Franchising 101 PDF

HISTORY OF FRANCHISING 18th Century: The Origins  1731 - Brewers and Tavern Owners (Germany) o Business Owner: Local Brewers o Origination: In the early 18th century, brewers in Germany granted licenses to tavern owners to sell their beer, forming one of the...

HISTORY OF FRANCHISING 18th Century: The Origins  1731 - Brewers and Tavern Owners (Germany) o Business Owner: Local Brewers o Origination: In the early 18th century, brewers in Germany granted licenses to tavern owners to sell their beer, forming one of the earliest examples of franchising. o Product: Beer o Year: 1731 o Significance: This marked an early form of franchising, where the tavern owners acted as franchisees. 19th Century: Early Developments  1851 - Singer Sewing Machines (USA) o Business Owner: Isaac M. Singer o Origination: Isaac Singer invented the sewing machine and established a franchising model by licensing distributors to sell his machines across the U.S. o Product: Sewing Machines o Year: 1851 o Significance: Singer’s model is one of the first documented cases of modern franchising, with independent sellers gaining exclusive rights in specific territories. 20th Century: Modern Franchising Emerges  1902 - Rexall Drug Stores (USA) o Business Owner: Louis K. Liggett o Origination: Louis K. Liggett started the Rexall franchise by offering independent druggists the right to operate under the Rexall name. o Product: Pharmaceuticals and Health Products o Year: 1902 o Significance: Liggett’s model was one of the first modern franchise systems in retail.  1920s - Automobile Dealerships (USA) o Business Owners: Henry Ford (Ford) and Alfred P. Sloan (General Motors) o Origination: Both Ford and General Motors established franchise networks of dealerships to sell their cars. o Product: Automobiles o Year: 1920s o Significance: The model set the standard for the automobile industry, where dealerships pay for the exclusive rights to sell a manufacturer’s cars in designated areas.  1925 - A&W Root Beer (USA) o Business Owners: Frank Wright and Roy W. Allen o Origination: A&W began franchising its root beer stands, becoming one of the first fast-food franchises. o Product: Root Beer and Fast Food o Year: 1925 o Significance: The success of A&W's franchising paved the way for the growth of fast-food franchises.  1940 - McDonald’s (USA) o Business Owners: Richard and Maurice McDonald (Founders), Ray Kroc (Franchise Developer) o Origination: The McDonald brothers opened their first restaurant in 1940, and Ray Kroc later joined in 1954, turning it into a global franchise. o Product: Fast Food (Burgers, Fries, etc.) o Year: 1940 (Founding), 1955 (Franchising) o Significance: Under Ray Kroc, McDonald’s became the model for global fast-food franchising, emphasizing uniformity and efficiency.  1954 - Burger King (USA) o Business Owners: Keith J. Kramer and Matthew Burns (Founders) o Origination: Burger King started as Insta-Burger King and began franchising soon after. o Product: Fast Food (Burgers, etc.) o Year: 1954 o Significance: Burger King expanded through franchising, competing directly with McDonald's.  1958 - Pizza Hut (USA) o Business Owners: Dan and Frank Carney o Origination: The Carney brothers founded Pizza Hut and began franchising the brand shortly thereafter. o Product: Pizza o Year: 1958 o Significance: Pizza Hut's success as a franchise contributed to the global popularity of pizza chains.  1965 - Subway (USA) o Business Owners: Fred DeLuca and Peter Buck o Origination: Subway was founded in 1965, and franchising began in 1974 to expand the sandwich shop. o Product: Sandwiches and Salads o Year: 1965 (Founding), 1974 (Franchising) o Significance: Subway’s franchising model allowed for rapid expansion, making it one of the largest fast-food chains globally. 1980s - Global Expansion  1984 - 7-Eleven (Japan) o Business Owners: Ito-Yokado (Japanese Retailer) and Southland Corporation (USA) o Origination: 7-Eleven, originally a U.S. company, saw significant growth in Japan through franchising. o Product: Convenience Store Goods o Year: 1984 (Japan Expansion) o Significance: The success of 7-Eleven in Japan demonstrated the global potential of franchising.  1984 - Hilton Hotels (Global) o Business Owner: Conrad Hilton (Founder) o Origination: Hilton Hotels expanded globally through franchising and management agreements, becoming a leading name in hospitality. o Product: Hospitality (Hotels and Resorts) o Year: 1984 (Global Franchising) o Significance: Hilton’s franchising model became a template for other hospitality brands seeking global growth. 21st Century: Diversification and Digital Franchising  2000 - WSI (Canada) o Business Owner: Mark Dobson o Origination: WSI started offering digital marketing services through a franchising model, helping businesses with online strategies. o Product: Digital Marketing Services o Year: 2000 o Significance: WSI’s franchise model capitalized on the growing demand for digital services, becoming a leader in its field.  2014 - Orange theory Fitness (USA) o Business Owner: Ellen Latham o Origination: Orange theory Fitness began franchising in 2010, offering a unique fitness experience combining science, coaching, and technology. o Product: Fitness and Wellness Services o Year: 2014 (Franchising Peak) o Significance: The brand quickly became one of the fastest-growing fitness franchises globally. Current Trends and Future Directions  2020 - Amazon Delivery Service Partners (USA) o Business Owner: Jeff Bezos (Founder, Amazon) o Origination: Amazon launched its Delivery Service Partners program, allowing individuals to start their delivery businesses under the Amazon brand. o Product: Delivery Services  o Year: 2020 o Significance: This program exemplifies modern franchising’s shift towards gig economy models and logistics services. History and Origin of the Word "Franchise" The term "franchise" originates from the Old French word "franc," meaning freedom or exemption. In medieval times, the word referred to a privilege or right granted by a ruler or lord, typically allowing towns or individuals to hold markets, collect taxes, or use resources freely. These early forms of franchises were essentially licenses granted by governing authorities. The modern concept of franchising in business began in the mid-19th century. One of the earliest examples came from Isaac Singer, the inventor of the Singer sewing machine. In the 1850s, Singer pioneered the use of franchising by selling licenses to local businesses to distribute and repair his machines. This system allowed Singer to rapidly expand his distribution network without having to directly invest in new locations. The franchising model evolved significantly in the 20th century, particularly in the United States, with brands like McDonald’s, KFC, and Subway becoming household names. These businesses refined franchising by standardizing operations and creating systems that could be replicated across multiple locations. Today, franchising is used in various industries worldwide, from fast food and hospitality to retail and personal services. The model has become a key strategy for businesses to scale quickly and efficiently. What is Franchising? Franchising is a business model in which a company (the franchisor) grants an individual or entity (the franchisee) the right to operate a business under the company’s brand and established business system. The franchisee pays an initial franchise fee and ongoing royalties to the franchisor in exchange for these rights. In this system, the franchisee operates their own location or branch, while the franchisor provides ongoing support, training, and marketing to ensure brand consistency across all franchise locations. Franchising allows the franchisor to expand its brand and reach quickly without needing to invest capital in each new location, as the franchisee bears those costs. Meanwhile, franchisees benefit from operating under a proven business model with the security of a recognized brand.  COMMON TERM IN FRANCHISING 1. Advertising Fund: o Explanation: This is a collective pool of funds contributed by franchisees to promote the overall brand. The franchisor uses these funds for national or regional marketing campaigns. o Example: Franchisees of a fast-food chain contribute 2% of their monthly sales to an advertising fund, which the franchisor uses to create TV commercials and digital ads. 2. Area Franchisee: o Explanation: A franchisee who has exclusive rights to open multiple franchise units within a specific geographic region. o Example: A franchisee secures the rights to open ten fitness centers in a specific city within five years. 3. Area Representative: o Explanation: A franchisee who also acts as a salesperson for the franchisor, helping to find new franchisees in their designated territory. o Example: An area representative for a coffee shop franchise assists in finding new franchise owners in their region and receives a commission for every franchise sold. 4. Breakeven: o Explanation: The point at which a franchise’s revenue equals its initial investment costs, with no profit or loss. o Example: A franchise business invests $50,000 and reaches breakeven after one year when it starts generating enough income to cover the investment and operating costs. 5. Candidate: o Explanation: A potential franchisee who has shown interest in purchasing a franchise. o Example: A candidate attends a franchise expo and expresses interest in opening a bakery franchise, prompting further discussions with the franchisor. 6. Churning: o Explanation: The frequent turnover of franchise ownership, either by selling to new owners, returning the franchise to corporate, or shutting down the franchise. o Example: A restaurant franchise location changes ownership three times in five years, with each new owner struggling to maintain operations. 7. Company-Owned Locations: o Explanation: Franchise units that are owned and operated by the franchisor, rather than by individual franchisees. o Example: A clothing brand operates ten company-owned stores across major cities, in addition to its franchise locations. 8. Conversion: o Explanation: The process of turning an existing independent business into a franchise unit of a larger brand. o Example: A local pizza restaurant converts into a franchise unit of a national pizza chain, adopting its branding and operations while retaining its original location. 9. Corporate Location:  o Explanation: A franchise unit owned by the franchisor, similar to company-owned locations. o Example: The franchisor operates its own flagship coffee shop in New York City to maintain direct control over brand presentation and customer experience. 10. Discovery Days: o Explanation: A scheduled visit where prospective franchisees visit the franchisor’s headquarters to learn more about the franchise opportunity before committing. o Example: A prospective franchisee visits the headquarters of a gym franchise to meet key staff and tour the facility as part of their decision-making process. 11. Field Consultant: o Explanation: A franchisor's employee or contractor responsible for supporting and assisting franchisees in running their businesses. o Example: A field consultant visits multiple fast-food franchise locations to provide guidance on operations, staff training, and marketing strategies. 12. Franchise Broker: o Explanation: A person or company that helps match potential franchisees with suitable franchise opportunities. o Example: A franchise broker assists an entrepreneur in finding the right daycare franchise based on their experience and budget. 13. Franchise Development: o Explanation: The process of adding new franchisees to a franchise network, often handled by specialized staff within the franchisor's company. o Example: A franchise development team meets with candidates at franchise expos and conducts interviews to assess their suitability. 14. Franchise Expo: o Explanation: A large event where prospective franchisees can meet with multiple franchisors to learn about different franchise opportunities. o Example: A prospective franchisee attends an expo in New York to explore different franchise options, from fast food to retail. 15. Franchise Agreement: o Explanation: The legal contract between the franchisor and franchisee that outlines the terms and conditions of the franchise. o Example: A franchise agreement for a retail store includes terms regarding fees, operational guidelines, and the duration of the franchise ownership. 16. Franchise Disclosure Document (FDD): o Explanation: A legally required document in the U.S. that provides detailed information about a franchise opportunity, including costs and obligations. o Example: Before signing a franchise agreement, a candidate reviews the FDD to understand the full financial commitment involved in opening a franchise. 17. Franchise Fee: o Explanation: A one-time payment made by the franchisee to the franchisor for the right to use the franchise’s brand and business model. o Example: A franchisee pays a $30,000 franchise fee to open a new unit of a fast- casual dining brand. 18. Franchisee: o Explanation: The individual or company that owns and operates a franchise business. o Example: A franchisee owns three ice cream shop franchises and manages daily operations at each location. 19. Franchisee Satisfaction Index (FSI): o Explanation: A measure of how satisfied franchisees are with the franchise system, based on surveys or reviews. o Example: A sandwich franchise receives a high FSI score, indicating that most franchisees are happy with the franchisor’s support and operational structure. 20. Franchisor: o Explanation: The company or entity that offers franchise opportunities to potential franchisees. o Example: A global hotel brand acts as the franchisor, providing its business model and trademark to hotel franchisees around the world. 21. Initial Franchise Investment: o Explanation: The total amount of money required to start a franchise, including the franchise fee and startup costs. o Example: A restaurant franchise requires an initial investment of $150,000, which includes the franchise fee, equipment, and leasehold improvements. 22. International Franchise Association (IFA): o Explanation: A large organization that represents the interests of franchisors, franchisees, and suppliers in the franchise industry. o Example: The IFA organizes events and provides resources to help franchise owners succeed and stay informed about industry trends. 23. Item 19: o Explanation: A section of the FDD where a franchisor can disclose financial performance claims of existing franchisees or corporate-owned units. o Example: A prospective franchisee reviews Item 19 to see the average revenue of other franchise owners in the same franchise system. 24. Lender: o Explanation: A financial institution that provides loans, including business loans for franchise investments. o Example: A prospective franchisee secures a loan from a bank to cover the startup costs of opening a coffee shop franchise. 25. Liquid Capital: o Explanation: Cash or assets that can quickly be converted to cash, often required by franchisors from prospective franchisees. o Example: A franchisee needs $50,000 in liquid capital to qualify for opening a fitness franchise. 26. Low-Cost Franchise: o Explanation: A franchise that requires a relatively low initial investment, typically under $100,000. o Example: A cleaning service franchise offers a low-cost investment opportunity with startup costs as low as $50,000.  27. Master Franchise: o Explanation: A type of franchise agreement where the franchisee has the right to sell additional franchise units within a designated region. o Example: A master franchisee for a real estate company has exclusive rights to develop and sell franchise units across an entire country. 28. Multi-Concept Franchisee: o Explanation: A franchisee who owns multiple franchises from different brands. o Example: A franchisee owns both a fast-food franchise and a daycare franchise, operating them under separate brands. 29. Multi-Unit Franchisee: o Explanation: A franchisee who owns multiple units of the same franchise brand. o Example: A multi-unit franchisee owns five retail clothing stores under the same brand in different cities. 30. Net Worth: o Explanation: The total value of a person or entity’s assets minus liabilities, often required by franchisors as a financial prerequisite. o Example: A franchisee applying to open a restaurant franchise has a net worth of $500,000, meeting the franchisor’s minimum requirement. 31. Franchise Operations: o Explanation: The processes and strategies that franchise businesses follow to deliver their product or service to customers. o Example: A fast-food chain's franchise operations include specific guidelines on how to prepare food, handle customer service, and manage inventory. 32. Renewal: o Explanation: The extension of an existing franchise agreement after the initial term has ended. o Example: A franchisee signs a renewal agreement to continue operating their franchise for another 10 years after the initial 5-year contract Key Terms Used in Franchising and their Explanations) 1. Royalty Payments These are ongoing fees that the franchisee pays to the franchisor, usually calculated as a percentage of the franchise’s gross sales. The royalties compensate the franchisor for the continued use of its brand, ongoing support, marketing, and business systems. It helps maintain the franchisor’s infrastructure and services. 2. Territory In franchising, territory refers to the geographic area in which the franchisee has the exclusive or non-exclusive right to operate. It is often defined in the Franchise Agreement  and protects the franchisee from internal competition within the same brand by ensuring that no other franchisee will operate in their designated area. 3. Operations Manual The Operations Manual is a detailed guide provided by the franchisor that outlines the business procedures, operational standards, and policies that the franchisee must follow. It ensures that every franchise location operates consistently with the brand’s standards, covering topics like customer service, employee training, marketing, and product delivery. 4. Training and Support: refers to the initial and ongoing education provided by the franchisor to help the franchisee understand how to operate the franchise successfully. Support includes continuous assistance such as marketing campaigns, operational guidance, technology support, and problem-solving advice. These services help franchisees operate in line with the franchisor’s standards and increase their chances of success. 5. Brand Consistency Brand consistency is critical in franchising, ensuring that every franchise location delivers a uniform customer experience, from products and services to marketing and store appearance. The franchisor enforces brand consistency through detailed guidelines and periodic inspections to maintain the integrity of the brand across all locations. 6. Initial Investment The initial investment is the total cost needed to start a franchise, which includes the franchise fee, equipment, supplies, real estate, marketing, and other startup costs. The amount varies depending on the industry and the specific franchise brand. 7. Marketing Fund Contribution many franchise systems require franchisees to contribute to a national or regional marketing fund. This contribution helps cover the costs of advertising and promotional activities that benefit all franchisees in the system, ensuring consistent brand messaging and broad market reach. 8. Term of Agreement this refers to the length of time that the Franchise Agreement is valid. Typically, franchise agreements last between 5 to 20 years. At the end of the term, the agreement may be renewed if both parties agree, or it may end if the franchisee chooses not to continue. 9. Exit Strategy the exit strategy refers to the options a franchisee has if they choose to sell or close their franchise before the term ends. Franchise agreements often outline the process for selling or transferring ownership, ensuring that the new owner meets the franchisor’s approval. ………………………..End ………………………..