What Is A Franchise And Why Should I Buy One?
By Geoffrey Stebbins

As a franchise consultant for over 26 years, these must have been the two most frequently asked questions. Potential new start-up business entrepreneurs often have many misconceptions of the nature of a franchise. Most will tell me that franchising is really not for them, as they do not want to go into the fast food industry. This false conception that franchising is synonymous with fast food is extremely prevalent. The truth of the matter is that virtually ever single business, whether it is in retailing, wholesaling, distribution, or manufacturing and whether it is in product or in service can be or is already available as a franchise. The only real exception to this rule are those few businesses that are either so highly personally specialized or require a extensive educational process, and cannot be cloned.

So what is a franchise? A franchise is a product or service delivery system, whereby the end-provider has purchased a proven business system. It is a partnership between franchisee and franchisor, whereby the franchisor provides a high degree of expertise and experience. The franchisor shares this expertise for a fee through initial training and on-going support to the franchisee. A result of obtaining this expertise prevents the franchisee from making too many mistakes, which could be costly to his business. Consequently, statistics show that on an average basis franchises fair better than those independent businesses that are not able to take advantage of this expertise.

The franchisee's share of this partnership is to provide the motivation for success. Nothing motivates man more than private ownership. As much as the corporate world endeavors to motivate their key employees, in satellite distant locations, through bonuses and maybe profit sharing, the level of motivation is never as high as that achieved through private ownership.

A franchise is therefore, a partnership of expertise and motivated players providing for what is generally a win-win situation. The franchisor obtains greater recognition and receives royalties; the franchisee maintains a proven profitable business.

I am now often quizzed why is this so? Could I not buy similar expertise and operate independently and save a considerable amount of money?

It is true that consultants are available and a lesser level of expertise can be purchased, but it would not be geared towards the specific needs and marketing requirements that would be best for that population. In addition, it is doubtful whether the independent start-up operator would end up making more money. Let's examine some of the advantages that the franchise can provide that would not be available with retaining an independent consultant to provide the expertise.

Group Advertising

Many franchisors charge a small fee to provide unique advertising material for use by their franchisees. The development of television advertisements, radio commercials, newspaper, print, and direct mail can be very expensive, but when shared by a number of franchisees this cost can be significantly reduced.

Name Identification

Market penetration is far more effective when there is a common awareness of name identification, which is shared by franchisees trading in the same market area.

Yellow Page Advertising

The cost of advertising in the Yellow Pages, which is very often imperative to the success of a business, can be extremely high. A national franchisor can usually negotiate far better prices for the same size ad than could a single individual. Add to the savings the sharing of the ad in the Yellow Pages, with other franchises, often this expense is minimal. One automotive aftermarket franchisee informed me that the savings he makes on his full page ad in the Yellow Pages, saves him thousands of dollars a year.

Group Purchasing

Many franchisors are able to purchase on a central basis for all of their franchisees, inventory, supplies, and equipment at considerable savings, even when they add a small profit to cover their administrative cost in buying and/or warehousing. I have heard many complaints from independent (non-franchise) business owners that they have difficulty in competing with the large discount stores and chains because of the lack of their buying power. Franchising overcomes this problem, as franchised independent business owners are capable of also buying at the best possible prices. I recall back in the 1970's when Kodak and IBM came out with their high speed copying equipment, the retail prices of such equipment was in the neighborhood of $100,000, a well-known printing franchise company was able to negotiate prices for their franchisees in the mid $30,000 range. This savings alone certainly cost justified the payment of royalties for this service.

Insurance

Business insurance plans, as well as health programs, are often available at the best possible prices. Non-franchised independent owners often have to resort to buying group policies through their Chamber of Commerce or trade association, which normally cannot be customized to the owner's individual needs.

Financing

Many finance establishments view franchise companies in a much better light, in granting start-up loans and even on-going loans. Banks and other lending institutions look at the track record of the franchisor and the franchisor's net worth as part of the criteria in granting a loan. Some franchisors even offer recourse to the lending institutions and there are a few that even have their finance programs.

The above categories are just a few very many actual tangible cost savings that justify the expense of purchasing a franchise. And yet, we have not even touched on the dozens of categories which simply fall into the area of expertise, without direct cost savings. Let us list some of these intangibles:

• Market Analysis
• Site-Selection
• Lease Negotiations
• Classroom Training
• Store Layout
• Store Setup
• Lease Improvements
• In-Store Training
• Operational Manuals
• Continued Support
• Staff Employment Techniques
• Employment Tax Information
• Payroll Information
• Employee Benefit Information
• Marketing & Sales Programs
• Opening Store Promotions
• On-going Promotions
• Profit & Loss Reviews
• Business Plan Projections
• Etc, etc, etc.

The result of this partnership creates a system which usually has greater chance of success, will produce higher profits, and will make it easier to resale the business and create a greater resale value.