Why are Franchises so successful?

Franchises

Franchises 

Franchises are defined type of license.

At its core, though, franchising is about the relationship the franchisor has with its franchisees.

The franchisor licenses its trade name and its operating methods (its system of doing business) to a franchisee; the franchisee agrees, as part of the bargain, to operate their business according to the terms of the license.

The franchisee is provided with support from the franchisor and exercises some control over some elements of the franchisee’s operations necessary to protect its intellectual property.

The franchisor also ensures that the franchisee is adhering to its brand guidelines.

In exchange, the franchisee usually pays the franchisor a one-time initial fee (franchise fee) and a continuing fee (royalty fee) for the use of the franchisor’s trade name and operating methods.

The franchisor has little or no role in the day-to-day management of the franchisee’s business, because the franchisee is an independent operator and not joint-employers with the franchisor.

For this reason, while the franchisor may provide some guidance and information on human resources best practices, the franchisee is free to hire, compensate, schedule, set employment standards and practices, and discipline their staff without any input from the franchisor.

Why are franchises so successful compared to other types of businesses?

Because they have a well-developed and proven system and a proven business plan, which has been optimized and upgraded for years and known to work very well.

According to International Franchise Association (IFA), 90% of franchisees renew their agreements at the end of their contracts.

Franchisees are people who buy into a franchise business and leverage someone else’s proven business model.

According to Franchise Business Review:

  • 90% of franchisees enjoy operating their business
  • 88% of franchisees enjoy being part of an organization
  • 85% of franchisees feel positive about their affiliation with their franchisor
  • 80% of franchisees feel their franchisor operates with a high level of honesty
  • 78% of franchisees would recommend their franchise brand to others
  • 73% of franchisees would “do it all over again” if they had the option

This raises important questions:

How is it that franchises have such a high success rate?

Why do franchisees respect this business model and their franchisors?

Why are they keen to keep working their franchise?

And… why is it the other way round with other business owners and businesses?

In comparison, according to US Bureau of Labor Statistics, about half of all new establishments only survive five years or more and about one-third survive 10 years or more.

The hard reality is that half of new establishments can’t survive past five years and they go bankrupt and close.

According to Bloomberg, 8 out of 10 entrepreneurs who start businesses, fail within the first 18 months.

This means 80% of them are bankrupt in less than 18 months. Many others will go bankrupt after 18 months.

79.6% of the businesses that started in 1994 continued to the next year. And only 19.5% of them last until 2015.

It is the same with the all the years after.

All years have the same pattern.

The reason is that all of those who start a business make the same mistakes.

I mean people are not getting better in running a business. They are still making the same mistakes.

So Why Are Franchises So Different?

Because franchise businesses have something independent businesses do not. Franchises operate using a “Proven Business Plan.”

Franchise businesses have a well-developed and strong system and a proven business plan, which has been optimized and upgraded for years and known to work very well.

When someone decides to join a franchise company like McDonald’s and becomes a franchisee, he has to take and graduate from special training courses that teach him how to run and manage a McDonald’s outlet, before ever being permitted to run his outlet.

The McDonald’s company supports him to operate the outlet.

They provide everything, all the equipment, and tools, along with close and direct support and guidance.

They even help him choose the best location to establish the new outlet.

When the outlet is launched, the company will keep on supporting and helping the franchisee, so as to enable him to manage and promote his franchise business in the best possible way and with the highest possible profit.

Therefore, the franchisee can’t go wrong.

He is not dependent on just his own experience and knowledge, which is not enough in 99% of cases.

He has a mentor who is dedicated to showing him the way and supporting him along the way.

However, when someone decides to run a business on his own, he has to do everything by himself.

There is no doubt that in most cases he won’t be able to get the business off the ground and he will close after a short while.

That is why 8 out of 10 entrepreneurs who start businesses end up failing within the first 18 months.

These businesses are dependent on the knowledge and experience of an owner, and they are not supervised by a big and financially robust company, such as a franchise company like McDonald’s or Starbucks.

Although I explained that the franchise business model has a high success rate, it’s not for everyone.

There is a very valid reason why this is not so.

According to Entrepreneur.com you have to be able to afford  an initial investment of between $1,003,000 and $2,228,000 to run a McDonald’s outlet.

And on top of that, a $500,000 liquid cash and a $45,000 initial franchise fee are required.

Additionally, there is an ongoing royalty fee of 4% and an ad royalty fee of 4%+.

It is almost the same scenario with the other franchises.

Many of them, like Hampton by Hilton are a lot more expensive:

  • $4,213,600 – $14,896,500 initial investment
  • $75,000 initial franchise fee
  • Ongoing royalty fee of 6%
  • Ad royalty fee of 4%

Therefore, you already have to be a millionaire to run a McDonald’s outlet or a Hilton hotel.

There are many other franchises that are cheaper, but none of them are free.

 You have to have a lot of money to become their franchisee.

In spite of having such a high success rate, the financial requirements that running a franchise business entails are out of reach for many, and thus, most people stay away from this type of business.

You have to have a lot of money already, in order to make money with a franchise business.

Thus most people stay away from franchises because it is something that is completely beyond their financial capability.

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