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Franchise Information

Learn the facts, the terms and the statistics about franchising.

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PROS & CONS :: GLOSSARY :: THINGS TO CONSIDER
QUESTIONS TO ASK THE FRANCHISOR :: COMMONLY ASKED QUESTIONS :: FRANCHISE HIGHLIGHTS

Why is a franchise investment the best option when starting a new business? The following section will help you answer this question and will give you information on the basics of franchising. We've included some facts, a brief history, comments on the future of franchising, a listing of pros and cons and a glossary of common franchising terms. We hope that this will give you a little background and basic knowledge of the world of franchising to get you on your way.

I. FACTS

• In the year 2000, franchises made up an estimated $1 trillion in annual retail sales.
• Franchises account for more than 40% of US retail sales.
• More than 8 million people in the United States are employed by a franchise.
• One out of every 12 US retail businesses is a franchise establishment.
• Franchises become profitable faster than typical start up businesses.
• In 1998 there were nearly $850 billion in sales of franchised goods and services at over 700,000 US franchise locations.
• A Gallup poll reported that nine out of ten franchise owners say they consider their franchise to be either somewhat or very successful.
• The report also found that overall satisfaction in owning a franchise business was high among the more than 1,000 franchise owners polled. "Nine of 10 respondents' expectations were either exceeded (18%), mostly met (48%) or somewhat met (24%)."
• The franchisees surveyed in this Gallup poll reported substantial levels of gross income, defined as the amount of money remaining after expenses are paid but before paying taxes. The average gross income reported was $91,630, and 25% of franchise owners reported grossing $100,000 or more in the past year.
• Statistics from the U.S. Department of Commerce show that from 1971 to 1987, less than 5% of franchise businesses were terminated on an annual basis.
• According to a study by Arthur Andersen & Company in 1991, of 366 franchise companies in 60 different industries, nearly 86 percent of all franchise operations that had opened in the previous five years were still under the same ownership; only 3% of those businesses were out of business.
• The U.S. Small Business Administration reports that from 1978 to 1988, 62.2 percent of all new non-franchised businesses were ended within the first six years of their operation due to failure, bankruptcy, retirement or other reasons.
• There are an estimated 1,500 different franchisors (franchise companies) operating in the U.S.
• There are more than 320,000 franchise retail outlets in the U.S.
• The franchising industry employs over 8 million people in the U.S.
• Annual U.S. retail franchise sales in 2000- 1 trillion
• The franchise industry accounts for 40% of all retail sales in the US
• A new franchise business opens every 8 minutes of every business day
• Approximately one out of every 12 businesses in the U.S. is a franchise business
• More than 75 different industries use franchising as a means to distribute goods and services
• The average initial franchise investment is $250,000- excluding real estate.
• The average royalty fees paid by franchisees range from 3% to 6% of monthly gross sales.
• Most franchise companies have fewer than 100 units
• The average length of a franchise contract is 10 years
• Top franchise industry- Fast Food

II. HISTORY

The word "franchise" comes from Old French meaning privilege or freedom. As economies evolved, so did the concept of franchising. It is believed that our current concept of franchising comes from the mid 1800s when a major German ale brewer granted certain taverns the exclusive right to sell their ale. Around the turn of the century, the face of franchising looked very much the same. This system essentially granted the right to distribute and sell a product. At this time, the trend-setting model was the franchising rights authored by oil refineries and automobile companies.

Franchising in the United States was first used in the 1860s by the Singer Sewing Machine Company. Singer developed written franchise contracts for the distribution of their sewing machines and was the first to implement the predecessors of modern franchise agreements. After WWII, millions of servicemen and women returned home, and with that - the Baby Boom began. The large work force demanded the opportunity to explore and develop more and better business opportunities, which changed the business and our economy forever. With these demands, franchising evolved into the dominant and most successful concept - business format franchising. In this type of franchising, the franchisor (example: McDonald's) not only allows the franchise to use its name and sell its products or services, but also involves the total transfer of a way of doing business. This includes marketing, operating, technical training, management techniques and expertise developed and perfected by the franchisor (sometimes referred to as a "learning curve"). The franchisor will also provide on-going training and support throughout the life of the franchise agreement.

III. FUTURE

Within the next 10 years, franchising will comprise over 50% of the retail economy and employ millions of people. This growth should be anticipated based on the simple logic of the underlying concept. Franchising offers success to aspiring, new business owners with the least amount of risk. These systems will enable hundreds of thousands of new business owners to realize the dream of successful business ownership and financial independence. Like the US and world economies, franchising is evolving. There will be even greater opportunities for wealth creation among both franchisees and franchisors as this evolution progresses. New franchises will be developed while the existing systems become more fortified and continue to grow.

If you are ready to take the next step and go into business for yourself or if you have an existing business that you want to optimize, then you should look closely at franchising as the vehicle to take you to where you want to be in the 21st century.

Economic Impact of Franchising* (2001)

• Franchised businesses generated jobs for more than 18 million Americans.

• They accounted for 9.5% of the private-sector economic output.

• More than 760,000 franchised businesses generated a total economic output of more than $1.53 trillion, or nearly 10% of the US private-sector economy.

• Franchising generated one out of every seven jobs in the private sector.

• The Businesses provided payrolls of $506 million, or more the 11% of the nation's private-sector payroll.

Largest Franchise Industries**

1. Fast Food
2. Retail
3. Service
4. Automotive
5. Restaurants
6. Maintenance
7. Building & Construction
8. Retail - Food
9. Business Services
10. Lodging

*Franchise Research & Information - Background
From the 2003 Economic Impact of Franchised Business conducted by PriceWaterhouseCoopers to measure economic activity that occurred in 2001, the latest data available.

**From IFA Membership Data 2005

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US Franchise Information and Facts

According to the IFA

• 767,483 franchise businesses exist
• Franchising generates 18 million jobs