What is a Franchise?
Most of you are probably already familiar with franchises. You may even patronize a variety of franchised businesses without realising that they are franchises. These businesses range from car servicing and financial services to yogurt and home repairs. According to the International Franchise Association(IFA) franchises employed nearly 9,000,000 Americans in 2015 and generated nearly $880 billion. Franchising is difficult to escape.
The technical definition falls fairly in line with what we all typically think a franchise is - “an authorization granted by a company to an individual or group enabling them to carry out specified commercial activities”. Basically they are businesses operated by an individual or a group (the franchisee(s)) that shares a common product and/or trade name to the parent company (the franchisor).
But, what you might not know is that there are actually two major types of franchises: product/trade name franchises and business format franchises. In product and trade name franchises the franchisee (operator of the individual business) has use of a product or trade name, but no supporting relationship with the franchisor (larger company). This means that the franchisee basically operates the business independently, but does benefit from the marketing and advertising efforts of the franchise system. You’ll typically see these types of franchises for products that are older and established with a proven customer base. Some of the most common if these businesses are auto dealerships, gas stations, and soft drink bottling companies. On the other hand business format franchises is a setup that is characterized by an on- going business relationship between franchisor and franchisee. The franchisee is not only offered a trademark and a logo, but also a complete system of doing business. This is the more well known and much faster growing form of franchising, with world famous companies like McDonald’s, Holiday Inn, Century 21, and Baskin-Robbins using this format. This is also the form of franchises that we’ll primarily talk about on FranchiseHelp.
In the best of all worlds, the business format franchise is mutually beneficial for franchisor and franchisee alike. The franchisee typically pays an initial fee and ongoing royalties, giving the franchise system a continuous supply of working capital to develop and expand the organization. In turn, the franchisee gets a business package which would take years to develop and refine, a strengthened ability, to compete through the established brand identity and marketing power of the system, and the cost benefits and clout associated with the franchisor’s collective purchasing power.
Why Franchisors Don’t Like Negotiating
The first impression that the franchisee gets from reading the franchise agreement is total incomprehension, unless they are well versed in legal terminologies and phrasing. The FDD is required to be in plain English but the franchise agreement has no such requirement. Typically, the franchisor’s legal department works extremely hard to secure the franchisor’s position through the Agreement and makes it impenetrable for someone who is not a lawyer to understand. The uniform nature of the agreement for all franchisees makes it assumed that the franchisee must sign the agreement so that all the franchisees follow the same terms. Even though that is partially true, the franchisee can plead their case and negotiate terms where they believe that they are offering something unique to the franchisor.
Personality Test: Are You Fit to Work From Home?
Have you had daydreams of working from home? Of course you have! Whohasn'timagined lazily rolling out of bed, pulling on their slippers, brewing a cup of coffee, and casually strolling into the next room to start “working from home"? It may sound like a fantasy, but working from home (running a home-based franchise or other home-based business) isn’t as easy as it's often made out to be.
Why I Have an Issue with the Forbes Franchise Rankings
The 5-Year Growth Rate and 5-Year Franchise Continuity are both great independent metrics of how a franchise is doing on average. As a potential franchisee both of these statistics are vital for selecting a franchise - you want to select a franchise that will provide you with a high return on investment and which will survive in the long run. I think these are, as FRANdata and Forbes suggested, two of the biggest (if not the two biggest) and most obvious metrics for whether or not a franchise is a “good” opportunity for a franchisee. But how do you use these to determine which franchise is BEST? This is the fundamental difficulty in coming up with a ranking system - it isn’t the difficulty in separating the good from the meh from the bad - it’s separating the great from the good and the best from the great. In the case of these rankings I found it to be pretty difficult to comprehend how they differentiated between the top ranked franchises. For instance, if you look at the difference between Discover Map (Forbes #4), Just Between Friends (Forbes #5), & Seniors Helping Seniors (Forbes #6) they all have extremely close continuity ratings and substantially different growth rates. In fact, in the case of these three, the overall rankings are opposite the growth rate rankings. Seniors Helping Seniors is ranked at the bottom of these three franchises despite having a growth rate that is 31 percentage points higher than Discovery Map and a continuity that is only 2 percentage points lower. This suggested to me that continuity was viewed as the dominant factor. But that logic didn’t hold for the rest on the “Economy Class” Top 10, as BrightStar Care (Forbes #7) had the same growth rate as Pop-a-Lock (Forbes #8) but a continuity rate that was 12 percentage points lower. These comparisons show that these were not the only two factors that went into the rankings, which is understandable, but no other factors that are explicitly listed in their results seem to be major factors.
