Article Contributed by Lee Flynn
Believe it or not, the franchising system has existed since the late 1850’s, and has been a cornerstone of American business ever since. Since it started out in the late 1850’s, franchising has branched out from its American roots to become a mainstay of corporate risk-management all over the world. The differences between American and international franchising are notable, but the system remains relatively consistent.
Franchises
A franchise is agreeing to use a company’s brand. Someone buying a McDonald’s, for example, is an individual who owns a business that is based on the brand; this is, in essence, what a franchise is.
The modern franchise system was pioneered by A&P in the late 1850s. Until the 1930s, it was an under-utilized structure, but modern franchising exploded in the 1950’s as a result of fast food. Colonel Sanders of KFC recognized the potential franchising offered his business, and the incredible success his company experienced began a fast-food boom.
While this corporate structure began in America, it has since spread to many other parts of the world. Kumon Education, Spar and Bata are all examples of franchises started outside of the U.S.A. Regardless of which country a franchise originates from, many traits are universal.
Individual Business owners
Most franchise owners are individual business owners. Most franchises require a very sizable initial licensing fee, so it it takes the entrepreneurial spark to start a franchised operation. It is estimated that anywhere from 8 in 10 to 50% of businesses will fail within the first ten years. Franchises often require large capital outlays to begin with – a sort of demonstration of good faith from the franchisee towards the company whose brand they seek to utilize – and so it requires a real propensity for risk and solid past results for an entrepreneur to start a business.
While the United States is often criticized for its regulatory burdens, at least in domestic politics, many other countries have much harsher standards of regulation on franchising. Australia has a franchise code of conduct, for example, while Japan is so weary of franchises that it published its regulations under the Japanese anti-monopoly regulations.
Smaller Businesses
Some businesses cannot be franchised, of course. Fast-food and clothing stores might be easy to franchise, but certain businesses are not. Specific and niche tasks that require local knowledge are difficult to franchise. Oriental rug cleaning companies would be difficult to franchise, of course, since the target audience would be such a small niche. Other tasks like plumbing, electrical work or a kitchen cabinet refinishing businesses would be difficult to franchise nationally due to the specificity of local conditions.
Aside from those smaller businesses, a franchise can provide excellent advantages. Though the initial investment is often costly, the brand recognition a franchise can provide more than makes up for it. McDonald’s is known the world over, while “Bobs Local Burger Shop,” is a total unknown. This is the reason Australians are willing to pay extraordinary amounts of money to buy a Wendy’s franchise license, even though Wendy’s is an American company – the credibility of a name-brand, especially one of the major American restaurant brands, more than makes up for the capital outlay it requires to purchase that license. McDonald’s and Burger King are available all over the world and provide a safe harbor for any Americans anywhere else in the world. Being able to attract tourists is another reason franchises are so attractive in the international markets.
Of course, this is a bare bones examination of domestic and international franchise differences. Further reading on this subject include, ‘The Educated Franchisee’ by Rick Basio, ‘The Franchise Fraud’ by Robert Purvin, and ‘Franchising for Dummies’ by Michael Seid and Dave Thomas. Dave Thomas was one of the great pioneers of franchising, as the owner and operator of the Wendy’s Franchise.