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Understanding How Franchising Works

Written by: Ken Hollowell

Article Overview: Mr. Hollowell explains the background of franchising and its history.

Understanding How Franchising Works

To understand FRANCHISING you first must understand the words FRANCHISING and FRANCHISE.
• FRANCHISING: Simply a method of marketing a product or service.
• FRANCHISE: Agreement. It’s the contractual arrangement between the parties.

Three types of franchise systems:
• Trademark
• Business Format
• Conversion

The Federal Trade Commission is responsible for overseeing and enforcing all franchise regulations but permits 13 States to enforce franchising within their own borders.
What constitutes a FRANCHISE? If you are going to offer a business opportunity and do is more than once, and there’s a written agreement, and these 3 things exists:

• Licensing a “Mark”
Trade Name, Service Mark, Trademark, Logo, Commercial Symbols

• Significant Controls & Assistance
Controls could mean such things as requirements to purchase from designated vendors or suppliers, quotas, territories, restrictions of what can be offered in connection with the business…
Assistance could mean a training program, on-going support, operations manuals, national or regional advertising campaigns.

• Remuneration
If the licensee pays the franchisor $500 or more during the first 6 months of the actual operations of the business it is considered a franchise.

Franchising Is Its Own Industry
Franchising is an industry composed of thousands of independent franchisors that have become extremely vital to the economy of not only the United States but over 40 other nations worldwide. Over the past half century, franchising has increased substantially in growth and recognition as a viable method of marketing for services and products. In the United States alone, franchising exceeds 1 trillion dollars to our economy.

The History of Franchising
The origins of franchising can be traced back to the middle ages (400 A.D. – 1500 A.D.). At that time, it was an accepted practice for local governments to offer important persons, even high church officials, a license granting them the right to maintain civic order and to make special tax assessments. Courts or lords could also grants rights to others to operate ferries, hold markets, and perform the business activities today carry out by professionals and craft guilds. The licensee (or franchisee) would pay the licensor (franchisor) a specific fund from the tax revenues collected or assessments made and in return receive military or other forms of protection.
Queen Isabella of Spain probably used (invented) a franchising system when she award Christopher Columbus a “franchise” in 1492 to develop travel and trade with the new world. It is fascinating that from the new world franchising would be introduced and re-established in the 20th Century.

Additional progress was made during the early19th century in England when tavern and pub owners, while experiencing financial hardship, turned to brewing companies for financial assistance. The tavern and pub owners in return for financial assistance were required to purchase all of their beer from that specific brewer.

In the United State, franchising developed in the 1850’s when the Singer Sewing Machine Company formed a franchise in 1851. Agents were commissioned to demo, sell, and repair the Singer line.

In the late 1889, Robert Metzger was the first franchisee of Ford…before him; Fords were sold directly from the manufacturing plant. Ford began establishing dealers under a license.

Rexall Drug stores – 1902
Western Auto – 1909
Howard Johnson – 1925
McDonalds – 1955
Kentucky Fried Chicken – 1955
International House of Pancakes – 1959 IHOP

Quick Franchise Facts, Franchising Industry Statistics

• There are an estimated 4,000 different franchisors (franchise business companies) operating in the U.S.
• There are believed to be more than 1 million franchise businesses in the U.S.
• The franchising industry and businesses employs over 20 million people in the U.S.
• In 2008, it was estimated that franchise businesses were responsible for over $1.5 trillion in economic output
• The franchise industry accounts for 50% of all retail sales in the US
• A new franchise business opens every 6 minutes of every business day
• Approximately one out of every 12 businesses in the U.S. is a franchise business
• Franchise fact: More than 76 different industries use franchising as a means to distribute goods and services
• The average initial franchise investment is $250,000- excluding real estate
• The average royalty fees paid by franchisees range from 4% to 8% of monthly gross sales.
• Most franchise companies have fewer than 100 units
• The average length of a franchise contract is 10 years
• Top franchise industry- Fast Food
• Top franchise company- McDonalds

Related Articles
  FRANCHISING PERSPECTIVE
  The Top 7 reasons why Franchising is Better than a Brand New Business
  Franchisee Profile Who should and should not buy a franchise
  Franchising can change the world
  I Want to Take My Business to the Next Level

Article Tags: franchise consultant, ken hollowell, our business, profran consultants



Related Forum Posts
Re: Re Franchise etc - [quote="bmueller47":e0j0nu4t]Can you see a shift of various types of franchises? What I am thinking about is that today it is more difficult to create franchises, that has great appeal. More and more people want to have their business, but no interference of someone else.[/quote:e0j0nu4t] Not sure what you mean exactly but it is certain that more and more people want to have their own business but not more and more people know what they really want to do, or how to do it. And that's what franchising is all about. Franchising is not for an entrepreneur. An entrepreneur will do his own thing. People who buy franchises want a turn key business, with a proven model. Franchising in the US had never been that good. I don't have the exact numbers in mind but I know for sure that franchising is growing more and more as people are getting more and more aware of this business model.
Franchising vs. Licensing? - What is your opinion on Franchising vs. Licensing? Which is better?
Nominations for a new Franchising Moderator! - Is there anyone you'd like to nominate as our Franchising Moderator (or volunteers for the position)?
Great Article, chock full of info. - Ian, Thank you for linking your article regarding Licensing vs Franchising. Its a good read.
Re: Hello from Captain Franchise - Hi BuzzAroundBooks, I actually found the site in my search for franchise networking. We're looking to make connections and also inform the general public about franchising. Franchising is often misunderstood because of the lack of knowledge. We're here to help and learn as well! Thanks!


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