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Franchising

in the arrangement is careful development and control of the high cost of constructing and operating its own out-
marketing strategies. This approach to franchising, very lets, thus giving it more capital for expanding production
common in the early twenty-first century, is used by such and advertising. It can also ensure, through the franchise
organizations as Holiday Inn, AAMCO, McDonald’s, agreement, that outlets are maintained and operated
Dairy Queen, KFC, and H&R Block. according to its own standards. The franchiser benefits
A good franchise system can offer the prospective because the franchisee, being a sole proprietor in most
franchisee a diversified array of business savvy. In most
cases, is likely to be very highly motivated to succeed. Suc-
instances, the franchisee enjoys the benefit of a nationally
cess of the franchise means more sales, which translate
recognized trade name, national recognition, and the
into higher income for the franchiser.
instant collective goodwill of the franchise. Standard qual-
ity and uniformity of a product or service coupled with an Despite these numerous advantages, franchise
existing—and successful—system of marketing and arrangements also have drawbacks for both parties. The
accounting are other benefits. In addition, expert advice franchiser can dictate many aspects of the business: decor,
on location, design, capitalization, and operational issues design of employees’ uniforms, types of signs, and numer-
is provided by the franchiser. Specialization on a national ous other details of business operations. In addition, fran-
level is done in order to maintain the necessary research chisees must pay to use the franchiser’s name, products,
and market analysis that will enable the franchisee to and assistance. Usually franchisees must pay a one-time
remain competitive in an ever-changing marketplace. In franchise fee as well as continuing royalty and advertising
other words, a business framework is supplied that reduces fees, often collected as a percentage of sales. For example,
the number of risks that may arise when starting a new
Subway requires franchisees to come up with $70,000 to
business. Most often these risks are associated with the
$220,000 in start-up costs. Franchisees often must work
financial investment involved. The franchise agreement,
very hard, putting in twelve-hour days, six or seven days a
however, often offers a cost savings by sharing a central-
ized purchasing system, and in some instances, direct week. In some cases, franchise agreements are not uni-
financial assistance. form; one franchisee may pay more than another for the
same services. The franchiser also gives up a certain
ADVANTAGES AND amount of control when entering into a franchise agree-
DISADVANTAGES OF FRANCHISING ment. Consequently, individual establishments may not
Franchising offers several advantages to both the fran- be operated exactly the way the franchiser would like.
chisee and the franchiser. It enables a franchisee to start a
business with limited capital and to benefit from the busi- MONEY AND TIME
ness experience of others. Moreover, nationally advertised COMMITMENTS
franchises, such as ServiceMaster Clean and Burger King, When entering into a franchise agreement, franchisees
are often assured of customers as soon as they open. If
business problems arise, the franchisee can obtain guid- must be prepared to make major commitments of both
ance and advice from the franchiser at little or not cost. money and time. They must be prepared to invest a sub-
Franchised outlets are generally more successful than stantial amount of money, both in the initial franchising
independently owned businesses. Fewer than 10 percent fee and in start-up costs and carrying funds to provide a
of franchised retail businesses fail during the first two cash flow sufficient to operate the business during the
years of operation, whereas approximately half of inde- beginning months or, if necessary, years. Most franchisees
pendent retail businesses fail during that period. The fran- average a net profit of approximately $30,000 the first
chisee also receives material to use in local advertising and year of the contractual agreement with increase in residual
can benefit from national promotional campaigns spon- profits annually the second year forward.
sored by the franchiser. At the start of the twenty-first cen- The second commitment is that of time; in the begin-
tury, Taco Bell franchisees profited from a national
advertising campaign featuring a Chihuahua demanding ning, the proprietor will be obliged to devote long hours
“Yo quiero Taco Bell” (“I want some Taco Bell”). The ads to the details of the business operation. Experience has
helped boost same-store sales at Taco Bell by 3 percent in shown that this commitment is the common denomina-
an otherwise flat industry. The talking dog was especially tor to many successful franchise operations. Franchisees
popular among teenagers, who spend more than $12 bil- must rely to a large extent upon their own aptitude and
lion per year at fast-food restaurants. drive in order to learn the business. They must also rely
The franchiser gains fast and selective product distri- upon the product, services, and business skills of the fran-
bution through franchise arrangements without incurring chiser.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 331