Franchising - Overview

Overview

The following U.S. listing tabulates the early 2010 ranking of major franchises along with the number of sub-franchisees (or partners) from data available for 2004. As can be seen from the names of the franchises, the USA is a leader in franchising, a position it has held since the 1930s when it used the approach for fast-food restaurants, food inns and, slightly later, motels at the time of the Great Depression. As of 2005, there were 909,253 established franchised businesses, generating $880.9 billion of output and accounting for 8.1 percent of all private, non-farm jobs. This amounts to 11 million jobs, and 4.4 percent of all private sector output.

1. Subway (sandwiches and salads) | startup costs $84,300 – $258,300 (22,000 partners worldwide in 2004).

2. McDonald's | startup costs in 2010, $995,900 – $1,842,700 (37,300 partners in 2010)

3. 7-Eleven Inc. (convenience stores) |startup costs in 2010 $40,500- $775,300, (28,200 partners in 2004)

4. Hampton Inns & Suites (midprice hotels) |startup costs in 2010 $3,716,000 – $15,148,800

5. Great Clips (hair salons) | startup costs in 2010 $109,000 - $203,000

6. H&R Block (tax preparation and now e-filing) | startup costs $26,427 - $84,094 (11,200 partners in 2004)

7. Dunkin' Donuts | startup costs in 2010 $537,750 - $1,765,300

8. Jani-King (commercial cleaning) | startup costs $11,400 - $35,050, (11,000 partners worldwide in 2004)

9. Servpro (insurance and disaster restoration and cleaning) | startup costs in 2010 $102,250 - $161,150

10. MiniMarkets (convenience store and gas station) | startup costs in 2010 $1,835,823 - $7,615,065

Mid-sized franchises like restaurants, gasoline stations and trucking stations involve substantial investment and require all the attention of a businessperson.

There are also large franchises like hotels, spas, hospitals, etc. which are discussed further under technological alliances.

Two important payments are made to a franchisor: (a) a royalty for the trademark and (b) reimbursement for the training and advisory services given to the franchisee. These two fees may be combined in a single 'management' fee. A fee for "disclosure" is separate and is always a "front-end fee".

A franchise usually lasts for a fixed time period (broken down into shorter periods, which each require renewal), and serves a specific territory or geographical area surrounding its location. One franchisee may manage several such locations. Agreements typically last from five to thirty years, with premature cancellations or terminations of most contracts bearing serious consequences for franchisees. A franchise is merely a temporary business investment involving renting or leasing an opportunity, not the purchase of a business for the purpose of ownership. It is classified as a wasting asset due to the finite term of the license.

A franchise can be exclusive, non-exclusive or 'sole and exclusive'.

Although franchisor revenues and profit may be listed in a franchise disclosure document (FDD), no laws require an estimate of franchisee profitability, which depends on how intensively the franchisee 'works' the franchise. Therefore, franchisor fees are typically based on 'gross revenue from sales' and not on profits realized. See Remuneration.

Various tangibles and intangibles such as national or international advertising, training and other support services are commonly made available by the franchisor.

Franchise brokers help franchisors find appropriate franchisees. There are also main 'master franchisors' who obtain the rights to sub-franchise in a territory.

According to the International Franchise Association approximately 4% of all businesses in the United States are franchisee-worked.

It should be recognized that franchising is one of the only means available to access venture investment capital without the need to give up control of the operation of the chain and build a distribution system for servicing it. After the brand and formula are carefully designed and properly executed, franchisors are able to sell franchises and expand rapidly across countries and continents using the capital and resources of their franchisees while reducing their own risk.

Franchisor rules imposed by the franchising authority are usually very strict in the USA and most other countries need to study them carefully to protect small or start-up franchisee in their own countries. Besides the trademark, there are proprietary service marks which may be copyrighted, and corresponding regulations.