What is Franchising? Franchise Industry Overview & Forecast
Updated: Feb 12
The franchise industry has been growing rapidly in recent years, with an increasing number of people looking to start their own business by becoming a franchisee. But many people today still do not understand “what exactly is a franchise?” and what is the opportunity in franchising in the United States? In this blog, we will provide an overview of franchising and take a look at some of the key franchise statistics in the United States, as well as listing some sources of information that can help you learn more about franchising.
What is a Franchise?
In general terms, franchising is a business model in which a franchisor (the owner of a successful business concept) grants the right to use its trademark, systems and business processes to a franchisee (an individual or business entity) in exchange for an initial fee and ongoing royalties. The franchisee operates a business that is similar to the franchisor's business and is required to follow the franchisor's established systems and procedures. Benefits of franchising may include a proven business model that offers less risk of failure than a start-up concept as well as support from the franchisor in training, systems, processes and know-how to grow the business to profitability.
Business Format Franchise
Legally speaking, there are a number of franchise types (for product and distribution rights associated with brands, etc.). However, with regard to selling a business model, a franchise is the offer for sale of a legally defined business format. Business format franchises for sale in the United States are highly regulated to protect the buyer and disclose the contractual franchisor-franchisee relationship according the Federal Trade Commission (FTC) Rule – 16 C.F.R. §436.1 and also by each state in the U.S.
The Franchise Disclosure Document (FDD)
For every franchise business offering, the FTC requires a Franchise Disclosure Document (FDD) along with the Franchise Agreement (FA) contract to be given to the potential buyer which must include specific information about the franchise business for sale. Further, each state in the U.S. may also have its own regulations which place further legal requirements on the franchise offering.
The FDD is very important, because it describes the business and it must be arranged uniformly by all franchisors to include certain information in pre-defined sections (Items 1 – 23). Some FDDs also include historical financial performance information (Item 19) for the franchisor’s existing business which can help the buyer understand what is possible with regard to earning potential and return on investment. The FDD and FA also detail the associated franchise fees and royalties required, and they outline terms and conditions for the ongoing franchisor-franchisee business relationship. In reading the FDDs and getting to learn about the business from the franchisor or existing franchisees, the buyer is then able to compare various business format franchises and decide on which they believe to be the best business type for them.
Considerations for Buying a Franchise
Of course, when buying a franchise, there are many things you should consider when deciding which type or brand of franchise business to buy:
What type of industry and business would you most enjoy?
What is the purpose of the business and do you believe in it?
How much liquid funds do you have available to invest in a business?
How much do you want/need to make to earn a living and have the lifestyle you desire?
What is your expected return on your investment dollars spent and how long will that take?
Will you enjoy growing the business and working with the franchisor?
How will you plan to exit the business eventually?
If you will sell the franchise business eventually, how much can you expect to sell it for in the long run? Is that worth your investment over time and today?
Is the industry opportunity of the business increasing, flat or decreasing?
Is there a territory available to you for the franchise business you want and is there room to grow your business in that brand and territory?
Will the business itself be expected to increase in value over time and what return could you expect to get for it if you do sell it in the future?
Franchise Industry Statistics in the United States
The franchise industry is a rapidly growing sector in the United States, with an increasing number of people choosing franchising as a way to start their own business. Some of the key franchise statistics in the United States include:
There are over 759,000 franchised establishments in the United States.
The franchise industry in the U.S. employs about 8 Million people which means that about 1 out of 8 private sector employees are employed by a franchised business.
The franchise industry is responsible for generating over $500 billion in economic output each year in the United States.
The franchise industry is growing at a rate of approximately 4% per year, with the number of franchised establishments expected to reach over 800,000 by 2023.
An Established Franchise Industry
Some say franchising got its start in the mid-1800s with the Singer Swing machine company starting a franchise in 1851. However, today, franchising is a well-established industry, with a wide range of sectors represented. While food and beverage is the most popular industry of franchise opportunities in the U.S. and accounts for over 40% of all franchised establishments, the U.S. Census Bureau reports that there are now more than 200 sectors/types of franchise businesses.
Some of the most popular sectors of franchising in the US include:
1. Food and Beverage: This sector includes franchises such as fast food chains, coffee shops, ice cream parlors, and restaurants. 2. Retail: This sector includes franchises such as convenience stores, clothing stores, and electronics retailers. 3. Health and Wellness: This sector includes franchises such as fitness centers, massage and spa franchises, and weight loss centers. 4. Home Services: This sector includes franchises such as home cleaning, lawn care, and home repair services. 5. Business Services: This sector includes franchises such as printing and copy centers, tax preparation services, and business consulting firms. 6. Education and Training: This sector includes franchises such as language schools, tutoring centers, and test preparation services. 7. Automotive: This sector includes franchises such as car dealerships, auto repair and maintenance services, and car rental companies.
Interesting Facts about Franchising Today
There are over 4,000 different franchise brand opportunities available today in U.S. and the cost to buy into a franchise business can vary widely. Franchise investments can range from a few thousand dollars (vending machine business) to hundreds of millions of dollars (a Marriott hotel for example). In considering this range, the initial franchise fees can range anywhere from $0 to hundreds of thousands of dollars.
The FDD from the franchisor always details the financial estimate and requirements to purchase a franchise and get started with building the franchise business. Typically, the franchisor will also make available qualifications for a buyer of how much liquid capital (cash available) will be required to consider buying the franchise business. The minimum liquid requirement is an estimate of downpayment (perhaps toward a business loan plus working capital) that is needed to get the business up and running. The FDD also states the fees and royalties which are required to own the business and be part of that franchise system. Surprisingly, the ongoing franchise system royalties from franchise to franchise can range from 1 – 50% percent or more of revenue. However, typical starting royalty percent is around 6 percent of revenue volume depending on the franchise and the industry. Did you know? McDonalds is considered the most successful food franchise with over 38,000 locations worldwide, but 7-Eleven takes the top spot for number of locations with more than 71,000! When it comes to franchise business ownership, according to a 2019 study as cited by frandata.com, about 24% of franchise business owners were women and about 40% of franchisees were multi-unit owners. As well, of those surveyed about 9% were owners of multiple business brands. An interesting trend in franchising is the growing amount of multi-unit owners and investments into franchising by private equity investors. Why would private equity want to invest in franchising? Some believe this is due to growth predictability of the franchise system and proven business model revenues which makes franchise investing attractive. Once they invest in a franchise system, the private equity companies may typically have the experience, capital and manpower to help grow the franchise system as a whole making it a good return on their investment.
Learn More about Franchising
If you are interested in learning more about franchising and exploring the opportunities available, there are a number of sources of information that can help you get started. Franchise trade associations are a great source of information on franchising. They provide a wealth of information on the latest trends, news, and developments in the franchise industry, as well as offering support and resources for franchisees. A leading franchise trade association in franchising is the International Franchise Association (IFA) www.franchise.org. As well, industry reports and studies are another great source of information on franchising. These reports provide valuable insights into the latest trends and developments in the franchise industry, as well as offering a comprehensive analysis of key market trends and growth drivers.
In conclusion, franchising is a business model that provides entrepreneurs with the opportunity to start their own business by using the established brand, marketing, business systems, process, products and know-how of an established franchisor. With a range of opportunities available, and the franchise industry growing rapidly in the United States, franchising can be a great option for aspiring entrepreneurs looking to start their own business. By utilizing the sources of information mentioned above, you can learn more about franchising and make an informed decision about whether it is the right choice for you.
Glosshouz spa franchise was founded in 2016 in Denver, CO metro area and began offering franchises in 2023. If you'd like to learn more about the Glosshouz Spa Center Franchise business offering, visit https://www.franchise.glosshouz.com
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