June 12, 2019
Let’s take a quick look at the history of franchising, because without it…without a very pioneering group of people, the opportunity for you to go into business in a truly amazing way, wouldn’t be possible.
The Clothes You Wear
The history of modern franchising has to do with what’s on your body. I’m speaking of your clothes.
Most franchise experts agree that the modern business model of franchising can be traced back to an entrepreneurial giant by the name of Isaac Merrit Singer. As in Singer Sewing Machines.
In the latter part of the 1800’s, there was nothing very “automatic” about the manufacturing of clothes. Believe it or not, everything was stitched together by hand, in not very ideal working conditions. The women who did the sewing worked incredibly long hours.
Isaac Singer was basically the first person to patent a practical, widely-used sewing machine. Though these machines started to appear on the scene in the mid-1800’s – and worked pretty well, Singer came up with an idea that made them work even better. A lot better. Good enough to sell. But, they were really expensive. At $120 each, Singer sewing machines were out of reach for most Americans.
A Fix. A Franchise.
One of Singer’s partners came up with an idea to make these newfangled machines more affordable. (Actually, he came up with what would turn out to be the first-ever installment plan.) That’s right—because of his financing idea, everyday people could purchase Singer’s sewing machines and pay for it in installments. All of a sudden, Singer was able to sell a lot more machines and that was a great thing. But, he still needed a better distribution method. And being the entrepreneur he was, he figured out just how to do it.
Singer came up with a licensing arrangement.
The Singer team would find business-savvy people who were interested in owning the rights to sell these amazing machines in certain geographical areas and get them to pay an up-front license fee. In addition to just selling the machines, Singer and his team decided that they would require licensees to teach consumers how to use the machines they had just purchased. Good stuff. Transformational stuff.
They sold a lot of licenses. Enough to continue funding manufacturing. So, now they had both manufacturing and distribution…an entire distribution network in the form of licensees. Sound familiar? It should.
Isaac Singer’s business system was the first licensing system. And, guess what? When you buy a franchise you’re buying a license.
Franchisees Are Licensees.
The Early 1900’s.
The invention of the automobile changed everything. Finally, there was a way for people to get from Point A to Point B in hours as opposed to an entire day or more. But, how could the early automotive pioneers get more automobiles into more people’s hands?
Answer: Mass Production.
But, what about distribution…and sales?
Dealerships…later called franchises were the chosen way to sell automobiles.
Bill (William) Metzger built and opened the first independent automobile dealership in Detroit, Michigan in 1896. Interestingly enough, he sold electric cars. (Really)
H.O. Kohler was the next person to open a dealership. He sold Winton (gas-powered) cars.
Those two men were actually the first automotive franchise owners. Henry Ford and the other businessmen who were manufacturing automobiles now had a distribution system. They put an automobile franchise network in place…in a lot of places all over the country, actually. There is probably an automotive franchise within a few miles of your house.
The Franchise Definition
In its simplest terms, a franchise is a license.
A franchise typically involves the granting by one party (the franchisor) to another party (the franchisee) the right to carry on a particular name/trademark, according to an identified system, usually within a territory or at a location, for an agreed upon term. The franchisee is granted a franchise license to use the franchise company’s trademarks, systems, signage, software, and several other proprietary tools and systems in accordance with the guidelines in the franchise agreement.
Basically, the franchise company came up with the idea for the service/product and is granting people, their franchisees, the right to market it for them. Since it is their idea, they require you to market it in a specific way. It is their system, so they get to (and do) write the rule book.
What Are You Getting?
You need to find out what you’re getting for that franchise fee.
All you have to do to find out is:
- Ask the franchise development director
- Ask the franchisees
The franchise development representative will give you a list of things that you’ll receive if you become a franchise owner. Things like:
- Their operations manual
- Formal training
- Access to their technology
- Access to their marketing system
- Their brand
One of the greatest things about franchising is that once you’ve received information from a franchisor, you can easily find out how good their system is. All you have to do is contact the people that have already invested their own money in it.
The Rule Book in Franchising
The rule book in franchising is the operations or operating manual, along with a multi-page franchise agreement. Not only must you do things their way, you must pay them an upfront Franchisee Fee (license fee), plus ongoing royalties. The royalties are usually in the form of a % of your gross sales, although sometimes there is a flat monthly fee. In addition, there is almost always an advertising/marketing fee paid monthly along with the royalties. (Usually 1-2% of sales)
I’ve seen royalties that are 4% of sales…all the way up to 15%. It depends on the type of business. Food franchises and retail franchises are usually at the low end of royalty percentages, while B2B franchises tend to be on the higher-end.
Franchise fees range from about $20,000 up to $75,000 and more. The average franchise fee today is around $30,000.
Franchising is a proven business model. It’s worked for many businesses and many people. But, franchising isn’t the right business model for everyone. As a matter of fact, business ownership, in general, isn’t for everyone. I go a step further in my hardcover (on audio, too) book, Become A Franchise Owner! In it, I suggest that “Franchising isn’t for most people.”
That’s because most people:
- Don’t have the courage to walk away from a job that provides them with a steady paycheck
- Won’t look at non-traditional career options when they lose their jobs
- Don’t have the courage to sit down and write a large check of their own in order to become their own bosses
Most people avoid risk whenever they can. Some people embrace risk.
Lots of people avoid change. Some folks thrive on it.
Some Questions About Risk
- Are you a risk-taker?
- Do you look “outside the box” for solutions to problems
- What do you do when you’re faced with change?
- What are your feelings about money?
- If you’re married, what does your spouse feel about money…about risking some of it?
As a matter of fact, you’ll need their backing.
Pro’s & Con’s Of Franchise Ownership
An introduction to franchising wouldn’t be complete without looking at the pros and cons of becoming a franchise owner. Right?
There are lots of positive things that the business model of franchising brings to the table. Here are just a few of them.
1. Systems– There are business systems in place for you to use…to follow.
2. Training– You’re provided with a formal training program to help you with everything you will need to know. You may even get pre-training via the web.
3. Technology– A franchisor’s technology budget is probably larger than yours, so plan on having several great technology tools at your disposal.
4. Marketing/Advertising– A franchisor has marketing plans and advertising templates for you, which helps get your name out to the public in your geographical territory.
5. Support– A franchisor has support systems in place from in-house personnel to field reps that will visit your franchise business in-person. Don’t be shy: Ask for help when you need it. You’re paying for it anyway via your monthly royalties.
6. Real Estate Department– A franchisor usually has resources in place to help you with site selection, store design, and more.
7. A Network– There are other franchise owners who, like you, invested in the opportunity. They have experienced things from the front line and can help you out with problems that may arise…especially at the beginning.
8. Equity. You have a real chance at creating real equity. Wouldn’t it be nice to at least have the opportunity to be the seller of a business? Wouldn’t it be great if one day (when you’re ready) to be able to sell your franchise business? For a profit? That’s equity.
9. Legacy. What if your children could take over the business you’ve built? Keeping things “all in the family” sounds like a plan to lots of people who are looking into franchise ownership.
Now, there are several negatives (perceived as negatives by some) that the business model of franchising has.
Here’s a few:
- You pay an upfront Franchise Fee for the right to use the franchisor’s systems.
- You must pay a percentage of your gross sales to the franchisor on a regular basis. (Royalties)
- You must follow the franchisor’s rules.
- You must buy from the franchisor or their approved vendors.
- You must use the franchisors logos, and advertising materials.
- When you sell, the franchisor must approve the buyer.
- You may have to pay into the franchisors advertising/marketing fund.
1. You can come up with a product or service of your own, invest, in an unknown, a potentially unlimited amount of your own money, make tons of mistakes, which cost money, and time. Growth will take longer.
2. You can leverage someone else’s systems, tools, and business acumen. By doing that, you can potentially ramp up faster, try to dominate a market, and focus on growth, while having a good idea of what your total investment will be, up front.
The business model of franchising is not for everybody. There are certainly pros and cons to investing in this type of business, and becoming your own boss.
In the case of franchising, the pros must outweigh the cons, in order for you to buy into the franchise model.
Rich is passionate about coaching small business owners and has been successful helping them find their true passion in franchising, increase profit margins, introduce new product lines and develop award winning teams. Rich wants to help those who are in life’s transition navigate through the complex journey of selecting their next franchise opportunity.