The Business World

The International Franchise Association (IFA) was established in 1960 to build and maintain a favorable

economic and regulatory climate for franchising. It is the only association serving as the voice for

franchising in the United States and is a major participant in the international franchise arena. IFA's

mission is to enhance and to safeguard the business environment for franchising worldwide. Today, more

than 75 industries operate within the franchising format, and IFA's membership and network encompass

some 1,000 franchisors, 350 suppliers, and over 7,000 franchisee members.

Unhindered opportunity for all Americans is essential to our economic and political well-being. To retain

leadership in bringing new products and services to the marketplace both in the U.S. and abroad, franchise

systems continue to provide the widest possible entrepreneurial opportunities for everyone. They also

provide expanding opportunities and strong growth possibilities for minorities, women, veterans, and the

handicapped. Franchised businesses are rapidly adding jobs to a broad range of industries. In addition,

franchise companies are major contributors in the development of management and technical skills which

are vital in the creation of an experienced work force, which is so important in building and strengthening

both American and foreign economies.

The mutually beneficial relationship that exists between franchisors and franchisees makes franchising

unique in the world of business. It provides entrepreneurs with an affordable means of accelerating

expansion, achieving development goals more quickly than might otherwise be the case and with far less

risk. Similarly, franchisees have a head start because of the support provided by the franchise system.

Franchising is, literally, being in business for yourself but not by yourself. Whether it's accounting and

financing, advertising and public relations, personnel management, purchasing or inventory control,

franchisors are there to provide “hands on,” one-to-one assistance. While franchising does provide

opportunities, it does not create miracles. Franchisees combine knowledge and resources with

entrepreneurial drive and spirit to form a business relationship unique to franchising. Franchising is a field

of expanding economic opportunity in which each and every person can play a part based on talent,

initiative, and dedication.

Franchising is a method of distributing products or services. At least two levels of people are involved in a

franchise system: (1) the franchisor, who lends his trademark or trade name and a business system; and (2)

the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's

name and system. Technically, the contract binding the two parties is the “franchise,” but that term is often

used to mean the actual business that the franchisee operates.

Imagine a store owned by an individual with a particular concept. If the business is successful, the owner

may develop a second or third store and hire employees for the day-to-day operations. At that point, if the

entrepreneur still wants to expand but prefers not to operate additional stores himself or herself, he or she

may decide to “franchise” the store name and business system to an independent business person known as

a franchisee. In return, the entrepreneur may ask for an initial fee and/or a continuing royalty payment

based on a percentage of that franchisee's sales. The business is now franchised.

FAST FOOD RESTAURANT, HOW CAN I TELL WHETHER THAT

RESTAURANT IS OPERATED BY THE FRANCHISOR OR A FRANCHISEE?

It's difficult to tell just by visiting the restaurant. However, if it is a franchise, there should be some

signage in the restaurant which indicates that the restaurant is independently owned and operated. Many

companies have stores that are operated by franchisees but also have stores that are company owned and

operated. So it's entirely possible that of two stores with the same name, one may be operated by a

franchisee and the other operated by the company. In either case, the products, services, and quality

should be the same.

The answer may surprise you. By 2001, there were 767,483 business establishments in all domestic

franchise systems (either owned by franchisors and franchisees), which employed almost 10 million

people, with direct output close to $625 billion, and a payroll of $230 billion. These establishments

account for significant percentage of all establishments in many important lines of business: 56.3% in

quick service restaurants, 18.2% in lodging, 14.2% in retail food, and 13.1% in table/full service

restaurants.

In business format franchising, the franchisor prescribes for the franchisee a complete plan, or format, for

managing and operating the establishment. The plan provides step-by-step procedures for major aspects of

the business and, anticipating most management problems, provides a complete matrix for management

decisions confronted by the franchisees. The major advantage of buying a business format franchise is that

the “system,” the means for distributing goods and or services, has been developed, tested, and associated

with the trademark. As a result, rapid expansion of a successful retail concept can occur more quickly than

century. In 2001, comparing business format franchising to product distribution franchising, business

format franchising had about 4.3 times as many establishments, employed 4 times as many workers,

generated 2.5 times the payroll, and produced nearly 3 times as much output.

1 Dave Thomas and Michael Seid, Franchising for Dummies 13 (IDG Books Worldwide, Inc. 2000).

FRANCHISING?

As the economy becomes more service and technology oriented, as more women enter the work force, and

as a larger percentage of the population grows older, growth areas in franchising are responding to these

changes. The industry categories in franchising that are expected to continue to experience rapid growth

for the start of the new century are service-related fields such as home repair and remodeling, carpet

cleaning, household furnishings, and various other maintenance and cleaning services; business support

services including accounting, mail processing, advertising services, package wrapping and shipping,

personnel and temporary help services, and printing and copying services; automotive repairs and services

such as quick-lube and tune-up; and other areas such as environmental services, hair salons, health aids

and services, computers, clothing, children's services, educational products and services, and

telecommunications services.

While it is important to consider industry growth before investing in a franchise, it is more important to

analyze an individual franchise company's track record, keeping in mind that quick growth does not always

spell success. A franchise organization that grows too quickly might not have a service team in place to

support all of the units properly. Overall, long range trends indicate a steady, solid growth in business

format franchising. Some will fall by the wayside, as is natural with any business, but others may well be

the “household name” franchise success stories of tomorrow.

FRANCHISING?

Virtually every business form you can imagine. The International Franchise Association now lists more

than 75 different categories to describe its members. Typically, you would think of fast food and

restaurants first when thinking of franchising, but franchising covers the spectrum from A to Z – from

advertising/ direct mail to construction to dating services to home inspection to security systems to video

sales and rentals. Printing and copying services, maid services, computer services, cleaners, lawn care

services, real estate, hotels and motels, and travel agencies are excellent examples of industries that have

successfully embraced franchising.

DISADVANTAGE? DON'T CONSUMERS WANT VARIETY?

Increasingly mobile consumers have come to depend on and appreciate the consistent quality of franchised

products and services. Today, no matter where they go, people expect and want the same quality, which is

why consumers so often stop at franchised establishments. The ability to easily recognize a franchised

store, restaurant or hotel from the outside guarantees there will be no surprises or disappointments on the

inside. Quite simply, the public knows what to expect and likes it that way.

Among the points which IFA recommends for investigation are:

a. the type of experience required in the franchised business;

b. a complete understanding of the business;

c. the hours and personal commitment necessary to run the business;

d. who the franchisor is, what its track record has been, and the business experience of its officers

and directors;

e. how other franchisees in the same system are doing;

f. how much it's going to cost to get into the franchise;

g. how much you're going to pay for the continuing right to operate the business;

h. if there are any products or services you must buy from the franchisor and how and by whom

they are supplied;

i. the terms and conditions under which the franchise relationship can be terminated or renewed,

and how many franchisees have left the system during the past few years;

j. the financial condition of the franchisor and its system.

Both the Federal Trade Commission (@ www.ftc.gov) and IFA (@ www.franchise.org) have many helpful

publications and resources. Equally important, IFA recommends that you engage an attorney to examine

the contract. It is important to work with an attorney who understands franchising, especially the antitrust

laws, the trademark laws, the Federal Trade Commission Franchise Rule, and applicable state laws. It is

also recommended that you ask a competent accountant to examine your anticipated expenses, your

financing needs, and your prospects for achieving your desired level of profitability before you sign any

agreement.

It is a federal regulation which requires franchisors to prepare an extensive disclosure document and to

give a copy to any prospective franchise purchaser before he or she buys a franchise. The disclosure

document typically used to comply with the Rule is called a Uniform Franchise Offering Circular, or

UFOC. Within the UFOC are many different categories of information about the franchise, including

some of the information described in the response to Question 9 above. Required fees, basic investment,

bankruptcy and litigation history of the company, how long the franchise will be in effect, a financial

statement of the franchisor, earnings claims (if the company makes them)… all are presented in this

disclosure document. IFA recommends that both your attorney and your accountant review the UFOC and

your franchise agreement. For further information from the FTC, or to order a free publication from the

FTC entitled Consumer Guide to Buying a Franchise, call (202) 326-2222. This Guide can also be

DISCLOSURE DOCUMENT IS TRUTHFUL AND ACCURATE?

Even though inaccuracy and misrepresentation carry civil and sometimes severe criminal penalties, there is

no way to be absolutely sure. The disclosure document makes fraud and deception less likely. However,

because the franchisor has -- under penalty of law -- answered in written (or electronic) form a variety of

very important questions you can use to judge the offer, IFA recommends that you carefully consider the

information provided and evaluate the materials, including the history and reputation of the company and

its officers, with the assistance of your lawyer and accountant. Also, be absolutely sure you talk to a

substantial number of others who have already obtained franchises from the company you're considering,

and ask them to verify any information you question. Learn if they are “satisfied customers” of the

franchisor.

Fourteen states require franchise companies to file or register their franchise offerings with a state agency:

California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode

Island, South Dakota, Virginia, Washington, and Wisconsin. These states, plus Oregon, also have

disclosure regulations similar to those of the Federal Trade Commission. By means of so-called "business

opportunity laws," certain other states regulate the offer and sale of a "business opportunity" which may

include the offering of a franchise under the state's definition of a “business opportunity.”

STARTED?

The first thing to do is to identify companies offering franchises. IFA's Franchise Opportunities Guide

gives a comprehensive list of franchise companies in more than 75 kinds of businesses. The Guide, which

costs $25.00 (including shipping and handling), is available by mailing a request and check or money order

to IFA Publications, P.O. Box 1020, Sewickley, PA 15143. Orders may also be placed by calling 1-800-

543-1038, or visiting IFA’s online bookstore at www.franchise.org, where you can find other relevant

sources to assist in your decision to buy a franchise. The Guide is also available online at the IFA website

You should contact the companies directly, and “shop wisely.” “Shopping wisely” requires that you

determine how much you can afford to invest and where to obtain financing. Careful investigation prior to

purchasing a franchise also necessitates understanding the UFOC. You need to examine what the

franchise relationship entails. For instance, you need to inquire into the training and support provided,

assistance in finding and developing a location, and the sources of inventory and supplies. You should

research the companies’ growth and prospects for future growth. You should also seek advice from

professionals and business people you respect. By shopping wisely, you can make an informed decision

on whether to purchase the franchise.

Investment requirements differ tremendously. It all depends on the industry and the type of business.

Total start up costs can range from $20,000 or less, to over $1,000,000, depending on the franchise

selected, and whether it is necessary to own or lease real estate to operate the business. The initial

franchise fee for most franchisors varies between $10,000 and $30,000. Seventy percent of franchisors

charge an initial franchise fee of $40,000 or less. The average investment, excluding real estate costs, is

between $350,000- $400,000. You must discuss the initial fees and opening costs with individual

companies, although IFA's Franchise Opportunities Guide can supply general information.

A successful franchisee should be suited to the industry of which he or she is a part, suited to the particular

franchise company, and suited to the franchise system generally. Important questions to ask yourself

include: Am I suited to the industry physically and by experience, education, learning capacity,

temperament and financial ability? What type of work is most appealing to me? For example, do I enjoy

working with food, mechanical things, people, real estate, books and recordings, sporting goods, etc.? Am

I prepared to work hard and take financial risks? Do my advisors, family, and friends think I am adaptable

and trainable? How do I react to controls? Am I a loner––resenting authority and restraints, or can I

accept guidance and direction happily? If I prefer to act as a passive investor in the franchise, will the

company accept this? How do I personally feel about the company's image and products and services?

The right answers to these types of questions help determine your potential success as a franchisee.

BUSINESSES?

“Success” is a subjective term. Studies that claim high success rates of a franchise business compared to

independent businesses should be taken with a “grain of salt”. There are so many variables – the type of

business, the location, the general business conditions, and experience and capabilities of the business

owners and operations – that it would be difficult to make such comparisons. While the franchisor

provides the franchisee with a “turnkey” business operating system, the success of the business ultimately

depends on the operator.

The Small Business Administration says most businesses fail from lack of two things -- management skills

and adequate capitalization. To insure against these risks, you should be sure that you have adequate

capital to operate the business and meet your other financial needs. With a franchised business, your

franchisor should be eager to help you overcome problems. Your hard work and the franchisor's expertise

constitute a strong team.

No one can be 100% sure. That's why you must be particularly wary of any company which "guarantees"

profit or certain success. If you hear a claim about a company that sounds too good to be true, it probably

is. Investigation of all earnings claims made by a franchisor is especially important. But, regardless of

earnings claims, you must recognize that your success can come only through hard work. Success or

failure ultimately depends on you.

In exchange for the security, training, and marketing power of the franchise trademark, you must be able

and willing to give up some of your independence. If you are a person who likes to make most decisions

on your own or to chart the course of your business alone, a franchise may not be right for you. As a

franchise owner, you must comply with the various controls and procedures established by the franchisor.

Then, too, all successful businesses require a lot of dedication and plain, hard work. You must be prepared

to make that commitment.

OF THE INTERNATIONAL FRANCHISE ASSOCIATION?

Companies that belong to IFA must meet certain membership requirements. They must have a satisfactory

financial condition and comply with all applicable franchise laws. In addition, all members must agree to

abide by the Code of Ethics. IFA members are kept abreast of every change in franchising laws. IFA

provides continuing educational programs for members on how to conduct their businesses. IFA offers

programs like a Franchise Sales and Disclosure Law Compliance Training Program, an Ombudsman

Program, and an Investor Awareness and Education Program. IFA members receive the latest information

about topics such as improving relationships with franchisees, use of technology, public relations,

marketing, advertising, field operations, networking, and procedures that a company with an eye to the

future must know and implement to compete in the marketplace. IFA members are committed to the

future… to learning… to succeeding.

Among the most important trends in franchising today are the internationalization of franchising, the

emergence of women and minorities in franchising, and the increased use of technology. All of these have

profound and positive effects on franchising and make it an even more dynamic method of doing business

today.

International Franchising

• Franchised businesses continue to grow in all corners of the world. Domestic franchisors in

many countries are increasingly establishing franchises across borders. More than 400 U.S.

franchise systems operate internationally. International franchising has been successful because

consumers around the world recognize famous brands as symbols of quality, consistency,

service, and value.

• If you are considering the purchase of a franchise, you may want to not limit the scope of your

search to franchisors in your home country. Increasingly, franchisors are seeking franchisees

internationally, and a foreign-based franchisor may provide you with the franchised opportunity

which you are seeking.

• In many cases, foreign-based franchisors offer individual franchises to operate a single unit.

They also often offer development rights to operate multiple units and “master franchise” rights.

The latter is, essentially, an opportunity to be the “franchisor” for the foreign-based concept in

your country or a portion of your country.

• Of course, international franchising presents some different challenges than domestic

franchising. For example, if goods will come from overseas, you may need to be aware of

various duties, tariffs, and transportation requirements. You also need to consider language and

cultural differences. For instance, if you are a franchisee in a different country from the

franchisor’s home office, the franchisor’s system may need to be modified for use in your

country.

Minorities and Women in Franchising

• Increasing numbers of minorities and women are discovering that franchising can be a good

opportunity for everybody. While franchising is not a panacea, it provides a means for

mitigating the traditional obstacles that otherwise competent and capable small investors,

particularly women and minorities, face: lack of business experience and capital. Franchisors

provide managerial training and assistance on an on-going basis and, in some cases, arrange for

property leases, provide equipment financing and sale-leaseback programs, and assist franchisees

in obtaining financing.

• As a result of a strong economy, women are increasingly in leadership positions in franchising

whether through establishing new companies, becoming single and multi-unit franchisees, or

having high-level positions at corporate headquarters.

• According to the Center for Women’s Business Research, as of 2004, there are an estimated 10.6

million privately-held, 50% or more women-owned firms in the U.S., accounting for nearly half

(47.7%) of all privately-held firms in the country. These firms employ 19.1 million people, and

generate $2.46 trillion in sales.

• As the population of minorities in the U.S. population continues to rise, minority franchising in

cities is expected to rise.

• IFA’s Minorities in Franchising Committee and the IFA Educational Foundation’s Diversity

Institute provides research, education, and outreach programs to expand the opportunities for

minorities in franchising.

• IFA’s Women’s Franchise Committee (WFC) is dedicated to inspiring and encouraging women

in franchising by creating a network of business professionals dedicated to strengthening the

success of women in franchising. The WFC has created a number of programs and resources in

order to achieve this goal, ranging from “how to” guides and conferences to local networking

chapters.

Technology and Franchising

There are several trends related to the use of technology in franchising today. First, many franchisors use

the internet to communicate with franchise owners and suppliers through secure extranets in order to share

critical information, facilitate discussion among the franchise network, post operations manuals and

updates, disseminate news about ad campaigns, engage in supply chain management, and gather sales

reports automatically and without the need for more labor-intensive data entry. Second, franchisors use

the internet to advertise their network to customers. Third, some franchisors use the internet to engage in

business-to-consumer (B2C) e-commerce, often with the involvement of franchisees. Fourth, many

prospective franchisees glean information and make contact with franchisors using the internet. Some

franchisors now report that they get more sales leads from the internet than from any other source. Fifth,

some franchisors have started providing disclosures to prospective franchisees by electronic means. Sixth,

and finally, franchisors make extensive use of technology in offering their services directly to consumers --

such as networks of businesses that offer website design and web hosting. The prospects for, and reality

of, involving technology in franchising make this a very exciting time to own a franchised business.

FOR MORE INFORMATION CONTACT:

INTERNATIONAL FRANCHISE ASSOCIATION

1350 New York Avenue, N.W., Suite 900

Washington, DC 20005-4709

Telephone: (202) 628-8000

Fax: (202) 628-0812

www.franchise.org

NOTE: Unless otherwise stated, the sources for facts in this booklet are from Economic Impact of Franchised Business: A

Study for the International Franchise Association Educational Foundation, by PriceWaterhouseCoopers for IFA Educational

Foundation, 2004; and The Profile of Franchising (Volume III): Statistical Profile of the 1998 Uniform Franchise Circular

(UFOC) data, prepared by FRANDATA Corporation for IFA Educational Foundation, February 2000. Both of these

publications are currently available from the IFA Educational Foundation. You can also download them for free from

www.franchise.org/20questions

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