The concept of franchising as it is known today dates back to the 1840s in Germany, when major ale brewers gave the exclusive rights to sell their products to certain taverns. But the true guru of modern franchising is Isaac Singer, who in 1858 built the market for Singer sewing machines using franchising agreements similar to those found today.
Singer's method of franchising, the product distribution method, was picked up by many manufacturers, including Coca-Cola, which expanded its product throughout the United States by shifting the burden of manufacturing, storing, and distributing its soda to local businesspeople through the process of selling them bottling rights. Car manufacturers found they could shift their distribution and selling costs to local businessmen who wanted to run car dealerships. Oil companies saw the light, too, and shifted their distribution and retail costs to local businessmen who ran convenience stores, gas stations, and car-repair shops.
After World War II, when millions of U.S. servicemen and women returned from the war needing jobs, the concept of business format franchising took hold. Many of these veterans decided they wanted to run their own businesses, but didn't necessarily have the knowledge or capital to develop a business concept from scratch. In addition to the need for jobs, there was also a dramatic need for the rapid expansion of service industries, such as hotels, motels, and fast-food restaurants.
These two forces drove the creation of the type of franchising that dominates the sector today - business format franchising. Companies that developed an ideal business model for running one of these types of service businesses sold their business model to local businesspeople who wanted to run that business in their own area. Unfortunately, at that time not all franchise businesses were legitimate, and many people who found the franchise opportunities and bought the rights to franchise found out the person who sold it to them did nothing more than take their money and run.
Both the industry and the government stepped in to clean up the franchise industry to save the concept of franchising. The International Franchise Association, was founded in 1960 and has since worked to enhance the professionalism of the industry. The IFA is now the world's largest clearinghouse and voice of franchising.
The U.S. Congress gave the Federal Trade Commission the responsibility for developing federal regulations. The FTC developed the rules behind the Uniform Franchise Offering Circular (UFOC) in 1979, which must be given to all businesspeople interested in buying a franchise before the company selling that franchise can accept any money.
Buying a Franchise
This guide will help you evaluate whether buying a franchise is right for you. It will help you understand your obligations as a franchise owner. Many people dream of owning and running their own business but are often let down by the reality of doing so. sBy purchasing a franchise, you often can sell goods and services that have instant name recognition and can obtain training and ongoing support to help you succeed. But be cautious.
Like any investment, purchasing a franchise is not a guarantee of success. sA franchise typically enables you, the investor or "franchisee," to operate a business. By paying a franchise fee, which may cost several thousand pounds, you are given a format or system developed by the company ("franchisor"), the right to use the franchisor's name for a limited time, and assistance. sWhile buying a franchise may reduce your investment risk by enabling you to associate with an established company, it can be costly.
You also may be required to relinquish significant control over your business, while taking on contractual obligations with the franchisor. sOutlined below are some of the main points you need to consider before buying a franchise: s- Franchise fee: Your initial franchise fee, which may be non-refundable, may cost several thousand to several hundred thousand pounds. s- Royalty payments: You may have to pay the franchisor royalties based on a percentage of your weekly or monthly gross income. You often must pay royalties even if your outlet has not earned significant income during that time.
In addition, royalties usually are paid for the right to use the franchisor's name. s- Advertising fees: You may have to pay into an advertising fund. Some portion of the advertising fees may go for national advertising or to attract new franchise owners, but not necessarily to target your particular outlet. s- Controls: To ensure uniformity, franchisors typically control how franchisees conduct business. These controls may significantly restrict your ability to exercise your own business judgment. s- Terminations and Renewal: You can lose the right to your franchise if you breach the franchise contract. In addition, the franchise contract is for a limited time; there is no guarantee that you will be able to renew it.
A franchisor can end your franchise agreement if, for example, you fail to pay royalties or abide by performance standards and sales restrictions. If your franchise is terminated, you may lose your investment. Franchise agreements typically run for 15 to 20 years. After that time, the franchisor may decline to renew your contract. sBefore investing in a particular franchise system, carefully consider how much money you have to invest, your abilities, and your goals.