What is Franchising: An overview
Past and present, franchising is an engine for local business ownership
By Michael Seid, Managing Director, MSA Worldwide
Sharing a brand
Given its long history in the United States and its importance to our overall economy, it is surprising how misunderstood franchising seems to be with the general public and with government officials. Franchising is merely the sharing of a brand between two independent companies: One company has an opportunity to offer, and the other makes the investment in that opportunity by developing their own locally owned business.
Franchising in the United States goes all the way back to Benjamin Franklin. Ben started a chain of printing shops and newspapers in the Colonies and signed his first franchise agreement on September 13, 1731 with Thomas Whitmarsh for a printing shop in Charleston, South Carolina. Ben’s third franchise was with Elizabeth Timothy, who published the South Carolina Gazette and is recognized as our first female newspaper publisher, remarkable for those times.
What Ben did back then was really no different from what franchisors do today. He provided his apprentices and others with an opportunity to own their own businesses by giving them the training, the equipment, and the necessary tools they required to be successful business owners. Like today, the day-to-day management of the franchised business was the sole responsibility of the local business owner, reflected in Franklin’s agreement with Whitmarsh: “That the Business of printing and the disposing of the Work printed shall be under the Care, Management and Direction of the said Thomas Whitmarsh and the working Part performed by him at his Expense.”
Franchising creates a reliable customer experience
After World War II, franchising exploded in the American economy after the passage of a remarkable federal law called the “Lanham Act” that allowed for the sharing of a brand so long as the brand owner controlled the quality of the products and services being delivered to the public.
How franchise systems achieve consistency is of little importance to consumers; what they really want when they make their purchasing decision is that the product or service they buy from any branded location is the same regardless of where they buy it from. Who owns the location or who manages the business on a day-to-day basis is not important to the consumer; but local ownership is the essential fact that distinguishes a franchise system from its company-owned cousin.
The ability of franchise systems to achieve an extremely high level of consumer satisfaction, regardless of where the customer shops and regardless of who owns the business, is likely what confuses many people into thinking that local franchisees are merely managers of chain locations. Since 1731, franchisors and franchisees have learned the art of creating consistent and economically sustainable local businesses to such a level that maybe we have done too good a job in sharing a brand. Next time you are in a branded location, look for the sign that says “locally owned and operated.” You may be shopping at your neighbor’s business.
How big is franchising?
There are nearly 800,000 franchise establishments in more than 120 industries employing over 9 million people in the United States. Franchising is the dominant creator of small independently-owned businesses in the United States, and has been for decades. Even during the recent recession, while other business models contracted, franchising continued to expand – creating economic opportunities for new business owners and leading the nation in job creation.
Franchising has immeasurably improved our quality of life, and likely not a day will go by where the average American won’t find the opportunity to shop at a locally owned franchise. Consumers appreciate that while the products and services they purchase are brand quality, the local business owners are their neighbors, attending the same houses of worship, sponsoring the same local events, having kids in the same schools, and caring like any resident about the quality of life in their community.
How does a business become a franchise?
The typical franchisor begins as a small, locally owned business that has achieved some success in their own neighborhood. Typically, they start on the path to franchising when a customer asks them how they can open a similar business; this question is often the trigger that results in new franchise systems being born. Over the next few months the local business owners will work with lawyers, consultants, accountants, bankers, web designers and other professionals to design and develop the franchise system – a considerable investment. This investment can also be risky, because no one can guarantee the emerging franchisor that anyone will ever choose to become their franchisee, regardless of how much they have invested in developing the system. Opening any business is risky, and both the franchisor and franchisee are risk takers.
Once the franchise system is ready, the emerging franchisor will generally spend months investing in advertising and marketing to recruit their first franchisee. If they are lucky, three or four months after they start offering franchises (including provision of their Franchise Disclosure Document or 'FDD' to prospective franchisees), their first franchise agreement will be signed. And if everything goes right, another nine months will pass before that first franchisee gets their location open and begins to pay the franchisor any licensing fee.
How does someone become a franchisee?
For the franchisee, signing the franchise agreement is only the beginning. They then begin the process of borrowing money (often by taking a second mortgage on their home), looking for the right location, negotiating their lease, hiring architects and builders, furnishing their location with the necessary equipment and fixtures, buying the products and ingredients they will need, attending training at the franchisor’s offices, attracting employees, training their own management and staff, and marketing their new business in their neighborhood. They do it all in the hope and expectation that customers will come through their door.
Thankfully, sharing a brand with a recognized franchisor means they will often have customers who are already looking for that precise branded product or service even before the business is open. It is the sharing of a brand between two independent companies, with the neighborhood location owned and under the control of the franchisee, that makes franchising so successful.
Franchises are independent businesses
My first job was at a locally owned business, and most executives learn their basic work and management skills from similar first-rung positions. Franchising has become the largest trainer in the United States of entrepreneurial skills, and because of that many franchises today are owned by individuals who started their careers working at entry-level positions, at market wages, in locally owned franchised operations.
There have recently been assertions that franchisees and their franchisors are part of the same business entity, and that therefore a small independent franchisee should be considered part of the larger company for unionization and employment practices. It's akin to saying that the tenant of an apartment and the owner of the apartment building are part of the same family because they share a common address, and makes little sense given the basic facts of the franchise relationship:
- Franchisors and franchisees are independent businesses that share a brand under a licensing agreement.
- From a practical point of view, the role of the franchisor is to grow their number of franchises and to support those franchised businesses before and after they are open.
- The role of the franchisee is to serve the public branded products and services in their local markets to the quality standards as defined by the franchisor; the franchisee has control over the day-to-day management of their business, including their employees.
Both the franchisor and franchisee are independent businesses – the only real control that a franchisor has over its franchisees is ensuring that the system’s shared brand experience is delivered to the same level of quality that consumers expect and the law requires. The power of franchising is that over the past 230 years, we have learned how to share a brand and achieve the goal of consistent sustainability by allowing independent business people to own and manage a business, and in the process create for themselves wealth and vital local employment opportunities.
Thriving, locally owned businesses today have created the most successful growth in the middle class than at any time in history. Because of franchising, local wealth is created in communities; solid careers are born because of the skills learned in first-rung positions that can evolve into management or even franchise ownership. Consider that if you work for a non-franchised company, the chance that you can ever own a location under that brand is zero. But for workers at a franchised location, that ownership goal is well within reach.
What is franchising? An incredible opportunity, when it is done well!
For a person looking to move up into the middle classes, it’s the opportunity for wealth creation through the ownership of their own business. For our youth, it's the opportunity to get a first-rung job, gain experience in the workplace, and have independently earned money in their pockets. For older or more experienced workers it's an opportunity to advance their management skills and possibly learn enough to start their own businesses. For the consumer, it's the assurance that when they make their purchasing decision they can do so with confidence, knowing that it is their neighbor who owns the business.
So take the opportunity to understand what franchising is all about. It is how the Great American Dream of independent business ownership is being achieved, every day, in the United States.