Franchising: Current Condition, Challenges and Considerations

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According to Entrepreneurship Theory and Practice (ET&P), more than 10 percent of businesses in the United States are franchise.

These businesses have $2.1 trillion economic value, said International Franchise Association (IFA). They support around 18 million jobs and are expected to create a total output of $802 billion in 2013.

Considering its impact to the country's economy, this seemingly miniature sector is a giant in a dwarf's clothing.

For Entrepreneur magazine special projects editor Tracy Stapp, these figures make for cautious optimism. According to Stapp, franchise industry leaders believed that the sector's showing could be stronger than its current performance if only public policies and economic recovery are not weighing them down. Quoting IFA, Stapp pointed out how franchisees are getting hit from every turn making slow and steady the safest strategy at this point.

Founder of Subway Restaurants Fred Deluca agreed. In a CNBC interview, Deluca said it would be impossible for him to start Subway if he did it today. Deluca believed that the environment for entrepreneurs in the United States has worsened due to the growing number of regulations. From the Affordable Care Act (Obama Care) to payroll tax, newbies in the small business industry are faced with tough government regulations.

Credit: Wikipedia Commons

How then would small business meet the financial challenges of the aforementioned factors?

Like competition, government regulations are there to stay. Franchisors should offer a franchising package that may compensate for the franchisee's losses due to government regulations without necessarily passing on all the burdens to the consumers. Below are two suggestions that may be helpful to small business owners interested pursuing franchising:

1.) Offer beyond-agreement support. Modest revenue from a franchise with a franchisor that provides useful training and support may be perceived as having better value over a franchise with relatively higher revenue but receives less training and support from its franchisor. The challenge for small business owners intending to franchise is to offer beyond the technical skills and products.

For instance, Oklahoma-based drive-in fast food restaurant chain Sonic Drive-In has a franchise advisory council that reaches out to franchisees for their concerns and suggestions. Other franchisors in the same industry may not offer the same benefit.

Staffing giant Express Employment Professionals, also headquarters in Oklahoma, does it differently. Aside from motivational meetings and a dozen of sales and marketing training events yearly, it also rewards managers that meet productivity goals with an all-expense-paid trip. Moreover, franchisees receive 10 percent more of the gross margin, said Robert Funk, Express' chairman and CEO.

After drafting a strategic franchising plan, franchisors' next assignment is to convey effectively that their franchising package is the better option over competitors'.

2.) Capitalize on the industry's potential to earn profits. For the socially conscious, a straightforward it's-about-profit description of any business is a little awkward. In all honesty, whether a small business projects social responsible image by reaching out to the local community, hosting fundraising events for certain causes and sponsoring a need-based scholarship, it still boils down to profit.

A franchisor should show prospective franchisees that the business is thriving, and it has competitive standing before its target markets. Every claim of profitability, however, should be backed up with statistics, market research and/or financial documents.

According to Entrepreneur magazine, the top 10 fastest growing franchise industries include children's enrichment and entertainment, fitness, frozen yogurt, hamburgers, health services, retail stores, restoration services, senior car and spa services. Is your business in any one of these industries? Are your target markets concentrated in the area of the franchisee's choosing? Business owners should utilize any driver of profitability that reflects their business' strengths.

Current Developments

A senate bill intended to protect franchisees in California is being deliberated on in the State Assembly. Introduced by District 19 Rep. Hannah-Beth Jackson, the bill would allow franchisees to sue franchisor acting in bad faith while keeping their right to form alliances with other franchisees and/or join existing associations in the franchising business.

Surprisingly, three major trade associations find themselves in three different ends. On one end is IFA opposing the bill on the merit of less government intervention principle while on another is the American Association of Franchisees & Dealers (AAFD) throwing its support to the bill on the merit of a leveled playing field.

When franchisors and franchisees enter into franchise relationships, the former has more control over the process and is in a better negotiating position over the latter. The bill is assumed to circumvent the system putting the two participants at an equal footing.

The National Federation of Independent Business (NFIB), however, expresses neutrality as it weighs on the possible impacts of the bill.

Potential and current small business owners should take into consideration the existence of different perspectives even among major industry players as early as the planning stage. Is there a possibility that the same bill would be adopted in Florida? How about in Texas? Small business owners should keep themselves up-to-date with developments in the franchising sector given the overlap between the legal and business spheres.

 

References:

Combs, James G., Ketchen, David J. Jr., and Short, Jeremy C. 2011. "Franchising Research: Major Milestones, New Directions, and Its Future within Entrepreneurship." Entrepreneurship: Theory and Practice, 35(3): 413+.

International Franchise Association (IFA). 2012 December 17. "Franchise Business Economic Outlook for 2013." http://www.franchise.org/uploadedFiles/Franchise_Business_Outlook_12-17-2012.pdf.

Stapp, Tracy. 2013. "Franchising Trends for 2013." CNBC, January 16. http://www.cnbc.com/id/100384177.

--- 2013. "10 Growing Franchise Industries." Entrepreneur magazine, June 28.http://www.entrepreneur.com/article/226882.

Terry-Cobo, Sarah. 2013. "Selling It: Franchising Is about Relationships." The Journal Record, January 21.

Toscano, Paul. 2013. "Subway 'Wouldn't Exist' If Started Today Due to Regulations: Founder Deluca." CNBC, February 27. http://www.cnbc.com/id/100501700.

Tozzi, John. 2013. "In California, a Bill to Protect Franchise Buyers Gains Ground." Bloomberg Businessweek, May 29. http://www.businessweek.com/articles/2013-05-29/in-california-a-bill-to-protect-franchise-buyers-gains-ground.

 

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