How To: Franchise in the US

What exactly does franchise mean? The term franchise is used in many different areas. Apart from the commercial sector it is also used in sports, the media and insurance. It is derived from the French and originally means “free (from servitude).” The definition of franchise by the Deutsche Franchise Verband e.V. (German Franchise Association) is:

“The term “franchise” (signifying a form of enterprise) and “franchising” (signifying the form of entrepreneurial activity within the system) signifies a specific method of distribution: a system of distribution aimed at sales promotion. A company, the so-called franchisor, allows mostly several partners (franchisees) to distribute its products or services under its name […]”

For more information about the history of the term “franchise,” please check this online franchise portal.

Some aspects of franchise development in the US

Currently, the franchise sector is expanding worldwide and especially in the US, where the concept of franchise was first established. Here it developed in two different forms:

-         Product and trademark franchise, where franchisees sell products and in return receive payment, a business model that has been around since the 50s.

-         Business format franchising is the model most used in the US since the 50s. From the mid-50s on, restaurants like McDonald’s, Pizza Hut and Kentucky Fried Chicken have been established. The business model that is in use here requires the franchisee to identify with the franchisor, and a constant and continuous relationship between both is required. Apart from the product, the service or the registered trademark, also the company’s business model, business strategies, marketing, quality control, internal communication, advertising, and many more characteristics have to be adopted by the franchisee.

Most franchise business models are to be found in the fast food sector, the hotel industry, and the food and beverage sector.

The fast food sector creates most jobs and the highest turnover for franchisors.

Product franchising is mainly used by gas station companies and the car service sector.

Several bills concerning the regulation of the franchise sector have been passed in the US: federal law regulates the sales of franchise models as well as business opportunities. In October 1979 the US Federal Trade Commission introduced the Trade Regulation Rule on Franchises and Business Opportunity Ventures, better known as The Rule, on a federal level. The regulations contain rules about bad or fraudulent business practices.

Franchising in the US is supported by the International Franchise Association (IFA) that was founded by a group of franchisors in 1960. They saw the necessity to establish a franchise lobby and a service for enterprises that wanted to go into franchise.

The association is also a place for members to exchange experiences. It is a non-profit organization and by now represents more than 500 American franchise companies.

Opportunities during the crisis

Leading franchise managers also see opportunities in the crisis, according to an IFA survey: on the one hand, the franchise sector survived crises in the past and emerged stronger than before, on the other hand, there is growth potential as soon as credit markets recover. In addition, further development of the franchise industry highly depends on the respective sectors. According to the study, fast food restaurants and other food and beverage enterprises may even experience some growth.

Franchise managers share a careful, but optimistic opinion about the future: only 15 percent expect the closing of certain locations. Most job losses (5 percent) are expected to take place in the automotive and retail trade sector. According to PricewaterhouseCoopers, the greatest loss in revenue is expected in the hospitality industry (3.2 percent), company service industry (2.8 percent) and real estate sector (2.1 percent). Franchise managers, however, are more optimistic about that as well: only 30 percent expect job losses, whereas more than 70 percent even believe in the creation of new jobs this year.