How did it start?
Modern business franchising became popular after the Second World War as veterans returned home and began looking for business opportunities to invest in that would sell recognizable goods and services. It rapidly expanded in the 60s and 70s, but with unregulated growth and poor management there was a very high failure rate and many companies declared bankruptcy, leaving franchisees holding the bag.
Because of these events, the International Franchise Association (www.franchise.org) was founded, to regulate and monitor the franchising industry, improving standards for franchisors and franchisees alike. The IFA works with the Federal Trade Commission and U.S. Congress to maintain a high standard of activity within the industry and improve industry relations. For the protection of potential franchisees, the FTC created the Uniform Offering Circular, which required franchisors to provide detailed documents on their company to any potential buyer. In 2007, this package was updated to include more required information and renamed the Franchise Disclosure Document.
How does it work?
A franchise is a way of doing business where an originating establishment, generally large and successful, gives another business its permission to use its trademark and proven methodology to sell products or services. In this arrangement, the established business is referred to as the franchisor, and the smaller start-up company is referred to as the franchisee. The franchisee will use the franchisor’s trademark to sell products or services under a strict set of guidelines set up to protect the brand. In exchange, the franchisor receives a regular licensing fee, and offers ongoing support to its subsidiaries.
The advantage of buying into a franchise is that the buyer gets to become part of an already successful formula, with an established brand name, instead of taking the time and effort of trying to build their own business from scratch. This puts them at a considerable advantage, as statistically franchises have a much higher rate of success than new businesses because of their built-in formula for success and existing base of customers.
However, there are still risks involved with franchising, such as if other franchises within your brand fail to perform they can sully the reputation of the entire franchise chain. Your franchise may only be as strong as its weakest link, and if the franchisor does not carefully choose and monitor his franchisee’s units, you could be adversely affected by someone else's lack of quality control or poor business management skills. It’s always best to do your homework before ever becoming involved with a franchise opportunity, or before franchise development of your own business, to make sure that the franchising formula is right for you.