Franchising Your Small Business - the Fly Speck Part Two

"The first examples of franchising as a way of doing business are found in mid-nineteenth century Germany, where brewers set up contracts with tavern owners to sell their beer exclusively in the taverns." - Shane

In the states, Singer sewing machines was the first franchise but soon, a much bigger name surfaced in the 1890s - Coca Cola. In retail you had Ben Franklin stores around 1920 and then the first food franchise A&W Root Beer in 1924. Because of rampant abuse of the franchising system by franchisors in the 1970s (taking franchisees money and then closing down), the FTC drew up the draft guidelines for Uniform Franchise Offering Circulars (UFOCs), the standard to this day for disclosing franchise opportunities to franchisees. Today, franchishing is now a regulated form of business.

Small-scale production, distribution in a wide variety of different geographic locations

Okay, just what the heck does that mean? Well take a burger stand for example. The burgers are made over and over again on a relatively small scale basis (as compared to say an aluminum plant) and these small scale burger factories can be successful in a variety of different locations - people don't travel far for a meal. In addition, we run into a concept called economies of scale - the central office builds the brand name driving traffic to the burger stands and they strike deals with distributors and vendors and ship the materials. (they get volume discounts.)

But, the flip side to this is that you don't necessarily grow the burger stand by increasing sales from your one spot. In a manufacturing plant you can ship your aluminum overseas. With a burger stand you don't necessarily want to ship the burgers overseas. To grow, you must increase locations.

So, remember ... only franchise if you can acheive economies of scale and the product can be sold in a wide variety of geographic locations. Hamburgers can be sold all over the place and the bigger central office (in theory) the better.

Sometimes a physical location is important

It is easier for McDonald's to set territorial limits because of the brick and mortar aspect of the business than it is for say a cleaning service whose franchisee's can get into a customer turf battle because they go to the customer and are not bound by a physical store.

The power of owner negotiation

Franchishing can be effective because it replaces an otherwise "hired employee" on a fixed wage with a business owner whose income is determined by profitable sales.

Standardize, Codify, Easy to pass on

Filing out tax forms is a standard process. Performing open heart surgery is not. That is why you see franchised tax preparers and not so much health care stands. Additionally, the procedures can be codified or written down. "The routines and procedures underlying the operation, from the ordering of supplies to the serving of customers, to the reparing of machinery. For example, Krispy Kreme gives its franchisees specific donut recipes, as well as procedures for how and when to make donuts. ... To control your franchisees' behavior and ensure that your standards are being upheld, you need to write down those standards in the contract you sigh with them. Moreover, when you franchise, one of the things that you lease to your franshisees is an operating manual, or written set of procedures for running the business."

You must be able to train quickly and to the general population - Subway trains its franchisees in two weeks.

To be continued ...