How To Develop A Franchise System: Part 2: What Is Franchising


This video covers the first basic question that all potential franchisors must know, “what is franchising”? What sets well-known businesses such as McDonald’s or Cold Stone Creamery apart from other business models? Learn the basic fundamentals of how a franchise works, and how to approach franchising with a mindset that will set you on the path to success.

Franchising is very well supported and developed. The capital is there to invest in franchising, laws today provide significant brand protection, and franchising is very stable as an industry. Franchising increases brand recognition, allows businesses to expand, and a consistent, sustainable delivery of the brand promise.

Video Transcript:

The thing to understand when you start to explore franchising is that all it is is a method of expansion, a method of distribution. Most companies today when they're looking at franchising will blend franchising with company-owned,with licensing, with joint ventures, and franchising needs to fit into a strategy but you never go into franchising truly believing that the only thing you're going to do is limit yourself to one method to distribution. It doesn't make sense to do that. 

McDonald's may be the most famous name in franchising, there's McDonald's all over
the world, but if you look at franchising today it's sitting now in between 120 and 150 different industry segments. Companies that are not franchising in the US will franchise overseas and vice versa, so you have companies like the Disney Store. The Disney Store in the U.S. is a company-owned model. Internationally, you walk into the London store, you walk into the store in Japan, those stores are owned by franchisees.

Ace Hardware is a franchise model except it's a cooperative. Ace Hardware is actually owned by the people that own the locations. 

You have Cold Stone Creamery, Cold Stone Creamery is part of a brand structure where it's a platform company and that company owns probably today six or seven other brands under the Kahala brand system. 

Miss Universe starts at the little wee children all the way up to the pageant you see on TV. It is a franchise model actually owned by Donald Trump. So franchising is a brand, is a type of system, that will go across almost any type of industry. What makes it so attractive? Well, today franchising in the U.S. is the largest, the most experienced market globally. 

We didn't invent franchising, but franchising starts in the United States back in 1731 before there were company and printing franchises. We have well-defined business regulations and because of that, well-defined franchising is allowed to be a proper method of distribution.

There is capital available, financing available for it, and we now have a very well-defined method of recruiting franchisees. There's an increased number in franchising today of multi-unit franchisees. In the past, if you look back to the origins of franchising, somebody bought a location and the family ran and operated that one location, maybe they bought a second. Today 53% to 54% of all franchises are owned by people that own more than one. We have laws today that give significant brand protection starting back in 1947 with the Lanham Act, which allowed companies to license their brand to franchisees and still retain the brand. We're in a wonderful position today if you look at the recession from 2007 forward, franchising, while we didn't grow as quickly as we were growing before, we grew faster than the rest of the economy. We're a very stable portion of that and because of that, there's a huge amount of available trained and experienced labor and management to support franchisees as they're going forward. 

In September of this year, and it's not untypical, 27% of all of the private sector jobs created in the United States were created in franchising. What a company is franchising, it's really simple,
they want rapid expansion, they want to increase their brand recognition. Because with increased brand recognition, it becomes a more valuable company for an exit strategy, and what franchising allows them to do is get a consistency in the delivery of their brand promise to the
consumer. Franchising lives on consistent, sustainable replication. 

Whenever you think of franchising and whenever you think of a franchise model, you want to pick models that can do consistent, sustainable replication. Sustainable being the most important part, because that's where the economics of the business reside. It's simply a form of license. Under a franchise model, the federal government has defined three elements that turns a license into a franchise: I allow you to use my brand; the second part of the license is, I'm gonna give you support and I'm gonna support you, and control how you use my brand. That makes a lot of sense. I'm also gonna charge you a fee. It's an economic relationship and today, under the federal law, it's about $540 that is spent over the first six months of a relationship.

So when those three elements are in place at least at the federal level, you're a franchise. Don't get fooled though, the states have other definitions. Some of them are more strenuous. You'll hear words like community of interest and marketing plan, so in each state you may find a definition slightly different than you'll find at the federal level.

What's fueled the growth of franchising is simply the desire to expand. If you think back to the automotive industry in the 1890s, Ford and General Motors were selling cars. Now you have to fuel those cars. The idea of franchising gasoline stations starts to come because Ford and GM need to have cars out there. There were limitations on human and financial capital and a need to overcome distance.

Think of Coca-Cola in the 1890s. An Atlanta-based company, that has glass bottles in wooden crates with a very heavy liquid inside. Once you try and expand that company when you have horse-drawn wagons, you're not expanding very far outside of Atlanta. Coca-Cola today would be a nice regional brand. Now flip it over to a franchise, they ship the syrup, they ship the bottles once,  they ship the crates once, the local franchisee took that product and blended it with local water, that syrup, now you have a brand that can go international. So the movement of that product, to overcome that distance, is exactly what we're seeing today with other franchise systems. It's just a different set of problems we're looking to solve.

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