Franchising has a very rich history in America. It has grown into a significant business model, where millions of people work under the franchising banner. While the franchising sector has been booming in the last several years, there are also many tough challenges up ahead.
The latest data from the U.S. Census Bureau found that 10.5% of all commercial businesses were franchises in 2007. Also franchises generated an estimated 1.3 trillion dollars in annual revenue.
A Recovering Sector
The recession was a big set back for many businesses, including those under a franchising model. But in the last couple of years different industries have greatly improved.
The automotive, lodging and retail products & services industries have been predicted to see the highest growth in number of establishments this year. However, the real estate and business service industries will grow only marginally.
Encouraging New Growth
It wasn’t all doom and gloom for franchises during the recession. Some were even thriving. There are three characteristic that all rapidly growing franchises share.
- Low initial investment. In today’s market, buyers are looking for franchises with low start up costs. A few years ago an average franchise investment would be in the region of $250,000. But some of the fast growing franchises cost around $125,000 or even less to start up.
- Quick to break-even. A quick way of reaching profits is essential to a successful franchise. Traditionally, a 2 or 3 year wait was required to reach profitability with a franchise operation. In today’s fast moving market, some franchises are able to break even in the first year.
- High profit margins. The last key to a high performing franchise is to deliver high profit margins. An average business takes around five to ten cents of every dollar towards the bottom line (That is after break-even). With today’s market conditions, people are looking for margins of three to five times as that.
Key challenges for Franchises
One problem facing franchisors, is recruiting able and suitable franchisees. You need the right kind of person to open up a franchise operation and make it a success.
Another issue is that franchisees are finding it more difficult to secure credit or loans, to invest in a franchise venture.
Top Strategies for Franchisors
The following ideas can help speed up the recovery of franchisors.
- Creative funding solutions. Lack of credit is having a negative impact for franchisors and franchisees. Explore new innovative funding options such as in-house financing.
- Improve collaboration. Put more focus on the relationship with franchisees and give them extra support.
- Attract experienced franchisees. Adjust your requirements to only accept franchisees that have the right skills and knowledge in running a business.
- Monitor legal issues. Recently there have been stricter legal requirements for franchisors. Work with a lawyer experienced in the franchising market and stay up to date with the latest relevant changes in state laws.