You are an executive who isbeing displaced or who is dissat-isfied with the way you are beingtreated by your company.Recently you have been thinkingabout putting your resume on thestreet, but more often than notyou have found yourself thinkingabout going into business foryourself.

Whenever you think about goinginto business for yourself, youthink about the horror stories andstatistics you read in USA Todayand the Wall Street Journal aboutthe failure rate of independentbusinesses. Those statisticsdampen your desire to own yourown business.

Yet every week in those samenewspapers you see ads bycompanies offering franchiseopportunities. If you want to beself employed and are intriguedby the idea of operating a fran-chise and want to find out moreabout selecting the right one foryou, read on.

What Is Franchising?Franchising is one of three

business strategies a companymay use in capturing market share.The others are company ownedunits or a combination of companyowned and franchised units.

Franchising is a business strate-gy for getting and keeping cus-tomers. It is a marketing systemfor creating an image in theminds of current and future cus-tomers about how the company’sproducts and services can helpthem. It is a method for distribut-ing products and services thatsatisfy customer needs.

Franchising is a network of inter-dependent business relation-ships that allows a number ofpeople to share:

■ A brand identification

■ A successful method of doingbusiness

■ A proven marketing and distribution system

In short, franchising is a strategicalliance between groups of peo-ple who have specific relation-ships and responsibilities with acommon goal to dominate mar-kets, i.e., to get and keep morecustomers than their competitors.

There are many misconceptionsabout franchising, but probablythe most widely held is that youas a franchisee are “buying afranchise.” In reality you areinvesting your assets in a sys-tem to utilize the brand name,operating system and ongoingsupport. You and everyone inthe system are licensed to usethe brand name and operatingsystem.

The business relationship is ajoint commitment by all fran-chisees to get and keep cus-tomers. Legally you are bound toget and keep them using the pre-scribed marketing and operatingsystems of the franchisor.

To be successful in franchisingyou must understand the busi-ness and legal ramifications ofyour relationship with the fran-chisor and all the franchisees.Your focus must be on workingwith other franchisees andcompany managers to marketthe brand, and fully use theoperating system to get andkeep customers.

Throughout this article we willdiscuss in detail some of the ben-efits of conducting business aspart of a larger group.

Page 10 Executives’ Guide to Franchise Opportunities 2001

What Is Franchising?Robert Gappa

Franchisingis one ofthree businessstrategies a companymay use incapturingmarketshare.

Other franchisees and companyoperated units are not your com-petition. The opposite is true.They and you share the task ofestablishing the brand as thedominant brand in all marketsentered and reinforcing the cus-tomers’ familiarity with and trust inthe brand. So in this respect youare working as a team with othersin the system. Other franchiseesshare with you the responsibilityfor quality, consistency, conve-nience, and other factors thatdefine your franchise and insuresrepeat business for everyone.Increasing the value of the brandname is a shared responsibility ofthe franchisor and franchisee.

An “ownership mentality”destroys the reason franchisedand company-operated units aresuccessful. Think about it. If youthink you “bought” a franchise,you become an “owner” andbegin to think and act like anowner. You will want to changethe system because of yourneeds, you will wonder what youare paying the royalty for, and youwill begin thinking of other fran-chisees as your competitors. Forthese and many other reasonsyou do not want to think of your-self as an “independent owner.”

As a franchisee you own theassets of your company, whichyou have chosen to invest insomeone else’s brand and oper-ating system and ongoing sup-port. You own the assets of yourcompany, but you are licensed tooperate someone else’s busi-ness system.

Finally, your desire to become afranchisee must be grounded inyour belief that you can be moresuccessful using someoneelse’s brand and operatingaccording to their systems andmethods, than you could if youopened up your own indepen-dent business and competedagainst them. You want to lookfor a franchisor who is building asystem of interdependent fran-chisees who are committed togetting and keeping customers,to growing faster than the mar-ket, to growing faster than thecompetitors, and to do all of thatwith high margins. When youdiscover a franchisor who under-stands this relationship, youhave a franchisor worth yourconsideration.

The Strength ofFranchisingFranchising is the most popular

system for growing a businessin the United States today.According to every governmentsurvey, franchising has experi-enced explosive growth since themid-70s and is expected to bethe leading method of doing busi-ness in the new century.

In the United States, there areover 2,500 franchise systems.These systems have in excess of534,000 franchise units, whichrepresent 3.2% of the total busi-nesses. This 3.2% of all busi-nesses controls over 35% of allretail and service revenue in theU.S. economy.

Franchising’s advantages overgoing into business for yourselfinclude; opening quicker, experi-encing success sooner, devel-oping a customer base faster,having less risk and being moreprofitable.

Your success as a franchisee isbased on the proven success ofthe franchisor to operate com-pany units and upon the suc-cess of existing franchisees. [Itshould be able to show that thebusiness can be successful invarious markets and in differentconditions.]

Franchisingis the mostpopularsystem for growinga businessin theUnitedStatestoday.

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A company franchises because itwants to quickly and in greatnumbers replicate its successfulcompany operations without sig-nificantly increasing its debt.Because it has been successfulat teaching its own employees tooperate the business, the compa-ny believes it can repeat thesame success by teaching othersto do it.

In franchising, the operating sys-tem becomes identified with thebrand or trade name that youlicense as a franchisee. Eachfranchise system uses precise

methods to service and satisfythe customer. By documentingthese practices, the franchisorinstitutionalizes the buying expe-rience. Because customers don’tlike surprises this consistency inoperations, unit to unit, buildscustomer loyalty to the brand.

Franchising is successfulbecause we Americans are peo-ple of habit and are brand-drivenwhen we purchase goods andservices. We trust brands that wesee everywhere, every day. Wetend to be loyal to a product orservice delivered to us the sameway all the time.

Investing in aFranchiseIn reality you are taking yourassets, which you own, andinvesting them in someone elses’brand and operating system. Youwill always own your assets. Youwill always own your corporation.

But you will “do business as”(dba) a licensee of the franchisor.

Before You Select AFranchise. . . Step 1: Evaluate YourselfYour job is to make an informedbusiness decision about whethera franchisor’s business opportu-nity meets your needs andwhether you can provide whatthe franchisor wants and needsin a franchisee.

You need to ask yourself basicquestions:What do you want from life at thistime? What are your wants,needs, and desires? What areyour goals, objectives, anddreams? What are you lookingfor in a business? Have youdecided to leave what you arenow doing–not just the job, butthe profession?

Have you made a decision tobecome a part of another organi-zation? Remember that in fran-chising you joined someoneelse’s business. You are going tobe using their marketing systemto generate customers and theiroperating system to satisfy them.

Do you have the kind of person-ality that can accept running thebusiness according to someoneelse’s plan without feeling that itcompromises your individuali-ty? Do you have an interest indoing this kind of work for thelength of the agreement? Haveyou ever worked for one com-pany for five or ten years? Doyou have related skills, knowl-edge, abilities, and work-relat-ed experiences similar to theones required for running thefranchise you are considering?Do you have the financialresources to open and operatethe business successfully? Canthe business support yourlifestyle needs? Which of thefranchises you are reviewing

meets your financial needsshort and long term?

Step 2: Evaluate the Franchise OpportunityEvaluate the legal documentsfrom a business perspective.Determine whether the franchisorhas territory policies that mightmake franchisees less competi-tive in a highly competitive envi-ronment. Many prospective fran-chisees erroneously believe thathaving a large territory is best forthem. It could, in fact, be theworst thing for them. For exam-ple, if you have too few fran-chisees in a market and competi-tors have more units than youhave, it could leave you at a dis-advantage in terms of dominatingthe market for your product orservice in your area.

Look for a franchisor who cancommunicate a strategy not justfor market presence but for dom-inating markets; look for a fran-chisor interested in establishing acompetitive edge and increasingmarket share. If a franchisor can-not talk about these issues, it isentirely possible the franchisor isusing franchising as a way togenerate franchise fees and roy-alty revenue rather than to estab-lish a competitive position in themarketplace.

Evaluate the marketing/advertis-ing fee. Many franchisors andprospective franchisees erro-neously believe that a low mar-keting fee is a good thing. In fact,the marketing fee should be relat-ed to the amount of money eachfranchisee needs to contribute tosupport an advertising campaignthat will generate enough newand repeat business for each ofthem. A 1% advertising fee maylook good now, but when youneed 5% from everyone to becompetitive, it might not be possi-ble to convince all franchisees toparticipate.

Your success as a franchiseeis based on theproven success of the franchisorto operatecompanyunits andupon thesuccess of existingfranchisees.

Page 12 Executives’ Guide to Franchise Opportunities 2001

Evaluate the effectiveness of theFranchise Advisory Council.Does the franchisor incorporatethe franchisees’ input in the deci-sions that affect the future direc-tion of the system? Does the fran-chisor involve franchisees’ inputin decisions?

Be sure you can answer thequestion “How will I make moneyin this business?” There shouldbe a very simple answer to thisquestion. It will not violate earn-ings claims restrictions for thefranchisor to answer it becauseyou are not asking “How muchmoney will I make?” You simplywant to know how money ismade in the business. Spend asmuch time as possible speakingto existing franchisees. Ask themif they would do it again. Howlong did it take them to recouptheir investment? How muchmoney are they making? Doesthe operating system work? Arethey provided with good market-ing programs? Do the fran-chisees get along well with eachother and with the franchisor?What are the major problemswith the business? Do they useall of the operating system? Is thefranchisor’s ongoing support ade-quate and helpful? The answers

to these questions will help youmake your decision.

Step 3: Evaluate theFranchisor’s Business PlanThe franchisor should have abusiness plan for the system thatcovers at least the length of theagreement you are being askedto commit to. Ask for the plan forthe market where you are goingto locate the operation. Ask fortheir analysis of the competition.Ask how many units are beingplanned for your area and whythat many. Why not more, why notless? Ask how much is going to bespent on marketing in your area.

Ask to look at the operationsmanuals or at least to see an out-line of them. This is importantbecause the operations manualsare your guideline to a successfuloperation. You need to feel com-fortable that they are completeand clear and meet your abilities,needs, and goals.

Ask to receive a full explanationof the initial and subsequenttraining programs. Ask how peo-ple are trained. Is it classroom orhands-on practice? Are therecase studies and discussions oris it straight lecture?

Ask for a full explanation of thepre-opening assistance offeredby the franchisor. Understandany help franchisors give for siteselection and lease negotiation.Be clear about what ongoing sup-port the franchisor provides to thefranchisees.

Author ProfileBob Gappa is president ofManagement 2000, Houston, TX, afirm specializing in assisting compa-nies in the use of franchising as agrowth strategy. A respected leaderin the field of franchise consulting,Bob’s 25 years’ experience includesdesign and implementation of sys-tems in franchise development andoperations, compensation planning,human resource management,strategic planning, and marketingstrategies. Bob has an in-depthunderstanding of the process ofconnecting franchisors with fran-chisees and is currently offering aprogram for franchisors on the sub-ject entitled “How to Recruit andSelect More Qualified Franchisees.”Management 2000 has beenresponsible for innovative thinking ingetting people to understand fran-chising as a business strategy.Management 2000 has offices inHouston, Texas and Edmonton,Alberta, Canada. ❖

Be sureyou cananswer the question“How will I makemoney in thisbusiness?”

In Summary . . .

■ Franchising is a businessstrategy centered around astrategic alliance betweengroups of people who sharespecific relationships andresponsibilities in addition tobeing licensed to use a fran-chisor’s brand name and pro-prietary way of doing busi-ness.

■ Other franchisees arenot your competitors;they work in tandem withyou to establish and rein-force brand-name domi-nance in your area.

■ Keep in mind that you own theassets of your company but arelicensed to operate someoneelse’s business.

■ Franchising is successfulbecause we Americans arepeople of habit and are brand-driven.

A Franchise UPDATE Publication Page 13