Franchising

By selling a brand, a business plan, and expertise to regional business owners, corporations can increase profi ts and gain a global reach without signifi cantly increasing risk.

The idea
The number and variety of franchises is large, and is a technique employed by companies ranging from McDonald’s fast food outlets to the Hyatt luxury hotel chain. There are two key elements of any
franchise—a franchiser and a franchisee. The franchiser sells its reputable brand and expertise to the franchisee, who then establishes and manages the business. The benefi t for the franchiser is the ability to increase profi t and become a nationally (or globally) known and trusted brand.
The benefi t to the franchisee is, many believe, a reduced level of risk. It also provides increased ease, as the franchisee does not have to create a new business plan or develop an unknown brand.
Although the idea of franchising is an old one, it was invigorated in the late twentieth century, with an increased desire for decentralized business structures. By 1999, statistics indicated that there were 540,000 franchises in America, with a new one opening every 6.5 minutes of each business day.
Starbucks is a well-known franchise success story. Founded in 1971 with a single store in Seattle’s Pike Place Market, it embraced franchising and, by 2006, had 8,000 locations in over 37 countries
and profi ts nearing $3 billion.

In practice
• Ensure a consistent delivery of high-quality service and product across all franchises to gain a positive, stable, and trusted reputation among consumers.
• Setting up new franchises too close to existing ones can risk one of the operations being “cannibalized” and losing trade. Although this can be a positive business practice, it is important to consider the repercussions.
• Allow franchises to achieve a higher degree of independence, differentiating them from passive investors or conglomerates.
• Use expert, experienced lawyers or advisers to help—whether you are selling or buying a franchise. The key to success is to have the right business product or service, to be clear about the details, and to agree and work together.