As you head into the third and final section of this book, you may still be wondering about what kind of business you actually want to launch. You may have the fire in your belly. You may be in The High- Performance Zone. You may have spent hours thinking about a business plan. But you may still be uncertain about where to go from here. Well, this session on franchising may be just what you’re looking for.
Globally, franchising growth has been explosive.
America has really fueled the explosive growth in franchising. In fact, in America, franchising accounts for ± 42% of all retail business and ± 10% of the gross national product. In America, six million people are involved in half a million franchise outlets. In Australia, on the other hand, franchising accounts for 25% of all retail business.
The growth in franchising has been slow mainly because the country has been dominated by a small number of large corporations. These companies tended to use their power to neutralize small businesses that appeared to be a possible threat. The fact that these large corporations have been forced to downsize and unbundle has been a great stimulation for the growth of small business - led by franchising.
Franchising accounts for only 9% of all retail business. However this figure is forecasted to escalate rapidly over the next 5 years. In fact, by 2004, we believe we will be close to the Australian figure of 25% - that’s a growth of almost 200%. So, if you are reading this section now, you are about to get into a part of economy that’s going to take off like a rocket. Fasten your seatbelts.
So right up front, we want to warn you: if a franchisor is not a member of F.A.S.A - STAY AWAY. Franchising with the right partner can help you make lots of money. Franchising with the wrong partner is a one-way ticket to the poorhouse.
90% of all new franchisees of reputable franchises succeed compared with about 20% of independent businesses
90% of all new franchisees of reputable franchises succeed because their business conceptualizing and pre-planning has been done for them. Furthermore, Professor John Stanworth, director of the small business unit of the Polytechnic of Central London, has carried out extensive research into the motivation of those wishing to become franchisees. He states that, “it is quite possible that as many as 50% of franchisees would not otherwise have become self-employed, if it was not for the franchise format”. This factor shows the power of franchising and the exciting opportunities for those who become involved in this dynamic sector.
So what is franchising? It means “being in business for yourself but not by yourself“
The word “franchise” comes from the French language and means privilege or freedom. In this sense, franchising offers people the freedom to own, manage and direct their own business. It means “being in business for yourself but not by yourself“.
Franchising is a collaboration between an independent person and a company that wishes to expand its business. This collaboration is governed by a franchise agreement. In order to expand its business the company (franchisor) allows a third party (franchisee) the right to use its trade name, business methods and know-how. In return, the franchisee, who is an independent trader, accepts certain restrictions on the way he or she conducts his or her business. The franchisee also agrees to make royalty payments to the franchisor. This type of franchising is often referred to as Business Format Franchising.
The term franchising is often used out of context and results in confusion between other agreements such as distributorships, agency agreements and licensing agreements.
Distributorships occur where a third party acquires goods on his account from a supplier for on-sale to customers. Such agreements will not usually require the distributor to trade under a specified name or put restrictions on the way he should run his business. The supplier’s return will be obtained in the mark up he charges the distributor. The distribution agreement will contain some restriction on the distributor relating to products to be supplied e.g. minimum quantities, servicing, guarantees, etc.
Agency agreements are similar to distributorships except that the agent does not purchase products from the supplier but on-sells the products on behalf of the supplier, while charging the supplier a commission for his services.
Licensing agreements also contain some elements which are found in franchising agreements, namely the licensing of know-how, or intellectual property rights, but are usually more associated with manufacturing than marketing and seldom contain restrictions in the way that the licensee can operate his business.
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