franchise
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Definition of franchise
(Entry 1 of 2) 1a(1) : the right or license granted to an individual or group to market a company’s goods or services in a particular territory also : a business granted such a right or license just opened a new fast-food franchise down the street (2) : the territory involved in such a right b : a constitutional or statutory right or privilege especially : the right to vote c : a special privilege granted to an individual or group especially : the right to be and exercise the powers of a corporation 2a : the right of membership in a professional sports league b : a team and its operating organization having such membership He’s the best player in the history of the franchise. 3 : a series of related works (such as novels or films) each of which includes the same characters or different characters that are understood to exist and interact in the same fictional universe with characters from the other works The main reason we all keep going back to the “Mission: Impossible” franchise is the stunts, of course. Watching Ethan Hunt as he scales mountains, jumps onto planes and dangles from skyscrapers fills us with eye-rolling delight.— Randy Myers Rowling’s seven Harry Potter novels sold more than 500 million copies. Its respective film franchise drummed up over $7 billion at the box office.— Dory Jackson 4 : freedom or immunity from some burden or restriction vested in a person or group
franchise verb franchised; franchising
Definition of franchise (Entry 2 of 2)
transitive verb 1 : to grant a franchise to 2 archaic : free
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What is franchising? Find all you need to know here.
franchisedirect.com
Franchising explained. Definition and meaning.
Franchising is a major force in the business world. Consider this…
• There are over 745,000 franchise locations in the United States.
• There are approximately 3,800 franchise systems operating in the United States, as of the beginning of 2019.
• Over the past few years, 250 to 300 businesses annually have developed their concept into a franchise.
• Franchises employ about eight million Americans directly.
• About 13,000 to 20,000 prospects invest in new franchises yearly, according to Franchise Performance Group and FRANdata.
What is Franchising?
Franchising is a form of marketing and distribution in which the owner of a business system (the franchisor) grants to an individual or group of individuals (the franchisee) the right to run a business selling a product or providing a service using the franchisor’s business system.
Franchisees are also given permission to use the franchisor’s branding, trademarks, and identifying marks under specified guidelines. It is important for anyone deciding to start a business by becoming a franchisee to remember that in franchising the franchisee is bound to a partnership agreement with the franchisor for a defined period of time (some exceptions do exist).
Franchising as we know it today is widely believed to have originated with Isaac Singer in the 1850s. After Singer invented his sewing machine he encountered two main problems when introducing it to the marketplace. The first was that customers needed to be taught how to use the new invention before they would buy it. The second was that Singer did not have enough capital to manufacture his machine in large numbers.
In response, Singer, along with business partners, came up with the idea of selling the rights to sell the sewing machines as well as train those who bought one to local business people across the country (and eventually internationally).
Once he employed this system, Singer’s enterprise expanded rapidly. The royalties earned from the license rights helped offset manufacturing costs and, because each franchise was self-financed, Singer Manufacturing Company was able to tap into the entrepreneurial attributes and local market knowledge of the franchisees to help Singer become more successful than he could have by himself.
The tipping point for franchising came in the 1950s. In 1954, Ray Kroc, a successful business man from Illinois, saw the potential in franchising a successful southern California hamburger stand owned by a couple of brothers. This restaurant chain, McDonald’s, is perhaps the most well-known example of franchising in the world. Kroc has drawn comparisons to auto maker Henry Ford for bringing an assembly line-like concept to the fast food industry through his belief that customers of McDonald’s should have an idea of what to expect wherever in the world they may be.
When asked, the majority of people when asked for a commonly known franchise would name a fast food franchise most often. However, franchising is extremely diverse. Name a product or service from ATMs to yogurt and there’s likely a franchise industry for it.
While franchising is a staple of the American business landscape, the merits of franchising have not been ignored abroad. It is steadily increasing its footprint in numerous other countries. This is especially true in emerging markets such as China, India, Russia, Brazil and the Middle East among others.
Elements of the franchise model has also been woven into the fabric several other industries. For example, Coca-Cola was able to expand throughout the United States by shifting the burden of manufacturing, storing and distributing its product to local business people who acquired bottling rights. Car manufacturers who had been spending enormous amounts of capital tooling their assembly lines found they could develop retail distribution networks using capital provided by independent dealers. Oil companies such as Standard Oil and Texaco also started granting franchises to convenience stores and repair mechanics across the U.S. to efficiently expand their reach.
The Myth of Guaranteed Success
No business method or industry sector can guarantee success, and franchising is no exception. If a franchise system has a proven product or service with a well-recognized brand combined with hard-working, well-financed franchisees, the chances of success are very high — but never a 100 percent given. If, on the other hand, the franchise system is under-funded with an ill-conceived business plan that has not been tested properly, and franchisees have been poorly recruited or trained, failure is likely.
Due diligence is key in making the right decision for you. Seek the advice of seasoned franchise professionals and ask questions until you are confident in your decision. Remember, it is your investment that is at stake. More information about finding the most profitable franchise for you can be found here.
Franchising Defined
Many people feel as though they have an understanding of the concept of franchising. However, do you really know what franchising is? Can you define it? (And no, saying fast food chains doesn’t count.)
As it relates to business, Merriam-Webster defines a franchise as: “the right or license granted to an individual or group to market a company’s goods or services in a particular territory.” While a good definition, it doesn’t exactly touch on many of the nuances involved in franchising.
The definition for franchising given by the International Franchise Association (IFA) gives more detail, stating that a franchise is:
“A contractual relationship between the franchisor and the franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format or procedure owned by or controlled by the franchisor, and in which the franchisee has made or will make a substantial capital investment in his business from his own resources.”
Individual franchises are part of a brand’s ecosystem, a network that is a pooling of resources and capabilities.
In a franchise business setup, the franchisees of a brand gain access to the franchisor’s know-how and experience of its business system in exchange for their money and personal labor. This way, franchisees who want to own a business can shorten the learning curve that comes with starting a business. It’s also a way for franchisees to avoid spending a significant portion of the time and money that typically comes along with developing a business idea.
On the other end of the deal, by licensing out its business methods and pledging support to franchisees, the franchisor allows itself the opportunity to expand into areas it may have had difficulty expanding to without the extra money and manpower.
There are three main types of franchises.
• Most franchises fall under the business format type where the franchisor licenses a business format, operating system, and trademark rights to its franchisees.
• The second type of franchise is product distribution, which is more of a supplier-dealer setup. The franchisor grants the franchisee permission to sell or distribute a product using their logo, trademarks and trade name, but typically does not provide an operating system to run the business with.
• The third is manufacturing, where the franchisor permits the franchisee to manufacture their products (e.g. clothing) and sell them under its trademarks.
When the purchase of a franchise is made, the franchisee is required to comply with strict guidelines and rules regarding the operation of the business. These guidelines are in place to maintain brand consistency.
In addition, fees are collected regularly for as long as the franchisee owns the franchise. In exchange for these payments, the franchisee will receive continued support such as marketing assistance and ongoing training opportunities.
Despite its strong association with fast food, franchising is not confined to a narrow range of business segments. Name an industry from drug testing to dog walking, and there’s likely a franchise in it.
Not only is it used in many different industries and sectors, but elements of franchising are becoming a feature in many areas of business. For example, car manufacturers who had been spending enormous amounts of money building up centralized assembly lines found they could more efficiently build and sell their cars by developing networks for manufacturing and retail distribution in different areas using capital provided by independent dealers.
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Jimmy John’s
An initial investment into a Jimmy John’s Gourmet Sandwiches franchise – one of the fastest growing franchises in the United States – averages around $444k but the profits of this popular sandwich brand can be extremely lucrative.
Dairy Queen
With close to 5,000 franchises in the United States and another few thousand in other countries, Dairy Queen is one of the most profitable franchises in America. One franchise can be opened for an initial investment of around $360k.
McDonald’s Franchise Costs & Requirements
An initial down payment is required when you purchase a new restaurant (40% of the total cost) or an existing restaurant (25% of the total cost). The down payment must come from non-borrowed personal resources, which include cash on hand; securities, bonds, and debentures; vested profit sharing (net of taxes); and business or real estate equity, exclusive of your personal residence.
Since the total cost varies from restaurant to restaurant, the minimum amount for a down payment will vary. Generally, we require a minimum of $500,000 of non-borrowed personal resources to consider you for a franchise. There are limited opportunities to enter the program with less cash available, and in some situations the financial requirements may be substantially higher depending on the specifics of the transaction. Individuals with additional funds may be better prepared for additional or multi-restaurant opportunities.
Financing
We require that the buyer pay a minimum of 25% cash as a down payment toward the purchase of a restaurant. The remaining balance of the purchase price may be financed for a period of no more than seven years. While McDonald’s does not offer financing, McDonald’s Owner/Operators enjoy the benefits of our established relationships with many national lending institutions. We believe our Owner/Operators enjoy the lowest lending rates in the industry.
Ongoing Fees
During the term of the franchise, you pay McDonald’s the following fees:
- Service fee: a monthly fee based upon the restaurant’s sales performance (currently a service fee of 4.0% of monthly sales).
- Rent: a monthly base rent or percentage rent that is a percentage of monthly sales.
RE/MAX
RE/MAX is a real estate franchise which has well over 7,000 franchises worldwide with over half of those in the United States. Franchisers enjoy freedom and generous commissions, plus the initial investment is relatively small at just $38k.
Kumon Math & Reading Centers
Opening a Kumon learning franchise costs an initial investment fee of $70k, with nearly 1,500 Kumon franchises already profiting in the United States alone.
Hardee’s
Investing in a Hardee’s fast food restaurant is expensive at around $1.5m, but it remains an attractive proposition as the combined franchises are estimated to earn a revenue of $44.7m per year.
Supercuts
Supercuts is a simple and affordable haircut business model, which offers franchises for initial investment fees of around $144k and is expanding its franchise total by 10% every year.
Hampton by Hilton Hotels
A Hampton by Hilton Hotels franchise may frighten off many investors as it requires a massive initial investment of between $7m and $18m. However, the extremely lucrative returns make it more than worthwhile for those who can rustle up that kind of cash.
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As you can see the cost of starting a franchise is well out of the reach of about 90% of Americans and 99% of people world wide.
As great as these franchises are the cost to enter into this market makes it something most will never be able to do, making this a fantasy and not a dream business.