Franchising - What Is It?

As part of our series on franchising we want to answer a lot of the very common questions I get on a daily basis from people that are thinking about owning their own business. In the coming weeks, we'll also be doing some profiles on local franchisees and cover their adventure from thinking about owning a business, to how their business is operating today.

Today we'll cover a few more basics of franchising.  

Franchising is a business growth strategy that the franchisor has decided to use to help grow the business into multiple units. They are choosing to sell the rights to operate a unit of their business in exchange for a percentage of the on-going profits (think Seattle’s Best Coffee).

The alternative would be a company that chooses to expand by selling equity or taking on debt and then owning all of its units as corporate locations (think Starbuck's). Two very similar businesses that chose different models for expansion. Many people think of fast food when they think of franchising, but there are 3,000 franchises in 75 different business categories. No matter what business you are in, there is a good chance that there are franchises in that industry.  

As a business owner, buying into a franchise is a risk mitigation strategy. There are staggering 10-year statistics about the success rate of franchise businesses (85%) vs. non-franchise businesses (15%).  So it's not a type of business, but a way to start a new business and minimize risk by giving up a percentage of the on-going profits. Through proper due-diligence, the prospective franchisee must determine if the value being received from the franchisor is worth the cost of joining the franchise system.    

Next time we’ll cover some of the typical fees associated with a franchise system and discuss why they are in place. As always, please submit any questions you have!