Alf's Articles

The Franchising Industry Continues to Heighten

by Alf Nucifora

It generates an estimated $1 trillion annually in the US alone and it takes an estimated 1,500 companies doing business through more than 316,000 retail units to generate that volume. Representing the industry is the International Franchise Association (IFA), the industry's oldest and largest trade group representing more than 30,000 domestic and international members. According to the IFA, the Top Ten franchise industries in descending order of magnitude were fast food, retail, service, automotive, restaurants, maintenance, building and construction, retail-food, business services and lodging.

The Inside Scoop

Surprisingly, it doesn't require outrageous amounts of capital or a high degree of net worth to become a franchisee. Today, approximately 250 franchise concepts, spanning every imaginable field, have initial investments requiring less than $50,000. The IFA, in its Profile of Franchising report, notes that 75% of all companies studied had initial investment levels of below $250,000. "What really drives up the cost of investing in a franchise are things such as building a large retail or lodging site, maintaining significant equipment or stocking the inventory necessary to run the business," said IFA President, Don DeBolt. If all that overhead is not in the budget, DeBolt suggests considering a lower-investment franchise that can be operated from a home office, doesn't demand a large inventory or expensive equipment and doesn't require more than a few employees.

Nevertheless, there are certain set expenses that are universal to acquiring any franchise. Most franchises require a payment of an initial fee that allows the franchisee to operate the business under the franchise company's trademark. Most franchise systems (70%) charge an initial fee of $30,000 or less. Then there is the matter of royalty payments to the franchisor. In 80% of the cases, those royalties are calculated as a percent of revenue, usually in the range of 3% - 6% of monthly gross sales.

In consideration of those payments, the franchisee normally receives help in selecting a location, negotiating a lease, hiring and training employees, securing equipment and establishing a supply line. Reputable franchisors will continue to provide training and support for as long as the business continues in operation. In addition, technology has greatly improved communications via tools such as secure intranet, distance learning and online supply ordering capabilities. And the icing on the cake…approximately one third of all franchises offer some type of franchisor-sponsored financing.

The McDonald's and Dairy Queens may have established the category but it is the service sector that is creating the news today. 1-800-Got-Junk (www.1800gotjunk.com) will haul away trash items from residences and commercial locations. They are the first to formalize the industry. Workers wear uniforms and arrive in trucks emblazoned with the corporate logo. The company features set pricing. Indexonly.com has developed an online business directory that provides users with global access to comprehensive lists of products and services in any state, city or town in the US and Canada.

The downside when considering a new or unique concept is the obvious lack of operating history. Since prospective franchisees cannot monitor a new franchise's growth and acceptance in the marketplace or interview many franchisee's, they should instead review the backgrounds of company executives and founders as well as check all references, research professional credits and talk to expert consultants in that industry.

Finding the Inside Scoop

Luckily the franchise industry is one of the most heavily researched, not to mention regulated. Under the FTC's Franchise Rule and numerous state laws, franchise systems must provide prospective franchisees with detailed information explaining the terms of the franchise relationship, including a long list of items ranging from bankruptcy history to franchisor's obligations to territorial protection.

The IFA also provides access to a number of helpful background publications including the FTC's Consumer's Guide to Buying a Franchise. The IFA also sells a 300-page Franchise Opportunities Guide with information on the world's leading franchise companies including investment requirements, company history and key contacts, legal and financial advice for the prospective franchisee, answers to frequently asked questions about buying a franchise and a self-evaluation section "Is franchising for you?" All IFA publications can be accessed via www.franchise.org, which also features the "Franchise Opportunities Mall Online," containing information on nearly 1,000 franchise companies that can be searched by name, category or investment level.