What is franchising?

Everything you want
to know about
franchising in thirtyfive minutes or less
John Hamburger
Franchise Times
Which is the largest
franchise?
• Subway
• McDonald’s
• 7-11
• Starbucks
Subway
• Subway has the largest
number of units in the
U.S. with 20,681 locations
7-11
• The most franchised
international with 24,400
locations
McDonald’s
• The largest worldwide
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sales and total units
$55 billion in sales
32,240 locations
Starbucks
• Is Not a franchise
What is franchising?
• French word franche
which means ”free of
servitude”
Trademark and System
• Franchisor lends his/her
trademark and business
system for a fee
Business Strategy and
Method of Distribution
• Franchising is a
business strategy
• Franchising is a unique
method of distribution
Franchising is leverage
• A franchisor uses the
franchisee’s capital,
labor, and local market
knowledge to expand
the brand
Government Oversight
• Franchising is loosely
regulated by the Federal
Trade Commission and
15 states
How big is franchising in
the U.S.?
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$1.5 trillion in sales
10% of the private sector
economy
800,000 units
2,500 franchisors
600,000 franchisees
70 different industries
Industry Segments
•Restaurants
•Retail
•General Services
•Business Services
•Maintenance
35%
11%
11%
8%
8%
Industry Segments
•Automotive
•Real Estate
•Construction
•Hotels
•Child Related
•Other
6%
5%
5%
3%
3%
5%
Franchises that everyone
has heard of
• McDonald’s
• Burger King
• Subway
• Holiday Inn
• Pizza Hut
• Taco Bell
Hundreds more that
you’ve never heard of
• Pet PeePee
• Mr. Sparky
• Geese Police
• Pop a Lock
Breakfast
Coffee
Lunch
Dinner
Retail
Printing and Signs
Hair Care
Pets
Convenience Stores
Fitness
Home Service
More Home Service
Tall Dark & Handy
Drycleaning
Real Estate
Financial
Staffing
Professional
Development
Kids
Auto
Travel
How does a Franchisor
make money?
• Initial Franchise Fee
• Royalty stream
Franchisors manage the
brand. They don’t:
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Loan money to their franchisees
Guarantee their franchisee’s debt
Guarantee their franchisee’s
leases
Guarantee that their franchisees
make money
How does a Franchisee
make money?
• Operating income after debt
•
service and royalty
Residual from the sale of the
business
What makes a good
franchise?
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Brand Value
Reasonable entry costs
Attractive gross margin
Royalty fees in relationship to
margin and brand value
Franchise support
History successful franchisees
What are the benefits of being
a franchisee?
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Brand identity
Purchasing power
Cooperative advertising
Training
R&D
Sharing of key operating info
Pizza Hut
Brand Value
Reasonable entry costs
Attractive gross margin
Royalty and fees priced in
relation to margin and brand
value
√ Franchise support
√ History successful franchisees
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Great Clips
Brand Value
Reasonable entry costs
Attractive gross margin
Royalty and fees priced in
relation to margin and brand
value
√ Franchise support
√ History successful franchisees
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Buffalo Wild
Wings
√ Brand Value
Reasonable entry costs
√ Good gross margin
√ Royalty and fees priced in
relation to margin and brand
value
√ Franchise support
√ History successful franchisees
Quizno’s
√ Brand Value
√ Reasonable entry costs
Good gross margin
Royalties priced in relation to
margin and brand value
Franchise support
History successful franchisees
Krispy Kreme
√ Brand Value
Reasonable entry costs
√ Good gross margin
Royalties priced in relation to
margin and brand value
Franchise support
History successful franchisees
Brand Value
√ Reasonable entry costs
√ Good gross margin
√ Royalties priced in relation to
margin and brand value
Franchise support
History successful franchisees
Brand Value
Reasonable entry costs
√ Good gross margin
√ Royalties priced in relation to
margin and brand value
√ Franchise support
History successful franchisees
What concepts are rapidly
growing?
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One Hour Air Conditioning
Good Feet Arch Support Stores
Certified Restoration Dry Clean
Zero Rez Carpet Cleaning
N-Hance Floor Renewal
Paul Mitchell Partner School
Mathnasium Learning Centers
All About Honeymoons
What concepts are rapidly
growing?
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Volvo Construction Equipment
Geeks on Call
Vino 100
Stroller Strides
KidzArt
Positive Changes Hypnosis
Massage Envy
Learning RX
What franchise segments are
growing?
• Fitness
• Education
• Food
• Home remodeling/repair
Landlord/Developer
Questions for Franchisee
Brand Value
Reasonable entry costs
Good gross margin
Royalties priced in relation to
margin and brand value
√ Franchise support
√ History successful franchisees
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What can you use to analyze a
franchise?
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Read the UFOC
Talk to the franchisor and other
franchisees
What are some red flags?
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Store closures and lawsuits
Stiff royalty and advertising
requirements
Limited equity in franchisor or
franchisee
Franchisor wants landlord to
pick up most of build-out costs.
The future of franchising looks
bright!
• Entrepreneurial
economy
• Capital availability
• Corporate downsizing
• The U.S. idea culture
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