Importance of Franchising
Have you ever wanted to be your own boss and get to pocket the profits of your hard work, but don’t feel like you have the knowledge or experience to start a business from scratch? Maybe you don't have a product or service idea you want to monetize? Don't let that stop you!
Starting a franchise might be the perfect way for you to make this happen. There are more options for franchises then you probably could have dreamed of, and starting your own is more accessible then you may think. The importance of franchising in our economy and to the lives of franchise owners is undeniable. In this blog we are going to discuss the whys, whats, and hows of franchising in more detail and help answer the question “why should you start a franchise” for yourself.
What Is Franchising?
At its core, franchising is when the owner of a business (the franchisor) gives permission to someone else (the franchisee) to run the same business using the branding and business practices. The exact rules and support the franchisor gives to franchisees will vary for every business, but the overall concept is the same for every franchise.
Franchising as a business idea dates back to the 1850’s, with Singer Sewing Machines. They needed local salerooms to demonstrate how these innovative home sewing machines worked, but didn’t have the capital or management capabilities to open and run the locations themselves. So they licensed individuals to market and sell the Singer machines. As a result, they became the first international leaders in sewing machines sales and are still a hugely successful brand more than 170 years later!
With such a long and successful history, it’s obvious that franchising is a business strategy that works. But there are pros and cons to every industry, so let’s look at some of the specific advantages and disadvantages of franchising.
What Are Advantages of Franchising?
There are advantages of franchising to both the franchisor and franchisee, which is why this practice works so well.
To the Franchisor (parent company)
- Diverse revenue sources
- Extend their geographic range without additional capital
- Increase the availability of their product or service with lowered need for management and employees
- Additional revenue from franchisee owned locations
To the Franchisee (independent business owner)
- Relatively low startup costs - many options under $50,000, some as low as $15,000
- Corporate support - branding, advertising, and business planning has already been done
- Brand awareness - have loyal customers before you open your doors
- Access to distribution system - know where and how to source your products easily
What Are the Disadvantages of Operating a Franchise?
With every good opportunity, there will also be downsides. One of the risks of buying a franchise is that running a franchise may not be a good fit for every business owner. Franchisors generally have done all the work of setting up business systems, marketing materials, and good location and building requirements, to create essentially turnkey businesses ready to go. This is a huge benefit to most franchisees, but if having full control over all these elements and designing them from scratch is something an aspiring entrepreneur really wants to do, a franchise might not be the right fit.
What Is the Importance of Franchising?
Franchises are so commonplace in the US nowadays that you’ve probably seen several already today (places like McDonald’s, Burger King, KFC and 7-eleven). Because of the benefits that come along with franchising, it’s no surprise there would be so many, or that they would have a big impact in the world. We’ll look at some of the different areas of life where franchises play an important role.
Importance of Franchising in the Economy
Franchising has a huge impact on the economy. It is estimated that in 2022 there are “some 753,700 franchise establishments in the United States, outputting some 670 billion U.S. dollars and employing 7.5 million people” according to Statista. With this huge contribution to GDP, job creation, tax income generation and essential products, the economic impact of franchising is astounding.
Importance of Franchise Organizations to Community
Because franchises are locally owned , they often play an important role in their communities too. Money spent in a franchise location tends to stay within the local economy much more than that spent at a corporate-owned chain. Locally paid taxes from the franchise workers and owners benefit local infrastructure. Increased profits earned by the management and owners are more likely to be spent within the local area, where these people live.
In addition to paychecks and taxes, locally owned businesses (which includes franchises) support their community in other ways. These types of businesses often provide funding, donations, volunteers, and sponsorships to all sorts of local programs - from kids sports teams, to charity events, to community center programs.
Importance of Franchising to Consumer Trust
There are so many options out there for consumers in every product and service imaginable, that it can be hard to know where to go to find a quality brand that can be trusted. Because many franchise brands are so widely known and used, it is easy for consumers to know what to expect from a company.
Not only does franchising make it easier for consumers to quickly know a lot about a company, it actually makes it easier for the franchised company to provide good service and a high quality product. The franchise fees paid to the parent company gives them more resources to put into perfecting a product, improving customer service, streamlining supply lines and delivering a consistent product. This same level of resources may not be as available to small businesses that are not franchised.
In fact, you can make the claim that the answer to the question of “what is the main purpose of franchising” is this brand recognition and built-in consumer trust. The largest portion of the franchise industry is quick service restaurants, and this instant consumer recognition and trust of brand plays a huge part in that industry in particular.
Importance of Franchising to Empower Business Ownership There is a lot of incredible talent for running a business out there that unfortunately doesn’t get reflected in demographics of average business owners. Starting a franchise can open business ownership opportunities to groups that otherwise might struggle for a variety of reasons. The lower startup costs and less risk associated with starting a franchise mean that more people are able to get started. The ability to control your own schedule and potentially work from home means anyone with limitations and responsibilities that are hard to work around now have an entry point into business ownership as well.
Advantages and Disadvantages of Franchising in International Business
We’ve talked a lot about franchising with the United States, but there are many important elements to international franchises as well. There has been detailed academic study of the impact of and motivation for franchises expanding internationally since the 1970’s. A systematic review of studies found that there were four main drivers in a company’s decision to extend franchises internationally: costs, international experience, brand fit, and economic growth potential in the host country. Let’s look at each of these factors in terms of the advantages and disadvantages of franchise ownership internationally.
- Costs - Labor, real estate, and materials costs to run a franchise might increase or decrease depending on the international location compared to the home country. International Experience - The amount of involvement and interest in expanding internationally that the franchisor has will play a huge role in if they consider international work.
- Brand Fit - Some types of companies or industries are naturally very good fits or very bad fits for the international audience, depending on the customs and cultures of different countries.
- Economic Growth Potential - Most franchisors will not consider international expansion until they are well established in their home country and feel as though opening up to the international market would allow for continued growth.
The above mentioned factors have more to do with how a franchisor might decide if opening up franchise opportunities internationally makes sense. But what are the benefits of franchising internationally to the franchisee? If we look specifically at franchising companies based in the US and opening locations abroad as examples, these benefits might include:
Allowing a franchisee to live abroad but run a business they already know Providing a franchisee who is from another country the opportunity to work with a US franchisor Setup is already done for complicated logistics of supply chains and distribution abroad Needed adjustments to the business model to make it work for the culture of the new country are already in place
Franchise.com: One Stop for all Your Franchising Needs
With all the benefits of franchising and the important role it plays today, it’s no wonder that so many people are looking into franchising opportunities! Ready to start looking for your own perfect franchise? At Franchise.com we have all the information you need on hundreds of franchises, all in one place! Our easy-to-use search features make finding all your options quick and accurate - search by industry, category, price, or state.
Feeling like you still need more information on all the benefits being a franchisee can bring? Read more with our up-to-date news and articles.