of statistics that talk about the “success rate” in franchising. As late as 2000, the International Franchise Association published statistics that claimed that franchisees had a success rate of 95 percent – versus a failure rate of 85 percent for nonfranchised startups in their first five years in business. Those statistics turned out to be inaccurate and misleading.
Franchising can be a very effective method of getting into business, but that depends on how carefully the franchise system is structured and supported. Even in highly successful franchise systems, locations can fail for a host of reasons. It is up to prospective franchisees to conduct a proper examination of every franchise opportunity that interests them.
The brand is a franchise system’s most valuable asset, because consumers decide what and whether to buy based on what they know, or think they know, about the brand. Unless a consumer has a personal relationship with the local owner of a franchise, they probably don’t give any thought to who owns the local business. In their minds, they are shopping at a branch of a chain. This fact is evident in the signs most franchisors require franchisees to post in their locations notifying the public that the location is owned and operated by a local business owner. In the consumer’s mind, a company’s brand equals its reputation.
“Many brands spend too much time talking about what and how they do things,” says Dawn Kane, CEO of Hot Dish Advertising. “Where brands win is when they connect emotionally to the customer. You can’t build a solid reputation without that emotional connection. It is the emotional connection that drives consumers into a franchisee’s location, and each location’s consistency in meeting that brand promise keeps them coming back.”
Franchisors focus much of their support effort, time, energy, and money ensuring consistency at each of their locations. This promise of consistency is a major advantage for new franchisees because it is meant to assure them a ready flow of customers. A good brand can communicate a positive message to the customer. Equally so, a bad brand experience can paint a negative message for the entire brand. With a great brand, consumers can visualize and almost feel the experience they will receive even before they enter the local business.
A positive brand recognition is what every franchisee hopes for. With a well-known successful brand, new franchisees don’t have to build brand awareness for their business because the franchisor and the other franchisees have already taken care of that. Having a reputation for a positive brand experience is one of the major advantages found in well-established franchise systems.
But brands are not born fully grown. Smaller franchise systems or those with limited brand recognition in markets can’t deliver consumer acceptance until the local franchisee creates a reputation for a positive brand experience in their market. This is an issue for new franchisees because they may be required to build brand recognition by spending more on advertising and promotion than where the franchise system’s brand is well known. When prospective franchisees review the franchisor’s offering, the amount of advertising specified by a franchisor is only the minimum amount they expect will be required – but most certainly is not the maximum amount a new franchisee may need to invest.
There are three basic types of franchising:
❯❯ Traditional or product-distribution franchising
❯❯ Business-format franchising
❯❯ Social franchising
Traditional franchising
The industries in which you most often find traditional franchising include soft drinks, automobiles and trucks, mobile homes, automobile accessories, and gasoline. The franchisee is typically selling products manufactured by the franchisor. Some examples include Coca-Cola, Ford Motor Company, and John Deere.
Although traditional franchises look a lot like supplier-dealer relationships, the difference is in the degree of the relationship. In a traditional franchise, the franchisee may handle the franchisor’s products on an exclusive or semi-exclusive basis, while the supplier-dealer may handle several products, even competing ones. For example, Tempur-Pedic mattresses may be offered by a national dealer network that also offers other bedding brands in their retail stores.
The traditional franchisee is closely associated with the franchisor’s brand and generally receives more services from its franchisor than a dealer would from its supplier. Frequently the franchisee provides some pre-sale preparation before a product is sold (such as you find with Coca-Cola, where the franchisee manufacturers and bottles the soda) or some additional post-sale servicing (such as you find at a Ford dealer with your periodic maintenance programs).
In a traditional product-distribution franchise, the franchisor licenses its trademark and logo to its franchisees, but it typically does not provide franchisees with an entire system for running their businesses. Measured in total sales, traditional franchising is larger than business-format franchising, covered in the next section.
Business-format franchising
The business-format franchisee gets a complete system for delivering a franchisor’s product or service. The major difference between a traditional franchise and a business-format franchise is that business-format franchisees operate their business based on a business system largely prescribed by the franchisor. The role of the franchisor is to define the business system and establish the brand standards, whereas the role of the franchisee is to independently manage their business on a day-to-day basis to achieve those brand standards.
McDonald’s doesn’t franchise hamburgers, and Domino’s doesn’t franchise pizza. What they provide to their franchisees is a system of delivering their branded products and services. Although traditional franchising is larger than business-format franchising, because the size of the individual transactions is larger, more than 80 percent of all franchise locations in the United States are the business-format type.
It is the franchisee’s execution to a franchisor’s brand standards that produces consistency – the foundation for a business franchisee’s success. Interim Health Care, Sport Clips, PostNet, PuroClean, Twin Peaks, and Firehouse Subs are all examples of business-format franchises. The business-format franchisor provides a detailed system, and the franchisee is trained and supported in their independent management of their business.
The confidential operating and procedures manuals (the how-to guides of every great franchise) provide the franchisee with the information they will need to establish, operate, and manage their businesses. The goal in a franchise system is for customers to get the same brand experience each and every time they shop in one of the franchise’s locations, and the manual is one of the tools to achieve that important goal.
“Successful franchises are usually started and operated by people who have been in that particular business for quite some time, and who have developed proprietary techniques for avoiding pitfalls or dealing with them when the unexpected occurs,” says Gordon Logan, CEO and founder of Sport Clips. “Thoroughly documented operating procedures, marketing plans, and training programs are the hallmarks of the most successful franchises. Great franchises never stop improving their systems, always putting the profitability of their franchisees at the top of their priorities while being relentless about maintaining brand standards. Market domination is always a prime objective.”
Although the franchisor provides a comprehensive business system, it is the franchisee’s responsibility to manage all the day-to-day affairs of the business. After