The franchisor to
Learn how to support your franchisees, your supply chain, and deliver to a sustainable market. Consistency is important in delivering an accurate representation of your brand. Successful franchisors know their market, know their community, and understand the environment of their franchisees.
Where are we today, fifty years after franchise rules come in and all these regulations? Franchising is an 890 billion dollar economic output in the United States. There's approximately 780,000 to 800,000 franchise establishments, brands. There are 8.9, close to 9 million people work in the franchise industry directly. Compound that with all the suppliers to the industry.
Franchising is a huge part and a growing part of our economy. Ownership today, we're looking today at about 50 some odd percent of franchisees own more than one, but we still have totaled about 45% of all franchises are single-unit operators, building up to a smaller percentage where people actually own a hundred or two hundred of these locations. Multi-unit franchising is now part of our system.
What makes for a successful franchise? What you're looking for is the ability to create critical mass. One of the mistakes new franchisors make, is they allow the phone call to tell them where to expand. When you're developing a franchise system successfully, you want to make sure that you can support your franchisees and you can develop critical mass, a number of locations in a market that will allow you to support your franchisees, your supply chain, your marketing to consumers.
So, ability to build critical mass is important for a successful franchise. Successful franchises certainly have product and concept expertise. They are bringing to a potential franchisee a system for delivering the product and the services; there's an operating system. Effective marketing goes on when you turn the TV on and you see an advertisement at the Superbowl for a brand that is relatively new, a brand that's probably 15 or 20 years old, it's because that brand as a franchise system had the collective resources from all of the franchisees and the ability to hire marketing people to create that advertising. There's market expertise and the market expertise, surprisingly, comes from the franchisees themselves. So, where a company has to do a lot of research, and we still do a lot of research in franchising, the local franchisee coming into the market knows the community, knows where people are shopping, knows where/when things are happening, and that market expertise is one of the reasons that franchising does so well. The franchisor has the benefit of getting their revenue off the top line generally on the franchise sales, but because we have this community and this collectiveness in franchising, often the operating costs of the
Landlords want to have a brand that attracts people into their centers, and you can leverage that into lower rent with many brands
When you're looking at what makes for a successful franchise, understand that the
Franchisees also need to be motivated. If you look at great franchise systems, one of the things you need to notice is that as you walk through the door there's a difference to their culture, how they feel, and that brand promise and that brand recognition is a major portion of what makes franchising, or any chain, successful.
When you're driving by a Starbucks at 60 miles an hour, you do not need to go into the Starbucks to know exactly how it smells, how it feels, and how the staff is going to respond to you. You also know if you're driving down the highway and you're looking for a clean restroom and you have a choice between the local gas station and the McDonald's, or the Burger King, or the Wendy's, that the restrooms in those places
You also want to make certain that the product is the same. Do you ever notice when you walk into a McDonald's the french fries taste the same, whether you're in Pittsburgh or Los Angeles or in Paris,
You'll also notice from company to company that brands will vary. So if I want to get vinegar on my french fries, I know I'm gonna have to go to Rhode Island to get that, and there's nothing wrong with the fact that one state over in Massachusetts, I can't get vinegar on my french fries. I also want to know that if I want to get some jalapenos on my pizza I'm likely to be going down closer to the Mexican border, and there's nothing wrong with Domino's doing that.
Your brand needs to breathe, and it can in a franchise system. So it's not that the franchise system is exactly the same from market to market. That would be idiotic. You have standards, but the standards flow based upon the consumer, and the franchisor can execute that. And the
Franchising creates opportunities for entrepreneurs. We have built a middle class since the 1940s and 50s because of franchising. Franchising builds equity. It builds wealth, it gives consumers worldwide access to branded products they wouldn't have. If you look at franchising internationally, in markets like Nairobi, Kenya, you're able to get Kentucky Fried Chicken. You're able to go to a Marriott, to a Hilton Hotel, to an Intercontinental Hotel, and the same exact standards - delivered in a different way, because the KFC Nairobi is different than the KFC here - but the quality of the product is consistent whether it's Nairobi or New York City.
It creates local jobs, it creates stability, it establishes and has built the middle class. If you look at the growth of the market around the Apollo Theater in New York - 25 years ago, that would have been considered an inner-city depressed market. You go by the Apollo Theater today and you see a host of brands. You see franchise brands, you see non-franchise brands, but they all started because branded locations allowed products to come to a community to create local, sustainable jobs, and out of that flow to middle-class. Franchising and brands have an awful lot to do with building the economy.
The capital for that expansion of a franchise system is coming from the
So if you're looking at a business, and one business's franchisee, one business independently owned and operated, not franchise-related; both have the same bottom line revenue, both have the similar investment in the business, I will get additional multiples off of the franchisee’s business when I go to sell it simply because of the brand value to it. So my
All of my responsibility for hiring and firing and day-to-day management is owned by the
The key benefits
They're resilient, they basically want to make sure that not only they succeed, but you succeed. For the franchisor, it's
So you always focus as a franchisor on your franchisees’ bottom line. It's easy to sell a franchise. What's important is sustainability; consistent, sustainable replication. Sustainability is the key word in franchising.
In a franchise setting, you are no more than a formula entrepreneur. You are going to take somebody else's system and brand and hopefully do it better. You're gonna smile more, you're gonna make sure the customers come back to you, but you're not truly an entrepreneur. You have a relationship with a recognized brand that provides immediate consumer credibility. You're opening up a new store, but you're not opening up a new brand. When you're working with a brand that is well-known, customers, they're gonna come to you.
You're gonna get this disclosure document. It's a relatively thick document, it’s an ugly document, it has lots of legalese in it, but in that
Franchisors are delivering to
If you think of a knowledgeable business person visiting your location either by phone or in person, who's going to sit down and talk to you only about your brand and how it relates to all of the other brands in the system, all the other units in that system, that's the type of support you'll get from a good franchisor. Don't think that all franchisors are good, but the great franchisors always make sure they support their brand well. There’s collective marketing, there’s collective purchasing, and great franchise systems look to reduce the operating cost for the franchisees so that the franchisees’ bottom line is improved.
Why do they do that? It's because it's really easy to sell a franchise when the potential franchisee calls up and speaks to a current franchisee and the current franchisee says “great group, got into trouble, they helped me,” “great group, all they're focused on is my bottom line,” “great group, when they're talking about expanding products and services or equipment, or the facility, they talk to me about return on investment.” That's what you want to see in a franchise system, that’s when you're developing a franchise system right, what you're looking for the keyword of sustainability.
That's why franchising is great. It can take away your focus - if you are only focused on franchising you may miss the opportunities to license, or to go into mass gathering; again, franchising is only a method of distribution, don't get too trapped in it as your only method. Franchising Can be Slower - how is that possible, since I just said it's a quicker way to get to market? Well, I have to find the first franchisee; when I have a pipeline of franchisees it will be faster, but before I become a franchisor I have to develop a strategy, I have to develop legal documents; in some
So franchising will be slower, but once it comes in, then it comes in well. Franchisees are independent owners; when I walk into my company-business and I say to my employees, we're gonna do this, they say certainly. I say the same thing to a
If you're a jealous type of person, then giving up that location on 42nd and Fifth Avenue which is making a lot of money on the bottom line is going to drive you totally crazy, but if you can embrace the fact that the
One of the major downsides of franchising, for a franchisor, is when they get into the mode of selling a franchise, rather than selecting a
What's the downside for the
You are dependent as a
You also have a lot of restrictions. You can't sell wherever you want, you can sell only within the territory provided to you by the franchisor - if they've actually provided you with the territory and not just the four walls of your business. The product and service offering is not yours; how you advertise, who you advertise to, the minimum amount you're going to spend on advertising, all of those are downsides to an entrepreneurial franchisee. You also have to look at your ability to sell the business; even though you have a ready buyer and want to leave the business, the franchisor may have rights of first refusal. The franchisor may actually be able to come in and say you're selling the business for too much money, because in their judgment the new franchisee will not be able to sustain that type of debt, and the franchisor may come in and tell you to reduce the price. It doesn't happen often, but it does happen, and you have to look at your contract as a