Five Levels of Franchising

     There is no question that franchising is an important part of our economy.  The concept of franchising dates back to 2000 BC, but in the last hundred years it has expanded and become more sophisticated, and regulated.  

       The first major franchises in this country were what I call Product Franchises.  They included franchises for automobiles, tires, and gasoline.  Franchising then expanded into Business System franchises. 

     Franchising success is phenomenal.  Franchises are involved with hundreds of industries and thousands of brands.  The International Franchise Association (IFA) says franchising had a great year in 2015, and 2016 looks even better.  The IFA also says franchise employment rose 2.9% in 2015 compared to 2.4% growth for the total non-farm private sector.  The IFA estimates that the Gross Domestic Product (GDP) for the franchise sector is forecast to increase 5.2% to $521 billion as compared the U.S. GDP of 3.3%.  Franchising is big business, but is a marketing system that allows an individual entrepreneur to be the owner.

    The first level of franchising is the Franchisor.  This is the person(s) who has a successful business model and chooses to franchise the concept.  Normally, two or three current operations must be showing strong success to prove the concept is franchisable. 

      Franchising a concept requires an investment of several hundred thousand dollars.  Manuals and training programs have to be developed, as well as completing and filing the Uniform Franchise Offering Circular, which is required by the Federal government and all Registration States.  The Franchisor then collects an initial franchise fee and a royalty fee from the franchisee.     

     The second level of franchising is the single-point franchise.  Some franchisors want the owner personally involved in the business and will not award more one franchise initially to an individual franchisee.  

       The third level of franchising is the franchisee that owns multiply locations.  This is becoming very common.  A successful franchisee may be awarded a second franchise.  Some franchisors require a prospect to commit to 2, 3, or even 6 locations initially.  The International Franchise association says 40,000 franchisees operate 200,000 franchises. 

       The fourth level of franchising is the Regional Franchisor.  This is an investor who buys the rights to sell and supervise franchises in a specific area.  The Regional Franchisor then shares the initial franchise fee and royalty fee with the Franchisor.  The Franchisor may require the Regional Franchisor to own and operate one location as a sales and training tool. 

      The fifth level of franchising is the Area Developer.  This is where one deep-pocket individual or cash-rich corporation buys the rights to an area and agrees to build-out all locations without selling any franchises. 

    Selling regions or areas for development might achieve faster growth for the Franchisor, but gives up some control and income. 

     The term Master Franchisor is sometimes used to refer to the Franchisor and sometimes it refers to a Regional Franchisor.  Clarify how the term is used.

     To learn more about franchising, read Business Fits by Terry Oliver Lee.  The book is available as an e-Book or a paperback on Amazon.  

        I also give talks on The Five Levels of Franchising.

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