Franchising :- A smart way to expand your business and create brand visibility.

Franchising is a business model in which many different owners share a single brand name. A parent company allows entrepreneurs to use the company's strategies and trademarks; in exchange, the franchisee pays an initial fee and royalties based on revenues. The parent company also provides the franchisee with support, including advertising and training, as part of the franchising agreement.

1.   Franchising is a faster, cheaper form of expansion than adding company-owned stores, because it costs the parent company much less when new stores are owned and operated by a third party. On the flip side, potential for revenue growth is more limited because the parent company will only earn a percentage of the earnings from each new store. 70 different industries use the franchising business model, and according to the International Franchising Association the sector earns more than $1.5 trillion in revenues each year.^[1]

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How Franchising Works

The franchising business model consists of two operating partners: the franchisor, or parent company, and the franchisee, the proprietor that operates one or multiple store locations. Franchising agreements usually require the franchisee to pay an initial fee plus royalties equal to a certain percentage of the store's monthly or yearly sales. Initial fees vary significantly across each industry, ranging from $35,000 for an Applebee's restaurant to over $85,000 to open a Hilton hotel.^[2] Royalty fees are also variable - for example, Intercontinental Hotels Group (IHG) franchisees are required to pay the company 5% of their yearly sales^[2], while Applebee's franchisees pay 4% of monthly sales and IHOP franchisees pay a 4.5% royalty fee of weekly sales.^[3] The franchisee also covers the costs of actually starting and operating the store, including legal fees, occupancy or construction costs, inventory costs, and labor. Franchise agreements usually have a term of between 10 and 20 years, depending on the company.

The parent company authorizes the franchisee's use of the company's trademarks (for example, selling Big Mac's at McDonald's) as part of the franchising agreement. Additionally, the franchisor provides training and support as well as regional and/or national advertising.

Advantages of the Franchising Model

Franchisees require less initial capital than independently starting a company and can use proven successful strategies and trademarks.

Franchisees are provided with significant amounts of training, not common to most entrepreneurs.

The franchisor benefits because it can expand rapidly without having to increase its labor force and operating costs, using much less capital.

Franchised stores have a higher margin for the parent company than company-owned stores because of minimal operating expenses in maintaining franchised stores. For example, DineEquity, Inc.(DIN) earned a 52.7% profit margin from franchisee-owned restaurants in 2007 while company-owned restaurants operated at a mere 6.7% profit margin.^[4]

Thanks for the cmenomt. Sorry my forms aren't working right! The company I use is having some issues. I think I've fixed most of the forms, but if you can't get it to work you can always email me at myfranchisemantra@gmail.com

Market Forces Affecting Franchising Companies

Weakened Economy Hurts Sales and Slows Franchise Expansion

Franchising becomes a much less desirable business model during rough economic times. First, franchisees must pay royalty fees based upon their revenue, regardless of whether or not they are earning profits, which adds to the franchisee's financial struggles in an economic downturn. Furthermore, slower sales cause parent companies to reduce expansion plans. For example, the 2007 Technomic Restaurant Industry Study blamed the poor U.S. economy as the reason why restaurants reduced funding for expansion by an average 1.4% during 2007.^[5]

Economic issues related to the 2007 Credit Crunch and subprime lending crisis drastically weakened the U.S. economy, which has led to lower levels of consumer spending, particularly in the restaurant dining industry. For example, many restaurants suffered from a decline in traffic and comparable store sales during 2007, like Applebee's, which attributes a 4% decrease in guest traffic and 2.1% decline in comparable store sales to weakened consumer spending.^[6] Additionally, a 2007 RBC Capital Markets Survey indicated that 39% of respondents reduced their frequency of restaurant dining because of lower levels of dispensable income in 2007.^[7][8]

High Potential for Growth Through International Franchising in Emerging Markets

Unlike the United States and many other Western countries, emerging markets are commercially underdeveloped and have significant growth opportunities. For example, the U.S. Department of Commerce estimated that over 75% of the expected growth in world trade over the next 20 years will come from developing countries, primarily large emerging markets like China.^[9] Furthermore, the rise of China's middle class, as well as India's booming per capita income provide significant new markets for franchises to operate. China's middle class is expected to almost double in the next two years, reaching 25% of the Chinese population in 2010, which is spurred by China's 700% growth in per capita income since the late 1980s.^[10] Furthermore, the Indian per capita income is expected to increase more than 300% by 2025.^[11]

As the wealth of consumers in emerging markets grows, so too will their appetites for consumer goods, as evidenced by India's 1,440% growth in its retail industry between 1991 and 2007.^[12] Also, as of 2007, India's franchising industry is expected to grow 30% annually as mega-franchising chains like Yum! Brands (YUM) have already established a presence in India.^[13] High levels of consumer demand, coupled with relatively low levels of competition, offer a lucrative opportunity for many franchisors to expand into emerging markets. Expansion via franchising is an attractive option for companies looking to expand abroad without incurring high costs. Additionally, international franchisees already possess many inherent qualities needed to succeed abroad, like the ability to speak the native language.

Key points while launching a franchise

Launching a new franchise in a post-recession world might seem like a scary move, but with a few smart choices, it’s possible to do it successfully. So how do you get off on the right foot? We spoke with two successful franchise owners who shared their thoughts.

 

Sell What You Know

Hipes says it helps to pick a franchise in an industry that you’re familiar with. Prior to owning Plato’s Closet, she successfully ran another used-clothing store, so branching into used teen clothing “was a natural progression.”

Play to the Times

The effects of the recession aren’t going anywhere soon. So offer a business that consumers can appreciate in this economy. Hipes’s product fits into this theme nicely, since her store offers clothing for 30 percent off the retail price, appealing to bargain hunters.

Survey Your Location

There are certain areas that will respond better to a product than others. Study the demographics of your target area, everything from age range to income brackets, to determine whether there are enough potential customers. You need to make sure there are enough people to support your business “before you even think of opening it,” Hipes says.

Pick the Right Partners

When you’re getting a franchise off the ground, it’s important to have a loyal team, says Hipes, who runs her store with her sister and mother. For her, family is the best option. Each family member has a different responsibility in the business. “We trust each other and we all have a vested interest,” she says.

Consider the Workload

Some franchises are more time-intensive than others, so take a close look at the business to determine the effort involved. Explore the amount of time it takes to process the product once it goes through your doors, and whether you can quickly train staff to learn the business, which will alleviate your workload.

 

Do Your Homework on the Company

Make sure your parent company has a pattern of sustainable growth. Also, ensure that it gives extensive support to its franchises and provides a significant return on your investment. Marble says he spent six months investigating a variety of businesses to determine which one had the most potential.

Know the Market

Evaluate whether there is a sustainable demand for the product that your company would be selling. Ask yourself: are there many competitors in this segment? What does your product offer that’s different? Five Guys, for example, responds to the new “fast casual” trend, offering better-quality food at more-reasonable prices.

Pick a Brand You Love

“You have to believe in what you’re selling,” says Marble. So it’s not enough to just target a company that could be profitable. You have to genuinely be a fan of it. Simply put: if you don’t love it, don’t do it.

Get the Finances Together

Hire a CPA who can provide guidance and direction for proper business management. Marble says many businesses fail because franchise owners don’t take the time to understand the finances involved.

Treat Your Staff Well

You want to acquire and maintain a quality workforce from the start. To do that, be nice and give them reasons to be motivated. Marble offers bonuses of 50 percent to 70 percent on top of a worker’s salary for great performance.