Success or failure ultimately depends on you.

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19. What are some of the drawbacks of owning a franchise?

In exchange for the security, training, and marketing power of the franchise trademark, you must be able and willing to give up some of your independence. If you are a person who likes to make most decisions on your own or to chart the course of your business alone, a franchise may not be right for you. As a franchise owner, you must comply with the various controls and procedures established by the franchisor. Then, too, all successful businesses require a lot of dedication and plain, hard work. You must be prepared to make that commitment

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20. Do I need relevant experience of the sector?

"No prior experience required," is one of the most common quotes you will read from a franchisor seeking franchisees. The reason for this is the commitment within the franchise industry to franchisee training, in fact all business format franchisors provide it. Comprehensive training opens up the availability of a franchise opportunity to a much wider population of potential franchisees, enabling the franchisor to select the best candidates in terms of commitment, drive and enthusiasm for the business rather than searching for relevant experience.

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21. Do I need to know how to run a business?

The somewhat clichéd claim 'In business for yourself, but not by yourself' has become a classic marketing line for franchisors marketing their franchise opportunities, justified by the support services supplied to the franchisee network by the franchisor. In making available a franchise to individuals with no previous business experience, many franchisors recognise the need to assist new franchisees in getting their business off the ground. This support is funded by the ongoing management service fee paid by franchisees. Basic pre-launch support will cover putting together the business plan, right the way up to pre-agreeing funding packages with lenders. Site selection is another area in which franchisors can provide assistance, while telephone support is practically a given when it comes to franchisee support. Dedicated IT and operational support is usually offered for franchisees in more complicated sectors, while technical advice is essential for specialist areas. As franchisees gain more experience they will require less constant advice and guidance from the franchisor, leading many franchisors to promise an intensive initial support system followed up by a more general programme for the more experienced network.

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22. Is my investment safe with a franchise?

The odds of survival for more than three years - never mind achieving a profit - for a new business start-up in the UK today are less than seven out of ten, according to VAT registration and de-registration statistics released in 2005 by the Department of Trade and Industry. That means one third of the UK's entrepreneurs that plough their business loans and nest eggs into new businesses will lose out to poor marketing, bad organisation, wrongly identified markets, inaccurate financial forecasts, management mistakes, shifting economic conditions...or any number of other pitfalls littering the road to building a successful business. Meanwhile, according to the UK Franchise Survey just 1.4 per cent of franchises changed hands due to commercial failure last year, with an additional 0.3 per cent due to disputes. The reason for this is that by investing in a franchise, the majority of franchisees ensure that their business concept is offering a product or service with proven demand and profitability. The systems and procedures will be professionally constructed, supported by experienced management staff and the franchisee will benefit from realistic financial forecasts.

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23. Will I have to cope with making sales and bringing in business?

This depends upon the role of the franchisee within the franchise system. Most franchises require their franchisees to take responsibility for generating sales for their own businesses, and many identify sales and marketing orientated individuals in their franchisee recruitment requirements. However, there are a number of franchises, mostly termed 'job franchises', where the franchisor takes some or all responsibility for winning accounts allowing the franchisee to concentrate upon providing a high quality service. Similarly, some management franchises in-source this aspect to allow their franchisees to devote their time to building the infrastructure of the business.

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24. What are the limits to the development of a franchise?

A typical franchise will be limited by its territory, and a growing number of established franchisees are investing in multiple franchises in order to continue their ability to develop growth in their businesses. However, for more ambitious prospective franchisees some franchisors offer alternative franchises. Area Development Franchises offer enlarged territories such as major cities or provincial areas in which the franchisee can develop a chain of managed outlets. Regional Master Franchises offer a similar territory, but allow the franchisee to sub-franchise - effectively becoming a franchisor in their area and earning a management service fee from their sub-franchisees' turnovers. National Master Franchises are awarded by foreign franchise brands seeking a suitable indigenous individual or organisation to develop a sub-franchisee network across the entire UK.

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